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Week 3: Debt
Today’s Easy Financial Task: Start your Debt-Pay-Down-Plan
How to rock this task :
- Take out your completed My Debt List from Day 15
- Make note of the amount of money you’ve allocated for debt from yesterday’s task, Day 16.
- Work through the Budgetnista Debt-Pay-Down-Plan
Today we have another video. Woohoo! Watch how to make today’s task work for you...
Video link: http://youtu.be/Vj9jO1c0df0
Watched the video? Great!
Today we'll cover a lot of valuable information. I've also secured two Dream Catcher exclusive deals to help you repay debt faster, so make sure you take the time to read the entire post.
In the video I recommend you pay off your debt with the lowest balances first. You may worry about neglecting your debt with high interest rates. Here are a couple of ways to lower your interest rates:
- Call your credit card company(ies) to negotiate for lower rates. The better your credit, the more likely companies will be willing to work with you.
- Transfer balances from your higher interest rate credit card(s) onto lower interest rate card(s).
- Use a personal loan with low interest to restructure your credit card debt.
- Refinance your private student loans.
Let's cover options #2, #3 and #4 in detail. (Don't worry, I'll give you tips to negotiate lower interest rates with your current credit card companies next week.)
How to use a balance transfer to lower your interest rate...
Go to www.magnifymoney.com and search for a balance transfer card. Look for a card that offers a 0% interest rate for at least six months and the lowest transfer fee available. Take note: when doing a balance transfer, credit card companies will often charge you a fee - about 3% of the total balance you’re transferring.
FYI: Sometimes credit card companies run a special where you can transfer your balance without a fee. That’s the type of deal you’re looking for on www.magnifymoney.com.
Once you locate a card you’re interested in, call the company and ask:
- How long will the 0% introductory rate last?
- What will my rate be after the introductory rate expires?
- How much is the transfer fee?
- What happens if I’m late with a payment?
- Is there any fine print that I should know about?
Note: If your credit isn't great, you may not qualify for a balance transfer card. That's OK you have another option. You can take out a personal loan with low interest and pay off your credit cards with that instead. We'll go over that next:
How to use a personal loan to restructure your credit card debt and save on interest...
Take out your Debt List and:
- Add up all of your credit card debt.
- Calculate your average interest rate. You can do this by adding up all of your credit card interest rates and dividing it by the number of cards you have. Knowing this average will help you compare rates to choose the best deal.
- Use www.CreditKarma.com to get an estimate of your credit score for free.
- Go to www.magnifymoney.com and search under “Personal Loans” for...
- A company that Magnify Money has given an B+ score or better.
- A company that will give you a rate without a credit inquiry. A "hard" credit inquiry will negatively impact your credit score.
- A company that offers a fixed term, fixed interest rate and no prepayment penalties.
- A company that does not charge up-front fees.
Not sure which company to choose for your personal loan?
My Personal Loan Recommendation
SoFi is a company I love and highly recommend. They also get an A+ rating on MagnifyMoney. See if you qualify, HERE.
Note: If your credit is bad, you may not get approved for a personal loan at SoFi. Circle back to point #3 above and try another company instead. Next week during the Challenge, I'll be giving you tips to improve your credit score. If after working through the tips you're able to increase your score, you can always apply for SoFi in the future.
How to restructure your private student loan debt to lower your interest rate...
Before doing anything with your student loans you need to determine if you have private or federal student loans. You DO NOT want to refinance your federal loans with a private company. Federal loans have certain benefits for borrowers that most private loans don't have.
- It takes 9 months of missed payments to default on a federal loan. It takes one missed payment to default on a private loan.
- If you become disabled, unemployed or experience financial hardship, you can apply for forbearance or deferment of your federal loans to postpone payments. Most private loans don't allow this.
- If you work in a specific sector (i.e. teacher, nonprofit etc), you can apply for federal loan forgiveness.
If you're unsure whether you have federal or private student loans, call your loan provider and ask.
For private student loans with high interest that you want to refinance, follow these steps:
- Add up how much student loan debt you have.
- Calculate your average interest rate by adding up all of your private student loan rates and dividing that number by the number of loans you have. Use this average to shop for competitive interest rates.
