Paying Down Debt Versus Emergency Savings

Most of the I’ve talked to are pretty bent on using their tax refunds to pay down as much debt as possible this year. I think that is a good choice — but I don’t think it is quite as simple as it might have been last year. The decision on whether to concentrate on paying down debt should be based on your emergency fund: as credit card companies reduce balances and are more reluctant to open new accounts, it’s much harder to depend on credit to cover emergency expenses. Having an emergency fund in place can also help you avoid taking on more credit card debt. If your rainy day savings aren’t really enough to make you feel secure, a better use of your tax refund might be buying a little peace of mind and depositing it in your emergency savings.

Which Debts Should Get Paid First?

Reducing debt as quickly as possible should still be a high priority for using your tax refund, as long as you’ve already got some savings you can fall back on. But narrowing down just which of your debts can be a bit complex. I’ve said in the past that putting personal loans at the top of your repayment plan may not make financial sense but it can be the best option for keeping healthy relationships. But when you have some spare cash — like a tax refund or a windfall, it’s not necessarily worth your while to accelerate paying down those personal debts. As long as you’re keeping up comfortably with the repayment schedule set for a personal loan, it’s okay to put your tax refund towards your balance with the highest interest rate.

If it feels like using your tax refund all towards one big balance doesn’t feel like you’re really making any progress in paying down debt, there is an alternative. You can use it towards your smallest balance — even if you can’t eliminate that balance entirely, you can get a pretty good feeling about your progress. You might not get quite as far ahead on interest, but paying off a balance can give you the momentum to keep going on your other balances.

Do Something Fun

While it’s probably not the best plan to use your entire tax refund towards fun (unless your finances are really in order), it’s perfectly okay to take a few dollars and put it towards fun. A dinner out isn’t likely to make a huge difference in your debt repayment schedule and it can serve as a reminder on why you want to get on a better financial footing.

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What Should We Do With This Year’s Tax Refund?

But sometimes, paying off your debt with the highest interest rate isn’t your priority. If you’ve borrowed money from a friend or family member, it might be worth reordering your priorities.

More Than Interest Rates

If your family is anything like my family, loans are extended without interest — and usually without any sort of repayment schedule. Looking at the situation from a purely financial aspect, a personal loan winds up at the absolute bottom of your debt repayment schedule. It’s almost certainly carrying the lowest interest rate of any of your obligations, and if something happens and you are late with a payment or even default, your family isn’t likely to report you to a credit agency.

But family and friends don’t offer loans based on purely financial thinking. If your mom or dad offers you money, it’s because they want to help you out. They trust you to repay it — they expect you to do your best by them, just as they do their best by you. That means that you need to take more than just the money into account when figuring out your debt repayment plan. You have to consider the emotional aspects as well.

Making Family a Priority

In my mind, a loan from a friend or family member takes precedence over just about anything else. I want to minimize the amount of time that loan is out there, causing any sort of strain on my personal relationships. I try to make a point of laying out repayment terms when I’m talking about a possible loan from a family member in the first place, but even if I don’t have a minimum payment due, I set out to pay it off as soon as possible.

Sometimes, that means sitting down with your debt repayment plan and figuring out by hand just how much you can afford to pay towards the balance of that loan. Without a minimum payment to guide you, it can be tough to determine just how much you want to pay each month. You can simplify it by paying those minimum obligations on other debts first and then paying everything you have left over towards that personal loan.

Your Choice

If you don’t have a set agreement with that family member or friend who extended you a loan, you don’t really have an obligation to put repaying the loan as a high priority. If you choose to go that route, it’s worth at least figuring out just when your lender can expect repayment and passing that information along. Simply ignoring question — at least in most families — just seems like asking for problems.

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The Priority of Personal Debts

Paul Pensabene of Saratoga Springs, N.Y., received a statement from HSBC on Dec. 8 that said he had a $359.99 balance and remaining available credit of $8,640. But when he went online to pay the bill several days later, his online account showed that same balance put him over his newly-reduced credit line of $300. And that didn’t include the $35 over-limit fee.

If you’ve been caught up in a similar situation, it’s unlikely that you’ll be able to get your credit limit raised back to previous levels. However, there are a few steps you can take to reduce the problems caused by a change in your limit.

1. Ask to have the initial fees dropped: If you’ve been a good customer, you can usually get your credit card company to drop the penalties triggered by a drop in your credit limit. However, if your balance remains over your new credit limit, you should be aware that future fees probably won’t be waived. You’ll need to call the credit card company, and you may need to be firm with the representative you speak to — remember, you aren’t at fault in this situation.
2. Decide what to do about your balance: You may not be able to pay off enough of your balance to bring it under your new credit limit before the end of the month (and your next bill). But that doesn’t mean you’re stuck with overage charges. Consider transferring part of your balance to another card, if you have to.
3. Set up balance alerts: Even if you can get your balance back under your credit limit in a hurry, it’s easy to forget about the change when you’re actually using your card. You can set up text message alerts for when you approach your new balance — many credit card companies provide this service, as do online money management applications like Mint.
4. Keep an eye on your credit: There’s no way for an abrupt drop in your credit limit to have a good impact on your credit score. In most cases, it will cause your score to drop. That means that you’ll not only have to be extra careful of potential dings to your credit in the future, but you’ll likely need to work on bringing your score up again. One of the simplest solutions in this sort of situation is to focus on paying down credit card balances as fast as possible.

