Can Consolidating Debt Help Your Credit Score?

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Consolidating your loans and credit cards can definitely improve your credit rating—but you have to be careful.

You know you need to be careful about taking on too many loans but it already happened and now you’re not sure what to do. You’re wondering if there’s anything you can do to fix your debt problems and improve your credit score. You don’t want to start missing payments and end up with bad credit or turning to payday loans and no credit check loans.

You might have heard of debt consolidation, and you’re wondering if consolidating your loans and credit cards helps your credit score. You might even have found this article while searching online for an answer to that very question!

Well, we’re here to provide those answers, as well as explain what loan consolidation means in general. Read on, and consolidate your knowledge.

What is “debt consolidation” anyway?

On a basic level, debt consolidation means taking multiple loans and turning them all into one loan. (It can also work with credit cards.) There are multiple reasons you might consider debt consolidation, but on a basic level, you hope that paying off one big loan will be cheaper and more manageable than paying off all of the smaller ones.

To learn more about debt consolidation, check out our three-part blog series, Debt Consolidation 101.

So that’s the idea. But does it work out that way? And how does it impact your credit? Let’s find out!

Credit where credit is due.

One of the most common ways to turn many loans into one loan is to take out a new loan big enough to pay off all the other ones entirely. Then you’ll just be paying off that new loan. And it can be a good move for your credit.

“If you take out a personal loan from your bank to pay off your credit cards, you can see your score go up as the cards get paid down,” nationally recognized credit expert Jeanne Kelly (@creditscoop) told us. “This can help you pay the credit cards faster since the interest rate is lower, but you have to be careful not to rack up more debt on those cards now that the balances are low again or paid off.”

Katie Ross, Education and Development Manager for American Consumer Credit Counseling (@TalkCentsBlog), also explained how debt consolidation loans can impact your credit:

“Consolidation can help improve your debt and credit situation. One way to consolidate credit is through a personal loan. This way you will pay off balances on multiple accounts, likely see lower interest rates, lower monthly payments, and a shorter payoff time.

“In turn, by consolidating with a personal loan, you will see a significant reduction in your credit utilization ratio, which accounts for 30 percent of your credit score. Credit utilization is the amount you owe on your credit cards versus the total amount of credit available.”

All right, so loan consolidation sounds like a great plan. Time to find the first loan consolidation place you can and get all your loans consolidated. Right?

But tread carefully.

Not so fast! Like with any kind of loan transaction, you’re going to want to do your research before getting your loan consolidated.

Jeanne Kelly stresses the dangers you have to watch out for: “If you sign up for a debt consolidation program, you do have to read the fine print as many do damage your credit if the accounts with your creditors get paid late and get noted as making partial payments. I see this often and most times the client never knew this would report as such. Again, be careful what you sign up for as you signed an agreement with the credit card company to pay on time.”

Natasha Rachel Smith, a personal finance expert at TopCashback.com (@TopCashBackUSA), gave an extensive overview of the cautious approach to loan consolidation:

“If you’re in debt, only four things – simultaneously – will help you avoid greater debt: changing your attitude towards money, putting the brakes on spending, throwing more cash towards outstanding debts, and getting the interest rates of your borrowing as low as possible. It’s essential to put all four points into action to avoid greater debt; not only one, two, or three.

“Regardless of how badly you are in debt, always make the minimum repayments on your credit cards and loans. This will preserve your credit score as best as possible. If you’re not able to meet even just your minimum repayments, you are spending more than you should and have to address that immediately. Write down a budget, pause any non-essential spending, and investigate getting a second job; that’s how serious not being able to cover your minimum repayments is.

Is debt consolidation a good option for you?

Smith continues:

“When it comes to getting the interest rate of your debt as low as possible, if your credit score has been affected because you haven’t been able to keep up with your minimum repayments in the past, you won’t be eligible to move balances to new credit cards that offer dirt-cheap introductory interest rates. Therefore, your call to action is to try to negotiate with your current lenders. See if they will lower their interest rates. If they won’t, look into how much the interest rate of a balance or money transfer and its fee would be with your existing cards to switch debt around.