- Use www.CreditKarma.com to get an estimate of your credit score for free.
Then go to www.magnifymoney.com and search for “Student Loan Refinance” for...
- A company that MagnifyMoney has given a B+ or better.
- A company that has no origination fee. An origination fee is an up-front processing fee.
- A loan that has no loan amount maximum. It allows you to refinance all qualified student loans.
Not sure what company to choose?
My Student Loan Refinance Recommendation
You guessed it! SoFi is also my student loan refinance company recommendation. They have low-interest rates, great customer service and borrower benefits which is unique for a private lender. If you lose your job, SoFi may allow you to postpone payments while you look for another one.
Here’s our special SoFi student loan refinance link.
Note: If your credit is bad, you may not get approved for a SoFi student loan refinance. You can check if you qualify without it hurting your credit score. If you're not approved, choose another lender from the MagnifyMoney list or work on building credit to apply again later. Remember to use our special DC SoFi Student Loan Refinance link when you do.
How to Systematically Pay Off Your Debt
Now, that we've covered ways to take care of your debt with high-interest rates, let's move on to our payment strategy. Even if you decide to keep your current rates, you can still work the Budgetnista-Debt-Pay-Down Plan.
FYI: DO NOT pay for debt if you're unsure if it belongs to you. Tomorrow I'll show you how to verify the debt you're unsure of.
Here’s the step-by-step guide to The Budgetnista Debt Pay-Down Plan : (can be used for other kinds of debt like: medical debt, student loans, car loans etc.)
1) List all of your debt from lowest to highest.
2) Figure out how much money you can squeeze from your budget for your Debt-Pay-Down-Plan, Day 16 task. Remember, you should still be saving while paying off debt.
3) Pay only the minimum amount required on all your debt, with the exception of the first debt on your list. This should be the card or debt with the lowest amount owed.
Note: Why should you pay off your debt from lowest to highest balances vs. highest to lowest interest rates? Paying off your debt with the lowest balance first will give you the early success and motivation you’ll need to stick to your Debt-Pay-Down-Plan. If you use the tips I gave you earlier on reducing your interest rates, they won’t be such a large factor in your repayment plan.
4) Pay the minimum and the money you squeezed from your budget (Day 16) toward the first debt on your list.
5) Automate the payments. This will leave you with less work and tallying to do each month. Make sure you automate the payments to reflect how many months it will take to pay down whatever main debt you are focused on paying off. Then reset your automation when you move on to the next debt.
6) Use UM (Unexpected Money) to help pay down the main debt you‘re focused on. You’d know what UM was if you watched the video… I’m just saying.
7) After paying off the first credit card, apply ALL the money you used each month to pay off that card and put it towards the next card (second lowest debt) on your list. This means that the minimum amount from the first card, the minimum from the second, and the extra money that you found in your budget, will be applied toward the next debt on your list.
8) Automate this new payment. Remember: doing this will help you stick to your strategy.
9) Use UM to help pay down this card.
10) Pay off the second card, then transfer ALL of the money you were paying each month to the second card and apply it towards the third card, along with its minimum (similar to step 7).
I suggest you continue this cycle until you pay off all of your credit card debt. Remember, you'll have to STOP using the cards for the system to work. If you're in a debt-ditch, stop digging. Once you are credit card debt free, use this system to pay off the rest of your debt and finance your savings, retirement, and investment goals.
And that is how you get out of debt faster than you ever imagined. *Drops mike and sashays away.*
Now that you have a clear debt-pay-down plan, you can work on negotiating to pay less for debt in collections. Yes, I said you can actually pay LESS than what a debt collector is asking for, it's called settling.
How to Settle Your Debt
Preface: This works best with credit card & medical debt. I wrote this assuming that you are behind on your credit card payment and it is in collections. This may also work for other kinds of debt.
1) Verify: Make sure the debt is yours by requesting a Debt Verification/Validation Letter. You can request one verbally or by faxing/mailing a letter to your creditor. Here is a template for you to use. I show you exactly how to do this during tomorrow's task
2) Identify Dead Debt : Make sure that the debt is not past the Statute of Limitations and now considered Zombie Debt. According to Forbes, Zombie Debt is debt that is years old -- often past the statute of limitations for you to be held legally responsible -- and it is entirely owned by a debt collection agency.