At this point, it’s legal for credit card companies to reduce credit card limits to the point where the card holder is saddled with fees — with no advance notice. New rules take affect in July 2010 requiring lenders to give cardholders 45 days notice if a credit line reduction would trigger penalties. But that’s still far off: in the mean time, the only thing you can do is to try to protect yourself in the event of changes to your credit card.

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What To Do When Your Credit Limit Drops: 4 Tips

Just A Few Ripples

It’s hard to comprehend how important even a little thing like deciding to save up for a large purchase, rather using a credit card can affect all of the rest of your finances. But there are plenty of situations where such a decision can have a huge impact: having more credit available on your card, along with a few extra dollars in your bank account, can make all the difference in the world if something happens to your car that your insurance doesn’t cover.

And decisions affecting your credit in particular can affect whether or not an employer will hire you or a landlord will rent to you. It may seem like your credit score’s importance is overblown — after all, you can effectively eliminate your debt if you’re willing to declare bankruptcy. But with even employers examining the credit reports of the candidates for each job, such a move can be disaster for your job applications (as well as your ability to get a credit card) for the next seven years.

Keep Those Ripples Under Control

It isn’t possible to prevent your personal finance decisions from affecting the rest of your life: after all, they’re called personal for a reason. But you can create a cushion so that your decisions don’t affect your life beyond a level that you can handle. While simply making good financial decisions seems like an easy answer to the issue, everyone makes the occasional mistake.

Instead, the best protection you can have is a good emergency fund. When you have a solid amount of savings in case of contingencies, you have more room to handle ripples. Even if something occurs that isn’t the result of something you specifically did — such as a car accident or a layoff — having an emergency fund will allow you to approach the situation in such a way that your finances don’t compound the original issue.

In addition to an emergency fund, insurance policies can provide further protection. It can take a little more careful consideration than you might expect to find the right insurance policies, though. Choosing a policy that doesn’t work well with your current financial situation can create more than few ripples on its own. Carefully weighing factors, like what a reasonable deductible might be, is absolutely necessary. Because everyone’s financial situation is different, it’s probably a good idea to seek out professional help in making sure that you find the right insurance policy.

Rocking The Boat

If you’ve got your finances under control, a ripple isn’t going to do much more than rock your boat. Moving forward in improving your overall financial situation is always a good idea — even if it rocks the boat a little.

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The Ripples of Personal Finance

Predatory Lending Practices

The best known options for quick money also among the worst. Payday loans, title loans, even tax refund anticipation loans all have horrible terms that can easily put someone in a worse position than they started in. It’s not unheard of for the interest on these predatory loans to work out to 100 percent interest (or even more!). The fact of the matter is that even the small amounts of money a pawn broker can offer is a better option than something like a payday loan.

Looking For Better Options

Loans aren’t the only option for finding money quickly. There’s always the option of selling something: while it’s hard to get the best rate if a seller is in a hurry to get money, there are plenty of options beyond pawning an item. For instance, placing an ad on Craigslist can get an almost immediate response, as long as the item for sale is desirable. It’s possible to complete a sale in just a day or two, if necessary. If there’s more lead time — if someone knows that they’ll be a little behind in advance — it’s possible to sell for better rates. And while pursuing such avenues as selling plasma sounds like a fall back to college money-making, such options are still available.

For those in a position where a loan is a better option than trying to complete a sale, there are sources of loans other than predatory agencies. It’s worth asking a family member for help before all others, but asking an employer for an advance or community members for some aid can also provide options.

Keeping Calm in a Crisis

Finding oneself on uneven financial ground is difficult. The first reaction many people have is to rush around, looking for someone to effectively bail them out. But if a person can keep their calm in such a situation, it’s often possible to find a solution that — at the very least — offers enough time to get back on solid ground. Rushing around only makes it easier for predatory lenders to take advantage and make the situation much worse.

The best thing someone in financial straights can do is step back and assess: determine the amount of money needed, possible sources and how helpful those sources might be. Consider all the options, such as piecing together a larger amount of money through multiple methods and sources. If there’s a way to find a little more time without making the situation worse, it’s almost always worthwhile — with more time, a person might even be able to take on a little extra work and earn enough to cover the shortfall.

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Money In A Hurry: Your Options

Chapter 7 & 13

In the United States, there is a set of laws governing bankruptcy known as the Bankruptcy Code. The code is divided into chapters, six of which describe specific types of bankruptcy:

• Chapter 7: basic liquidation for individuals and businesses
• Chapter 9: municipal bankruptcy
• Chapter 11: rehabilitation or reorganization, used primarily by businesses, but can be used by individuals with substantial debts and assets
• Chapter 12: rehabilitation for family farmers and fishermen
• Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income
• Chapter 15: ancillary and other international cases

For individuals, Chapter 7 is the most common type of bankruptcy, followed by Chapter 13.