“If that avenue doesn’t prove fruitful, possibly because you don’t have enough credit available or your providers aren’t offering you a lower interest rate for balance or money transfers, consolidating your borrowing to be with one provider might be something worth considering. Before you commit to the idea, call each of your existing lenders and write down the interest rate you’re paying for each debt. If you have personal loans, find out if there’s an early repayment charge attached to your agreements.

“If the interest rate is five percent or less, put that debt to one side and continue chipping away at it. If the loan has an early repayment charge, put that debt to one side and continue to repay it.

“For all debts that are charged more than five percent in interest costs, as a last resort for those with a very poor credit score, it could be worth considering combining them to be paid off with a reputable loan provider. It’s vital to find a loan provider that will lend to you with a poor credit score but that also doesn’t charge an extortionate rate of interest or makes you agree to a lengthy term or unfair penalties if you accidentally miss a repayment. Read customer reviews online to guide your decision.

“Sadly, it’s likely that the interest rate will cost much more than your existing interest rates, but it’s important to get to a point where you’re able to afford your minimum repayments again; for the benefit of trying to rebuild your credit score to aid your future financial worthiness. Check whether you can pay more than the set repayment amount each month without a penalty. Only take this consolidation route if you are confident you can remain disciplined and change your spending habits once you’ve combined the applicable debts.

“Never, ever switch debt simply to have it with one lender because you think it makes it more manageable; that’s a falsehood and will cost you so much more in the long-run. That attitude will lead you into accruing further debt, snowballing additional borrowing on top of the debt you’ve already consolidated, bringing you back to square one.”

If you already have not-so-great credit—and have taken out the bad credit loans to match—then you are going to want to think long and hard before pursuing debt consolidation. Lower credit scores mean higher interest rates, which means that finding a consolidation loan with a lower rate (and qualifying for it) might just not be in the cards.

But don’t let that get you discouraged. Follow all of this advice, and you should be able to figure out if loan consolidation is a good option for you.

What have your experiences been with debt consolidation? We want to know! You can email us or you can find us on Twitter at @OppLoans.

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Contributors

J_BisestoJeanne Kelly (@creditscoop) After being turned down for a mortgage 15 years ago, Jeanne Kelly realized she needed to get her credit in order. Not only was she able to fix her bad credit, but she took the skills and knowledge she gained and decided to share it with the world. Now she’s a nationally regarded credit coach and expert, with multiple books and television appearances. She’s also been kind enough to share her insights with us on many different occasions. Follow her on Twitter and check out her site to get the credit help you need!
R_FaidaNatasha Rachel Smith (@topcashbackusa) is a personal finance expert at TopCashback.com. Natasha’s background is in retail, banking, personal finance and consumer empowerment; ranging from sales to journalism, marketing, public relations and spokesperson work during a 17-year career period. She’s originally from London, UK, but moved to Montclair, New Jersey, USA, several years ago to launch and run the American arm of the British-owned TopCashback brand; a global consumer empowerment and money-saving portal company.
PIGKatie Ross joined the American Consumer Credit Counseling (@talkcentsblog) management team in 2002 and is currently responsible for organizing and implementing high-performance development initiatives designed to increase consumer financial awareness. Ms. Ross’s main focus is to conceptualize the creative strategic programming for ACCC’s client base and national base to ensure a maximum level of educational programs that support and cultivate ACCC’s organization. Ms. Ross is certified by the Center for Financial Certifications as a Certified Personal Finance Counselor.

How to Money, Episode Four: Debt to Income Ratio

Debt to Income Ratio

So far on How to Money, we’ve covered credit cards, credit scores, and annual percentage rates (APR), all of which pretty commonly known.

That’s why on this week’s episode we’re going tackle something that’s a little more obscure: the debt to income ratio, also know as DTI.

Enjoy!

What is the debt to income ratio?

Your debt to income ratio is a pretty simple measurement. It shows you how much of your income goes towards paying off debt.

The ratio is measured on a monthly basis. So if you had a monthly income of $3,000, and $1,000 of that money went towards debt payments, then you would have a DTI ratio of 33.3%.

Included in the ratio are any payments made towards personal loans, credit cards, student loans, auto loans, and home loans. If you do not have a mortgage, it also includes the money you put towards rent.

The basic equation for calculating your DTI is:

Monthly Debt Payments / Monthly Income = DTI.