The statute of limitations begins calculating the last time the debt was active. So DO NOT agree to anything on the phone until you get your Debt Verification / Validation Letter and can confirm the debt is not Zombie Debt. You want to avoid accidentally reactivating the Statute of Limitations by agreeing to make a payment.
Find your state's statute of limitations on credit card debt here. If a creditor contacts you about Zombie Debt, although you still owe the debt, they cannot legally collect it as long as you have proof that it's past the statute. Your proof can be found in the Debt Verification / Validation Letter that you should request from them.
3) Negotiate: Try and reduce the balance of your debt to as low as possible. The debt collector bought your debt from the original company you owed and probably paid pennies on the dollar to buy it. Because of this, debt collectors will often take less than you owe if you negotiate.
Call toward the end of the month to take advantage of the quotas many collectors must make before the new month begins. Start low by offering to pay 30 percent or less of what you owe and negotiate your way to an amount that you and the collector can both agree upon.
Make your offer attractive. If you're going to ask that they settle for 70 percent off of what you owe, you should pay it in a lump sum payment. Asking for a steep reduction of your debt as well as a payment plan, is not likely to work in your favor.
4) Omit: Ask that they DO NOT report your agreement as settled on your credit report (this is VERY BAD and to be avoided if possible). Instead, ask that they report it as, "paid as agreed upon." Also ask if they can erase the tradelines associated with the debt. Tradelines are just the account and its history on your credit report.
Tradelines can take up to seven years to drop off your report, so getting rid of negative ones early is beneficial. Your creditor may or may not agree to do so, but it's worth it to ask, especially if you're planning on paying a lump sum.
5) Remember Uncle Sam: Know that you may have to pay taxes on the amount that your creditor(s) excused as a result of your awesome negation skills. Uncle Sam views "excused debt" as income and wants his cut. You can avoid this by shaving off no more than $600 on the debt you owe.
Anything above that amount will be reported and taxed. Be smart. It may be worth it to pay the taxes on the amount of debt that you don't have to pay, if you can dramatically reduce what you owe.
FYI: As far as taxes are concerned, if you have a negative net worth at the time of settlement (you owe more than you own), you are insolvent and not liable to pay taxes on any forgiven debt. To know for sure, consult with a tax professional of course.
6) Get Proof: If your creditors agree to the terms above, MAKE SURE TO GET IT ALL IN WRITING BEFORE MAKING A PAYMENT. This way, if they don't honor what you both agreed upon, you could use what they sent you in writing as proof. You'll also need it if you want to make corrections to your credit report, should your creditors report you incorrectly.
Perk: You'll see your credit score rise as a result of reducing your debt. It will jump even higher when you pay off the debt you've negotiated down. Thirty-five percent of your score is based upon how much debt you have in comparison to your income.
We covered A LOT of ground today.
Excited?! You should be. Share your excitement and questions with me in the comments below and with the Dream Catchers in our LRC Forum.
Share this too. It might inspire someone else to work on their debt too.Whoo Hoo! I now have a debt pay-down plan that will actually work. Day 17 #LIVERICHERChallenge Click To Tweet
The NFCC is the nation's largest and longest-serving nonprofit financial counseling organization. NFCC members provide a variety of free and affordable financial services to millions of consumers each year in person, over the phone, or online. They can help you with more than just credit. They help with debt too.
If you’re still a little confused, no worries! Watch the Debt-Pay-Down-Plan video again and I’ll walk you through the steps. If you have more questions, reach out to me!
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My Lisa Rule: I have 4 sisters and Lisa is the baby (well she’s not a baby anymore). Of all of my sisters, I’m the most protective of her. Before I share any product or service with you, it must pass my Lisa Rule.
What’s the Lisa Rule? If I would not advise Lisa to use a product or service, I won’t advise you to. YOU are my Lisas. I feel protective of you and your financial journey.
The products/services mentioned in this post pass my Lisa Rule. Yes, I'm an affiliate, but I would not recommend a product or service that I didn’t believe was helpful and useful.
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