Choosing a Chapter 7 bankruptcy can be a difficult choice: as part of the proceedings, the debtor gives up their assets. Some assets are exempt, and it’s possible to make arrangements to keep a car or home that the debtor is still paying for. Bankruptcy is not intended to be anything but a last resort, and Chapter 7 can be especially difficult to go through. If a person considering Chapter 7 has much in the way of assets or is involved in a corporation and partnership, filing for bankruptcy under Chapter 11 or 13 may be much better. Chapter 13 offers the opportunity to create a repayment plan: a debtor’s assets aren’t liquidated because they are working to pay off debts rather than have them simply discharged.

The Credit Concern

While bankruptcy may seem like a ‘get out of jail free’ card on the surface, there are some major drawbacks to going through the proceedings. A bankruptcy sticks with a person long after the financial matters have been finalized. Bankruptcies stay on a credit report for ten years. That means that for someone who has been through a bankruptcy will have a much harder time getting credit in the future and more: prospective employers and landlords both look at credit reports and can use a bankruptcy as a reason to refuse to lease an apartment or to offer a job.

Depending on the type of debts at stake, a bankruptcy may not even offer a truly clean slate. It provides a way to eliminate credit card debt and other unsecured credit cards. However, there are a whole list of obligations that bankruptcy does not affect:

• Child support and alimony
• Student loans, except in very limited circumstances
• Most property liens
• Most Tax Debts
• Fines and penalties imposed for legal violations
• Judgments from personal injury suits
• Debts incurred through fraud (lying on a credit application, using borrowed property as collateral, etc.)

Furthermore, any debts not specifically dealt with during bankruptcy proceedings are not discharged. Creditors also have the opportunity to convince the judge during most bankruptcy cases that their debts should survive the bankruptcy.

The first step to filing for bankruptcy — no matter which chapter — is to contact a bankruptcy attorney. All bankruptcies in the U.S. are handled through the United States Bankruptcy Court, but state laws can have some extensive effects on a bankruptcy. It’s crucial to discuss a potential bankruptcy with a local attorney: at the very least an attorney can help explain other options in a particular state. A lawyer will be able to walk a debtor through discovering whether bankruptcy will really discharge enough debt to make it worthwhile. However, not all bankruptcy attorneys are inclined to turn down a potential case unless specifically asked about alternatives.

The Big Benefits

Especially if a debtor takes time to look at all the options available, a bankruptcy can offer some help. Filing Chapter 13, for instance, specifically offers a chance to stop a mortgage foreclosure. And any unsecured debt, like credit card debt, can be very easily dealt with during a Chapter 7 bankruptcy — as long as the debtor is willing to liquidate assets in order to do so.

Beginning bankruptcy proceedings offers another benefit, although it isn’t necessarily monetary: it can stop creditor harassment, as well as collection activities. It may seem like an extreme approach to stop phone calls and letters, but it’s important to remember that collection activities include foreclosures and repossessions. Bankruptcy can provide a short-term solution to stop such situations and hopefully help find a more long-term solution.

Options Beyond Bankruptcy

Surprisingly few people are aware of options beyond bankruptcy for settling their debts. While not all alternatives fit every situation, it is very possible that in a given case, bankruptcy is not the best choice.

• Negotiate with creditors: A debtor can negotiate a repayment plan or settlement plan without going through a bankruptcy court. It’s as simple as picking up the phone and asking. Most creditors know that if a case progresses to bankruptcy, they’re chances of receiving money drop, so they’re usually willing to at least discuss some kind of settlement.
• Debt counseling: A debt counseling agency can help a debtor come up with a repayment plan (similar to Chapter 13) without the black marks a bankruptcy adds to a credit history. There’s a little less legal protection for debtors who miss payments, but for a debtor committed to repayment they can be a better — and cheaper — option than bankruptcy.
• Do nothing: Oddly enough, not acting can be a much better option than bankruptcy in some very specific cases. Creditors can’t take away essentials (basic clothing, household furnishings, personal effects, food) or certain benefits (Social Security, unemployment, public assistance). If a debtor doesn’t have a steady income or property — and doesn’t expect to have them in the future — bankruptcy isn’t necessary. Creditors realize they can’t collect in these situations and rarely try. In seven years, any such debts are removed from a debtor’s credit history.

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The Facts About Bankruptcy

It sounds great on the surface: homeowners get to stay in their houses, lenders get at least a portion of what they’re owed and everyone is happy. At least, that’s the way this press release (from a mortgage company specializing in short refinancing, of course) made it sound.

The realities of short refinancing are a little more complicated. It is one of many options a homeowner might have — and from the homeowner’s point of view it can be a very good one. But while a homeowner might like the idea, most lenders don’t. The simple fact is that most lenders just don’t like the idea, because they’ll face substantial losses on any short refinancing. Lenders can’t afford short refinancing unless there’s just no other way to still make a few dollars off of a house. Even a short sale is preferable — after all, the homeowner that has already proved that he can’t manage a mortgage will be out of the picture.