When you’re shopping for a mortgage, it’s important to remember that your potential mortgage payment will replace your rent payment the calculation. When adding up your monthly debt obligations, make sure to account for that.

What is the debt to income ratio used for?

Your DTI is used by potential lenders to help determine whether or not you can afford a given loan.

Basically, the ratio a good idea of whether or not your debt burden is sustainable. If your DTI is already too high, it tells a lender two things:

  1. You have taken out too much debt
  2. If you added this loan on top of the loans you’re already paying off, you might have trouble making your payments.

When applying for a home mortgage, a DTI of 43 percent or below will make you eligible for a Qualified Mortgage.

What’s a Qualified Mortgage?

A Qualified Mortgage is a home loan that meets certain specific benchmarks designed to make the loans safe and affordable.

According to the Consumer Financial Protection Bureau (CFPB), a lender that offers a Qualified Mortgage has to make a “good-faith” effort to determine a borrower’s ability to repay their loan.

(Lenders that do not do this are usually predatory and should be avoided.)

In addition to the 43 percent DTI cap, other requirements for a Qualified Mortgage include a loan term no longer than 30 years and no features like negative amortization or an interest-only period of loan payments. Qualified mortgages also can’t include balloon payments at the end of the loan’s repayment term.

What is a good debt to income ratio?

The ideal DTI would be zero. This would mean that the person in question does not have any debt whatsoever.

However, that’s not really feasible for most people.

As a general rule, it’s best to keep your DTI below 33 percent. That means paying less than a third of your monthly income towards debt payments.

A ratio in that range will show most lenders that you are handling credit responsibly. It will mean more approved applications and lower interest rates. Read more about debt to income ratio in our post What is the Debt to Income Ratio?

What would you like us to cover on future episodes of How to Money? You can email us by clicking here, or you can get in touch with us on Twitter at @OppLoans.

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How to Live Like a Lannister and Always Pay Your Debts

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Step one: If you take out a loan from the Iron Bank of Braavos, don’t leave them hanging.

We know. We know. Game of Thrones Season Seven premieres this Sunday night. Until then, it takes all the effort you can muster to think about literally anything else. Your work week? Shot. Your grocery list? Growing longer every day. Thankfully you don’t have kids to worry about, right?

(That was a trick question. You do have kids. They’ve been waiting for you to pick them up after school for three hours.)

But a whole week spent thinking about Dany’s return to Westeros, Jon Snow’s parentage, and Cersei’s rise to the Iron Throne doesn’t need to be a whole week wasted. If anything, there are plenty of lessons that Game of Thrones can teach us that can be applied to our everyday lives.

And one of those lessons is also the unofficial motto of House Lannister: A Lannister always pays his debts.

So to celebrate Season Seven of Game of Thrones, we asked some genuine financial experts for some GoT-inspired tips on how you, just like those pesky Lannisters, can make sure you pay off all of your debt.

Don’t get overconfident

Every time you pay off a new loan or credit card, it’s going to feel good. And it should!

The only problem is that sometimes that good feeling can bleed over into cockiness. You just paid off that credit card, so what’s the harm in splurging on a new PS4, right?

It’s a lot like running a 5K and then rewarding yourself with a giant ice cream sundae and six-pack of beer. If you’re not careful, all that great work you did will get undone in the blink of an eye.

And speaking of eyes… 

Ian Atkins, an analyst and staff writer for Fit Small Business (@FitSmallBiz), says that “Once you begin paying down your debt, you may be tempted to let up. Here’s my one word of warning: Don’t make the mistake of Prince Oberyn Martell (The Red Viper).”

“If you’ll remember, Prince Oberyn put on a dominant martial display in his duel against The Mountain. But when he sensed victory was imminent, he let up. The Mountain, never one to give up, recovered and The Red Viper was left with a rather massive headache.”

“The lesson for those paying off debt,” says Atkins, “is to remember that your enemy will never give up. Interest rates are relentless, marketing efforts are merciless, and just like The Mountain, your debt will take advantage of any opportunity you give it.”

“If you have your debt on the ropes, finish it off. If you let it stay in the fight, you might be left with your own headache.”

Save for a rainy (or a wintery) day

Deborah Sweeney (@deborahsweeney), CEO of MyCorporation.com (@mycorporation) says that people can take lessons from the show’s ever-present Stark family motto: ‘Winter is Coming.’