Advocates of short refinancing have argued that lenders should at least consider the option because of the potential of a lender winding up with houses sitting empty and unsold. But a lender can afford to foreclose on a home and let it sit empty for a few months, if they can sell it for enough money to cover costs down the road. It’s like flat out debt forgiveness — it’s just not an option that lenders can exercise often and still stay in business. Many lenders are also concerned that if short refinancing becomes a more common option, homeowners will try to take advantage of that fact. Foreclosures are scary — homeowners will work hard to avoid them — but the opportunity to reduce the amount a homeowner owes on a mortgage just sounds like a good deal.

It is possible to get a short refinance through absolute persistence, as long as the homeowner can prove that he can’t catch up by reducing expenses or increasing income, as well as can prove that he could meet the payments of a refinanced mortgage. A financial review and appraisal are the bare minimum requirements. But short refinancing remains rare. Companies that promise to negotiate short refinances for homeowners are — at best — overly optimistic. I’ve taken a look at several websites for such companies and I know I wouldn’t put my home in their hands. I’d recommend that any homeowner trying to get a short refinance to research their lender’s policies thoroughly and set up meetings to discuss the prospect on their own.

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Short Refinancing: Really An Option?

Rising Interest Rates

Many credit card companies have higher interest rates than they did this time last year. While the possibility of using a credit card remains an option, it’s getting a lot more expensive. Even if you only wait until February to pay off the balance, you could be paying your credit card company quite a bit for the pleasure. Even the rewards that many cards offer don’t equal the cost unless you can pay off your balance in the month that you do your spending.

Tightening Belts

Even if your credit card’s terms haven’t changed recently, you may have noticed that a lot of people are tightening their belts for this year’s holidays. That doesn’t mean that we’re backing down on gift giving — most people will do everything they can to continue to give gifts even in an economic crunch. But there will be more handmade gifts this year, as well as careful shopping for sales.

A Holiday Without Cards?

There’s another card that will be making a reduced appearance this year: the gift card. Concerns about the stability of several major retailers makes a gift card a risky choice. Chances are increasing that recipients just won’t be able to use the full value of a gift card. The thought of using a credit card to purchase a gift card that won’t be used makes it an even more uncomfortable choice. If your goal is to help a friend or family member make a purchase, there is a far more stable option — cash.

Fewer Cards

According to eBillme (an online shopping option that allows users to pay cash), credit card use is dropping significantly this season:

Index results for the fourth quarter show that the credit crunch is causing shoppers to reduce their credit card usage and impacting consumer access to credit, resulting in a shift to cash alternatives.

It’s not necessarily a bad thing that we’re using our credit cards less, though. The average American household with at least one credit card has nearly $10,000 in credit card debt. The first step for any of us looking to reduce that debt is to put the credit cards away. It’s virtually impossible to pay off credit card debt when a person is still routinely using his or her credit cards for purchases — especially for a holiday gift shopping spree.

There are plenty of options for giving gifts that cost surprisingly little: we can give the gift of time or craft a gift for our loved ones. And if we do so, we get a gift of our own: the chance to avoid taking on credit card debt for the sake of the holidays.

Are you going to have a credit-card free holiday season?

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A Credit Card-Free Holiday Season?

The Risks

An intentional foreclosure is not a ‘get out of jail free’ card, no matter how it appear on the surface or how some companies are selling it. The most obvious problem with a foreclosure is the major ding it will put in your credit score. It will be harder to get credit of any kind after a foreclosure, including a new mortgage. But the potential problems are far larger: there is no guarantee that your lender won’t sue you for other assets you may still have. Fewer lenders are doing that these days because of the sheer number of foreclosures, the expense of such a suit and the fact that most people in upside-down mortgages have minimal assets beyond their homes.

The Benefits

For many people with upside-down mortgages, it’s a matter of time before their mortgage goes beyond the point they can handle. Even if a homeowner seems to be doing alright now, there’s no guarantee that the situation won’t change. For homeowners that are pretty sure that their mortgage will go south sooner or later, it’s hard to argue against getting out of the mortgage before they’ve dumped too much money into it. And if you’re in a position to turn around and take out a new mortgage — you have enough savings for a sizable down payment — you could actually repair your credit in virtually no time.

The Foreclosure Process

Before you consider intentionally foreclosing, it’s worth your while to try to reach a loan remediation agreement with your lender. It’s essentially a renegotiation of what you owe and can help you avoid foreclosing. But with tens of thousands of other borrowers trying to do the same thing, there’s little guarantee that your lender will actually be interested in a loan remediation agreement.

If you decide to go through with your foreclosure, a number of companies have popped up that will help you through the steps. Many of these companies seem on par with debt settlement companies — they seem more than willing to take advantage of people in a bad situation. Do your homework before working with an intentional foreclosure company.

A Question of Ethics

A foreclosure is guaranteed to tarnish your credit report, but that’s not the reason a lot of people are objecting to intentional foreclosures. Instead, there is a question of ethics. Because a mortgage is a contract to make payments, an intentional foreclosure is much the same thing as intentionally breaking a contract — an act considered unethical, if not actually cheating.

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Intentional Foreclosures: Just Walking Away

Most debt settlement companies work pretty much the same way. When you sign up with one of these firms, you stop making payments on your debts and instead send one monthly payment to the company. The company then divides the money between your debts, after convincing the companies holding those debts to accept a small total than you had previously owed. While non-profit debt settlement organizations can provide useful services, most debt settlement companies are in business for themselves: on top of that one monthly payment you may find yourself paying all sorts of fees and you may not be making a dent in your debt. In some instances, the debt settlement company may not come to an agreement with the holders of your debt and you can get hit with interest and late fees from your creditors while you wait for your debt settlement company to find a solution.

More people are turning to debt settlement companies this year than in years past, and that fact is made clear by the number of complaints about such companies. According to the Wall Street Journal, complaints about debt settlement companies this year is already double the number received in all of 2007. Part of the problem is that there are minimal licensing requirements: anyone who wants to set up a debt-settlement company pretty much can. And, as someone using those services, you have no real knowledge of their business practices or successes. The best you can do is check with the local Better Business Bureau and see if another customer has filed a complaint.

Some creditors won’t even deal with debt settlement companies. American Express, for instance, has a policy of working only with account holders. According to Lisa Gonzalez, a spokeswoman for American Express, “There’s no service or benefit that a debt-settlement company can offer our card members that they don’t receive from working with us directly.”

But there options beyond debt settlement companies if you feel that you can’t handle your debt without help. There are a number of credit-counseling services that work on a non-profit basis. While these organizations won’t get you amazingly reduced settlements, they will help develop a manageable repayment plan — and many creditors will agree to waive fees or lower interest charges for account holders working with reputable groups. You do need to be on the lookout for organizations that claim to be non-profits but actually operate like for-profit companies. Both are allowed to charge fees, for instance, but for-profits generally have more routine fees. A good indicator of a true non-profit is whether the organization offers to educate you on how to handle your credit in the future. For-profits generally ignore this facet of credit counseling.

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Think Twice Before Paying For Debt Settlement

Your Mortgage

The liquidity argument pops up just about every time someone mentions a mortgage. In most situations, if you can pay your mortgage down ahead of time, it’s a good idea to do so. You cut the interest you’ll pay in the long run and you build a little extra equity. But in tough times, some people think that wisdom doesn’t hold true. The argument is that it’s better to keep those extra payments as cash and put them into savings — if something happens, you can’t just pull money back out of your mortgage, after all.

It’s a tough decision to make. Owing less money seems like a good idea, but if the future seems even a little bit shaky cash can be important. It would be nice to pay off the mortgage ahead of time, but for now, I’d make building up an emergency fund a higher priority. And as for all those suggestions to open HELOC and other lines of credit to have cash available ‘just in case,’ I think that may be one of the worst pieces of personal finance advice I’ve ever heard. Taking on debt on the off chance that you’ll have trouble paying a bill or two is just poor financial planning.

Your Credit Card

Liquidity is much less of an issue with a credit card. After all, if you can pay down your balance, you’ll have more credit available if you need it. I don’t like the idea of using a credit card as an emergency fund. Honestly, though, I can picture a lot of situations where it would be necessary. Depending on the interest rate on your balance, paying more than your required monthly payment can be a good bet: if you can improve your credit even a little bit, you may be able to get your credit card company to lower your interest rate. Paying down your balance can be worth the risk of not having a lot of cash on hand.

Looking Ahead

Right now, I’d recommend making an effort to eliminate consumer debt and build an emergency fund over paying off your mortgage early. Both approaches will put you on more steady financial ground if there are problems down the line, and provide a few more options for handling future expenses you might not be able to take care of otherwise. Paying more on your mortgage just doesn’t offer the same sort of security net.

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Should You Pay Ahead When You Can?

But leaving things the way they’ve always been — sticking with the status quo — can keep you from making financial progress in the long-term. Consider your cable box. Maybe you’ve come to the conclusion that you don’t really want cable service anymore. You can get most shows online without having to pay for them. But you don’t have the time to call up and cancel — it might be quite a hassle considering all the efforts customer service representatives are required to make in hopes of keeping your account. You set the question aside to deal with ‘later’, but every month it takes for later to occur is another cable payment you didn’t have to make.

I’m guilty of sticking to the status quo — I’ve got a stack of financial papers that I need to deal with that are practically guaranteed to add some money to my account as soon as I tackle them — and I’m sure you can think of a few tasks you should tackle as well.

Big Changes

One of the reasons I continue to struggle with changing the status quo is because I’ll have to put forth some effort — and probably some cash. I’ve been trying to make the changeover to reusable grocery bags for almost a month now. I need to buy some bags and start using them. I know that reusable bags will pay for themselves quickly: my local grocery market offers five cents off my total bill for every reusable bag I use instead of a plastic one.

But I haven’t made the switchover. For me, using plastic bags is normal. I know that those nickels will add up pretty fast, considering my weekly grocery trips, but I just haven’t gotten around to changing the status quo.

The Sure Thing

I can think of hundreds of examples of opportunities lost because I wasn’t about to give up a sure thing. I’ve turned down job opportunities that required a little risk because I already had a job. Sure, with the risk there is a higher potential paycheck. But it’s very hard to give up a paycheck that you know will appear on schedule without any problems. I’ve even refused to give up jobs that made me miserable because I didn’t want to change the status quo that guaranteed I could afford my rent and meals.