“In the Game of Thrones universe,” says Sweeney, “everyone is perpetually preparing for winter and how the harsh climate will affect their lives—particularly since winters in this universe generally last a few years on average.”

Sweeney says that, “While you’re paying off your debt, my advice would be to also make sure you are establishing a financial cushion and not putting all of your money strictly towards debt.”

“Put aside small chunks from your paychecks to build up your savings so that you have a safety net in place in case of unexpected emergencies—which may or may not include preparing to face the White Walkers.”

One of the great things about the new Game of Thrones season is that finally, finally, winter is here, and it’s bringing the White Walkers with it. And while you won’t be nearly as excited when your own financial winter descends, you will be much happier if you are prepared to meet it.

The characters on Game of Thrones have dragon glass, Valyrian steel, actual dragons, and a giant honkin’ ice wall to help them fight off the White Walkers. Next to that, a few thousand dollars in an emergency fund is a piece of cake!

Choose a fighting style that fits your strengths

Not everyone on Game of Thrones fights their battles the same way. Take Arya and The Hound, for instance. Whereas he wields a giant broadsword and cuts through his enemies like an angry bull, she prefers her rapier, Needle, and the balletic “Water Dancing” style of swordsmanship from Braavos.

If The Hound fought like Arya, or Arya fought like The Hound, it wouldn’t end well for either of them. Each has found a fighting style that suits their strengths and compensates for their weaknesses.

The same principles hold true when you’re choosing a debt repayment strategy. (And believe us, you are going to want a strategy.) A person who needs early accomplishments to keep going will need a different style than someone who doesn’t mind the longer grind but needs to save as much money as possible.

Kelsay Dickey is a financial coach and the founder of Fiscal Fitness Phoenix (@IamFiscallyFit). In the style of one of Game Of Thrones’ great mentors, Jaqen H’ghar, she has an overview of four useful strategies for debt repayment:

The Debt Snowball (Winter is Coming!): “Paying off the lowest balance first is great for people that lack motivation to pay off debt or need quick wins to stay motivated. Once you pay off the lowest balance, you move on to the next lowest balance and continue the process. Much like when Khaleesi started with nothing and with each new city she conquered she acquired a bigger and bigger army to help her ascend to the throne, you can pay off debt and see the big impact with each debt you pay off.”

The Avalanche Method: “Pay off the debt with highest interest rate first. This is great for people that have one or two very high-interest rate debts (like a payday loan or really high-interest credit card) which is costing them a lot of money in interest every month. Littlefinger is a master of puppets and kills off the biggest obstacles that cost him the most first. Kick that debt through the Moon Door!”

The Kiyosaki Method: “This excludes real estate; you pay off the debt with the highest monthly payment first. This is best for people that have very little wiggle room in their monthly cash-flow and if they clear out these higher monthly payments they will be able to have more available cash for emergencies and other debt. The Night’s Watch has to make do with what they have, which is little help from anyone else. If you have expenses coming at you from all sides with no escape, pay off the highest monthly payment first to give you more room to battle the Night King.”

The Most Emotional Baggage: (This repayment method is of Dickey’s own creation.) “There are just some debts that make you feel really yucky and jaded when you pay them.  This could be the credit card you used to pay your divorce attorney or your student loan that you abused or the like.  Give yourself permission to pay those off first, get that weight off your chest then move on to another strategy once you pay it off.  Sometimes you get mad at someone for not marrying your daughter and have to get them out of your life.  No big deal….”

Whichever strategy works best for you is the one that you should choose. Remember the lesson taught by Bronn after he defeated Lysa Arryn’s knight during Tyrion’s trial by combat in Season One. Bronn knew that he couldn’t best the heavily armored knight one-on-one, but he could evade the man until that same armour tired him out–at which point Bronn stabbed him with ease and pushed him through the Moon Door.

Bronn knew how to play the situation to his advantage. When it comes to paying down debt, you should do the same.

Have any debt repayment tips or got fan theories you’d like to share with us? We’d love to hear from you! You can get in touch with us on Twitter at @OppLoans.