Bad for Personal Finance

The status quo is bad for your personal finances, despite the effort it takes to change your own routines. If you don’t change what you regard as normal, it can be absolutely impossible to change spending and saving habits and take advantage of new opportunities. Today, I plan to buy reusable grocery bags — what are you going to do to change your routines? Is there one small action you can take to improve your personal finances, like changing banks or canceling an unnecessary service?

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Is The Status Quo Hurting Your Wallet?

Cruising is a unique vacation experience, as anyone who has been on one can tell you. Let me give you a quick rundown on how it works, and I’m sure you’ll see where budgeting can get tricky.

Your Room Card is Your Credit Card
The first thing that most people don’t realize is that there is no such thing as cash on a cruise ship. Nor is there anywhere that you can use your debit or credit card. That little room card you are issued when you get on board does a lot more than open your cabin. It is encoded with your personal information, as well as the credit card you used to book your cruise. Paid for your cruise in cash? Doesn’t matter. Before you board you’re asked for one anyway, as this will be your onboard account. All charges, from ordering a drink to paying for a massage will go to this card.

Obviously this is where things can get sticky. After a day or two of simply signing receipts, you start to disassociate the fact that all those charges are being transferred to the credit card you gave them in the beginning. Once the cruise is over, your on board account is tallied up and charged to your credit card. The front desk on the ship keeps a running statement of all your charges, so feel free to ask for a copy each day to see where you are in terms of your budget. If anything looks suspicious or unusual, ask the staff to produce the signed receipt for the purchase.

Use Your Credit Card On Shore
Something that you should do in any unfamiliar situation, but absolutely when you’re traveling is to use your credit card for purchases. For reasons mentioned in other articles, credit cards are much more secure and safe than debit cards or cash. While traveler’s checks are the old standby for vacationers, they are being accepted less and less due to fraud surrounding them. The alternative traveler’s check-card is nothing more than a pre-paid debit card, and easily compromised. A credit card doesn’t link to your money directly like a debit card does, and it gives you plenty of time to dispute any issues. If something does happen, and your credit card is overdrawn or disabled, you still can have your debit card as a backup if you need cash.

Balance The Books
If you’re using the same credit card on shore that you used to open your on-board account, be sure to keep track of your on shore purchases and add them to your statement from the ship. Some might see their statement from the ship and think that they are within their budget, when in fact they forgot about all the charges they had at their destinations.

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Money Conscious Cruising

But if you’re working on getting your financial house in order, simply ignoring old debts may not be in your best interest. Sure, eventually they’ll pass the statue of limitations. But this tactic holds plenty of danger for your finances. Up until the day that your debt expires, your creditors have rights of their own. They can continue to try to collect on your debt — including taking you to court over the matter. And some creditors are willing to take more extreme measures the closer you get to the statue of limitations. Remember, a court case is always more expensive than just paying up would be.

More importantly, in the long run, just because the statue of limitations is getting close for a particular debt doesn’t mean that it drops off your credit report. Even when your creditors can no longer collect, you look like a bad credit risk. Perhaps you ignored an old debt to pay off more current bills faster. Your more recent credit could look great, if not for that old debt dragging you down. If you’ve got big plans, getting rid of that old debt is crucial. It always looks better for your credit history to show that a debt was paid off. Negotiating some sort of settlement still looks better than entirely ignoring it, though.

There’s even a psychological reason to pay off old debts, in my opinion. It takes a certain mindset to get into debt. As you rebuild your finances, you’ve over come that mindset and focused on more positive things in your life. But having old debt hanging there in the background can lead some people back to that old mindset: they think, ‘Hey, I got away with it before. There are plenty of ways out if I want to go back to that lifestyle.’ But knowing you stood up and took care of that debt can positively reinforce your new approach to money.

I advise thinking long and hard before writing a debt off as ‘too old.’ In the long run, it’s worth your while to make the effort to pay it off. It may seem overwhelming, on top of your other bills. If a debt is that old, though, your creditor may be willing to make a deal. He may be willing to settle for far less that what you actually owe — perhaps just the actual amount you originally charged rather than all the accumulated interest. Or perhaps he’ll accept small payments over the course of time. You won’t know until you actually contact your creditor and offer to work things out.

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Dealing With Old Debts

With big corporations reducing costs, we have to wonder if maybe we should be doing the same. Sure, most of us don’t need to worry about a big corporate bottom line, but we do have to worry about things beyond paying the bills: are we saving enough? will we have enough for retirement? can we cover the costs of an emergency?

It can be hard to bring balance to our spending, especially as the cost of everything seems to be rising. And for some of us, the best option can be downsizing — reducing our needs in order to reduce our costs. Downsizing in your personal life can go from the extreme (selling your house and moving into a smaller residence) to the fairly mild (buying generic rather than brand name). Personally, I’ve eliminated a few luxuries in favor of less expensive pleasures. For instance, rather than rely on expensive cable for my needs, I use Netflix. I don’t really watch enough TV beyond Netflix to justify cable.

Deciding when to downsize isn’t difficult: there are three questions you can ask yourself that can make it clear if it’s time.

1. How’s my spending? Breaking even isn’t good enough. As long as your spending leaves plenty of room for savings, you’re okay. But if you’re only saving a few dollars from each paycheck, it’s time to cut costs.
2. Can I live without it for a week or longer? Think about your expenses (especially those that are reoccurring) in terms of the utility you get out of them. Maybe you’ve started taking more public transportation because of the cost of gas. Maybe you wouldn’t miss your car — or the loan payments, insurance and maintenance costs — if you sold it.
3. Is stuff cluttering up my life? Stuff — clothes, books, whatever — costs money even if you bought it. You have to store it, and it takes up space that better stuff can use. Getting rid of stuff that you don’t want or use can be a beneficial form of downsizing — you can cut your tax bill if you donate it or make money off it if you sell it.

There are other ways to deal with rising bills, of course. If you truly don’t want to cut your costs, or you feel you can’t, you can take another approach. Make more money. Downsizing is generally easier — you don’t have to commit your time long-term to the project. But making the effort to earn more money can counteract rising gas and food bills, at least for now.

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Is It Time to Downsize? 3 Questions to Ask Yourself

Don’t Move, Improve!
Several homeowners are turning to large renovations on their existing homes rather than moving to a new one. With the market in the state it’s in, selling your home is no longer a smart option. If you purchased your home in recent years, it’s very likely that if you sold it today you would be losing money. Therefore people are using the equity in their homes to renovate and make them better. Between additions, upgrades, and remodels, people are essentially building a new home from their old one, instead of dealing with the hassle of buying and selling. There’s another reason people are putting down the ‘for sale’ sign and picking up a hammer; renovations build value. The more updated and expanded your home is, the more its value increases. So a few years down the road when you do sell, you’ll make more in profit than you spent on renovation.

Money For The Lean Months
If you’re a seasonal worker or are self employed, a HELOC may be the way to make sure you don’t starve during your off months. Perhaps you have a landscaping business that is very productive and employs many people. But every year when the snowy season comes, plowing roads just doesn’t pay the bills. Not to mention you don’t want to lose all your employees because you can’t pay them as much as they earned during the summer. If you use money from a home equity loan to bolster your accounts during those times, and pay it back during your busy months, you can even out your expenses and maintain a steady flow of cash all year.

Make Credit Cards Go Away
High interest credit cards can be the thorn in your side that just won’t go away. With a HELOC, you can pay off your credit card and essentially ‘transfer’ the balance to your new loan. The interest on home equity loans is significantly less than many credit cards. Average rates for high interest cards can be anywhere from 20% to 30%, while HELOCs are currently between 4% and 6%. A scenario (warning, math ahead!):

Say you have a $15,000 balance on a 20% credit card, and planned on paying it off in 5 years. If you paid off that card with a 5% home equity loan, and paid it down within the same 5 years, you’d save $6,860.40 in interest! Not to mention going from a monthly payment of $397.41 to a much more manageable $283.07. Sounds good to me!

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When To Use A HELOC, And Why

1. Pay Down Your Cards and Spread Out Your Debt - Are you thinking “duh!” right about now? It’s true that you just need to pay down your credit cards and focus on the cards where you are closest to your limit. MSN personal finance columnist Liz Pulliam Weston says that “getting your balances below 30% of the credit limit on each card can really help.” Credit scores look at how much available credit you have vs. how much credit you’re currently using (credit utilization ratio). Points are deducted when you’ve charged over 50% of your limit.
2. Ask For Credit Limit Increases – Make a phone call to the card companies that you’re in good standing with. Ask for an increase. If they agree, you’ll immediately boost the credit utilization ratio and see a jump in your score.
3. Occasionally Use Old Cards – As you know, credit history gets better with age. But you need to continue using your old cards or the companies may stop updating your accounts with the credit bureaus. You want your accounts to stay active. Charge a small item on an old card every now and then and pay it off in full once you get your next statement.
4. Ask For Forgiveness – If you have just one pesky late payment on a card, call or write your lender and ask them if they can erase it from your history. You have a good chance if you make the request in writing and if you’ve had 12 or more on-time payments since the late one.
5. Verify Your Credit Limits – Check to make sure the credit bureaus accurately list the credit limits you have for each account. If you find any errors, call the bureau and ask them to correct it.
6. Do NOT Close Your Cards – You always want to have a high amount of available credit, so closing your cards can hurt you instead of help you. Pack the cards away in a safe place, out of sight, if you need to.
7. Pay Your Bills On Time and Above The Minimum – This is an easy tip, but it’s always good to remember. An easy way to never forget your payments is to set up automatic deductions or have your bank pay your bills for you. You can also set aside a time every week to look at upcoming bills in a spreadsheet that you securely saved online. This way, you can check on your bills from wherever you are.

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7 Obvious (and Not So Obvious) Ways to Boost Credit

In other words, charging different prices for the same product. While this isn’t a new idea in general, its application to the banking world is less than a year old. Airlines charge different rates to the same destination based on the time of year (ever try getting a flight around the holidays?) and retail shifts their prices based on how new or how popular a product is. Now banks are looking to charge different rates of interest on their loans, based upon the customer.