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Contributors
Ian Atkins (@FitSmallBiz) is an analyst and staff writer for Fit Small Business. He covers small business finance with a focus on traditional and alternative small business lending. Ian has over 9 years working in personal and small business finance.
Kelsa Dickey (@IamFiscallyFit) is a financial coach from Mesa, AZ. She has been helping individuals take the stress out of money management since she began Fiscal Fitness Phoenix in 2010. Her clients, which include women, men, couples, small business owners and larger companies, turn to Kelsa for honest advice and practical guidance. Her goal is to help her clients see their money as a way to achieve their dreams, not the thing that keeps them from dreaming big.
Deborah Sweeney (@deborahsweeney) is the CEO of MyCorporation.com (@mycorporation). MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and Twitter.

Bad Debt vs Good Debt: What’s the Difference?

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One helps you increase your net worth, the other means you’re spending beyond your means.

If somebody told you that they had taken out $30,000 to get a nursing degree, you probably wouldn’t be too shocked, right? Sure, $30,000 is a lot of money, but that education will almost certainly be worth it in the long run.

But on the flip side, if a person told you that they were $30,000 in credit card debt, you would probably spit out your drink. $30,000 in credit card debt sounds pretty bad, right?

Well, hold on a second… Why is $30,000 of credit card debt so much worse than $30,000 of student debt? In either case, you have to pay back $30,000! Aren’t they both equally bad?

No. They most certainly are not.

And that’s because one of them is considered “good” debt, while the other is considered “bad debt.” Let us explain.

What is Good Debt?

When it comes to good debt versus bad debt, it really comes down to what kind of purchase that debt is being used to finance.

“Good debt is debt that creates some sort of positive return,” says Brad Botes, a bankruptcy attorney, and founder and president of Bond & Botes, PC (@bondandbotes). “Debt that reflects an investment such as real estate or home mortgage debt is usually good.”

Natasha Rachel Smith, personal finance expert at TopCashBack.com (@TopCashBackUSA) says, “It is perfectly OK to accrue debt when it is manageable and the asset purchased will grow in value each year.”

When you buy a house, you are doing so with the expectation that the value of that house will increase over time. When you eventually sell the house, you can sell it for more than you paid for it originally.

“Borrowing money with the best interest rate, such as a well-structured student loan or a mortgage are considered good debt. An investment into something that has the potential to grow in value or can generate long-term income is good debt,” says Smith.

“The best way to understand the difference is by asking yourself one simple question, ‘Can you write it off on your taxes?’, if the answer is ‘yes’ then your debt is good debt.”

Likewise, taking out loans to pay for college is seen as good debt, because you are (hopefully) increasing your future earning potential. Because your debt is helping you work towards a brighter financial future, it counts as good debt.

That’s why, in our earlier example, that $30,000 in student debt doesn’t leave you fearing for your friend’s financial future.

Of course, taking out $100,000 in student loans to get a degree in Comparative Snapchat Studies is a different story…

What is Bad Debt?

If good debt is debt that’s used to increase your ultimate net worth over time, then bad debt is debt that, well, does the opposite.

According to Smith, “Bad debt results when you purchase things that quickly lose their value or do not generate income. Frivolous spending and credit cards with high-interest rates are bad debt.”

Financial expert Harrine Freeman (@harrine), CEO and owner of H.E. Freeman Enterprises, says, “Bad debt has no value and is a liability. Bad debt is usually something you can’t afford to purchase with cash so you apply for a loan or credit card to pay for it.”

Bad debt includes all consumer debt, such as credit cards and personal loans. That’s why hearing that a friend has $30,000 in credit card debt would make you fear for their financial well-being.

Bad debt also generally includes auto debt, as cars do not appreciate in value over time like houses do. As the old saying goes, a car starts losing value the second it’s driven off the lot.

So does that mean that you shouldn’t buy a car? Well, we wouldn’t say that…

According to Gerri Detweiler (@gerridetweiler), head of market education for Nav.com, “Sometimes the line between [good and bad debt] can be blurry. A car loses value the moment you drive it off the lot, but perhaps you need it to get to school or work. Is that bad debt or good debt?”

In the end, “bad” debt can still be an effective tool, especially if you’re using a safe and responsible loan in place of a predatory payday or title loan. It’s all about making sure that you’re using debt responsibly and not spending wildly beyond your means.

Smith advises that you “Do not buy things you simply want. Focus on the things you need alongside sometimes treating yourself to the items you want.”