But it’s not going to work like you think. In the past, the more relationships you had with a bank (checking accounts, savings accounts, etc) the more perks you got. Perhaps it was a better interest rate on a CD or no fees on an account. With price optimization, the more relationships you have (and indeed, the more money you have in general) the higher your interest rate will be. Why? Because banks want money, and the need it fast. Here’s a scenario:

A 31 year old professional walks into his local bank branch and expects to get a very good rate on a loan. After all, he has an extremely good credit score (785), and is willing to make a 20% down payment on a new four bedroom home. He walks out with an offer of 6.5%, not even close to the industry norm of 5.8%. If he goes with them, he could end up paying over $21,000 more over the life of the loan.

Essentially the banks are looking to eek out as much interest revenue as possible in the shortest amount of time possible. Therefore the more money you have the higher interest rate you’re able to pay. There are many other factors that play into it as well (up to 20,000 in some models). Computer software takes your information and after running it through filters and projection models, determines how much you would be willing to pay. Live in the Midwest? You’re more likely to eat a higher rate than someone in New York. Applying at a local branch? You’re more likely to take a higher rate than a phone or internet application. Are you a lifetime customer who doesn’t have accounts anywhere else? You’re going to get hit just as bad as an uneducated consumer with a low credit score.

The lesson here is to be aware. There is nothing that says you have to take these higher rate offers. Shop around, do some research, make some calls. Essentially the banks are hoping that you don’t do these things, and take their word for granted. The best thing you can do is arm yourself with knowledge and challenge your bank to give you a better rate. If they don’t, then move on to one that does. Industry consultants say that eventually this approach will phase itself out, that once people start looking around for better rates the computer software will start spitting out lower rates to compete. However for the short term, banks are looking to squeeze every dime out of you they can. Don’t let them! Take matters into your own hands and become an educated consumer. Now, if we could only do something about airline rates…

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Same Loan, Different Rates

Many people say that they want to pay off their debt in less than five years. This is a noble goal, but take a look at the total amount of debt you owe and compare it to your income. Do you make enough money to pay off your debt and live reasonably with that time frame in mind? It’s one thing to say you’ll live off of top ramen and water to save money and pay off your debt, but after a few months of a ramen and water diet, you’ll probably re-think your five year plan.

One of the easiest ways to set reasonable goals for yourself is to take your larger, loftier goals and break them down into smaller projects. These smaller projects will be easier to tackle which will help to ease the overwhelming pressure that often accompanies a larger goal like becoming debt free as soon as possible. It also helps give you a sense of satisfaction because you will be able to see that real progress is being made!

Let’s say that your larger goal is to become debt free (we won’t worry about a time frame right now as everyone’s debt is different). What are the steps you should be taking?

By now you should have a budget in place with a tentative payment plan in place. This makes you a few steps ahead of those who have merely said “I will get out of debt soon.” It means you have taken some active steps toward your goal of being debt free.

What should your next goal be? Being debt-free is a noble goal, but part of setting reasonable goals for yourself is figuring out the steps you need to take to realize those goals.

Perhaps you should figure out a “pay off” order with your bills. Decide which bills need to be paid off first, second, etc. This way you can work through your debt systematically instead of just making payments on everything and hoping that the overall total eventually goes down.

Now what? You have a budget, you have a payment plan, you have an order of accomplishment on your bills… what else can you do? What can you do by the end of the day to put money toward your debt? What can you accomplish in a week?

Setting reasonable goals is far more effective than simply sitting under the umbrella of a large and overwhelming goal. Reasonable goals give you results you can see (almost) immediately and they will give you active steps to take which helps to provide you with incentive to keep working toward your own, personal finish line.

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Setting Reasonable Goals

Here are a few quick ways to make sure that you don’t add to your debt.

1. Take the credit cards out of your wallet. One woman I know was so serious about not using her credit cards until they had been completely paid each of her credit cards in a Ziploc bag full of water and then stored those bags in the freezer. I’m not saying that you have to be that extreme, but you are far less likely to buckle under impulse buying pressure if your credit cards are at home.

2. Only buy something if you have the cash on hand to pay for it. There is nothing wrong with buying something small if you already have the cash in your wallet—as long as that cash isn’t earmarked for something else.

3. Consolidate wherever possible. Is it possible to pay off two smaller debts with high interest by using a third credit account that has a lower interest rate? This won’t necessarily get rid of that debt, but it will keep it from growing quickly. If you own two cars, consider selling one car and sharing the second. Use the money from the sale of the car to pay down your debt!

4. Shop only when you need to. There are tons of people who like to simply “go shopping.” It’s a hobby instead of a necessity. If this is you, find a different hobby! There are plenty of things to do that do not involve spending money (or involve a very small amount of money)! Hobby shopping is one of the easiest ways to rack up debt.

The basic idea is this: when you keep spending money or taking out loans, you aren’t going to reduce your debt. You are simply going to keep it in limbo—especially if you add the same amount to your credit cards that you pay on them each month. Paying cash, consolidating your expenses and shopping only as a necessity are great ways to keep your debt going in the right direction: down. When it comes to debt? Down is good.

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Down is Good