Lastly, there’s another way that the term “bad debt” is used that’s a little bit different…

Richard Gertler is an attorney and partner at Gertler Law Group, LLC (@gertlerlawgroup). He says, “A bad debt is when the debtor is not paying in a timely manner. A good debt is when the debtor is paying in accordance with the debt payment terms.”

“Lenders must consider the risk of not being repaid in determining whether or not to loan money,” says Gertler. “The risk is also considered by the lender in setting the interest rate. The person who shows a pattern of not timely repaying their debts stands to have higher interest rates or perhaps will be denied the loan.”

In this case, it doesn’t matter what kind of debt you have. If you’re not making your payments, that debt is going to become a problem! In addition to the threat of late fees and debt collection agencies, failing to pay your bills can have a very negative impact on your credit. Payment history makes up 35 percent of your score—more than any other factor!

Do good debt and bad debt affect your credit score differently?

Having too much debt on your credit report will always have a negative effect on your credit score, but that doesn’t mean that good debt and bad debt affect your score equally.

Freeman says, “Yes, these types of debt affect a person’s credit differently… Secured debt such as a mortgage or a secured credit card and unsecured debt such as a traditional credit card impact your credit scores the most. Revolving debt such as a credit card impact your credit score next. Installment debt such as student loans impact your credit scores the least.”

According to Freeman, “There is no set amount of bad debt that a person needs to have before their creditworthiness is affected because creditworthiness is determined by mathematical calculations and is different for each borrower.”

She says that borrowers with a large amount of bad debt are “viewed as a high risk and may have to pay upfront and/or hidden fees, a down payment, a higher interest rate or a balloon payment.”

However, as we mentioned earlier, there are many other factors that can lead to debt affecting your credit—whether that debt is good or bad.

“Credit scores may take into account different types of debt,” says Detweiler. “For example, a mortgage may have a somewhat different impact than a credit card. But overall credit scores are non-judgmental about the type of debt. They are looking primarily at factors like payment history and debt usage.”

Freeman lays out the different situations where debt can negatively affect your creditworthiness:

  • If your debt-to-income ratio is above 36 percent
  • If your credit card balance is above 20 percent of the credit card limit
  • If you made a late payment within the past 6-12 months
  • If your credit card utilization is above 20 percent

According to Botes, “There is no definite answer to this question but it is fair to say that prospective creditors will look to your debt to income ratio. The higher your debt balance and resulting monthly payments, the lower your creditworthiness.”

Your debt-to-income ratio doesn’t measure the amount of debt you have; it measures how much you pay towards that debt each month. If you are putting greater than 36 percent of your monthly income towards debt repayment, that will negatively affect your score.

When it comes to your credit score, good debt is better than bad debt&mash;especially if your bad debt is mostly on credit cards. But if you’re really concerned about improving your score, reducing the amount of debt you owe overall is the best way to go.

To learn more about debt repayment strategies, check out our blog posts on the Debt Snowball and Debt Avalanche techniques!

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Contributors
Brad Botes (@bondandbotes) is the founder and president of each of the Bond & Botes, PC law firms, which are located in Alabama, Mississippi and Tennessee, managing the team of lawyers since its inception in 1989. He was recently named a Birmingham “Top Lawyer for 2016.”
Gerri Detweiler (@gerridetweiler)A credit expert for more than 20 years, Gerri Detweiler has built up a trove of credit resources, from podcasts to articles to books (two of which you can get for free right now). A friend of the OppLoans Financial Sense Blog, Gerri keeps her Twitter account full of all the financial tips and news you need.
Harrine Freeman (@harrine) is a financial expert, speaker, counselor, writer, CEO and owner of H.E. Freeman Enterprises, a financial services company that provides personal finance consulting services such as credit repair, debt reduction, budgeting, saving, planning for retirement and financial literacy education. Harrine is also the best-selling author of “How to Get out of Debt: Get An “A” Credit Rating for Free.” She has made over 150 media appearances as a featured financial expert.
Richard Gertler (@gertlerlawgroup) is a Partner at The Gertler Law Group, LLC in Long Island. Richard is experienced in helping individuals and businesses with their bankruptcy or business needs.  Richard Gertler has been helping the people on Long Island for over 20 years and is dedicated to giving people the best service possible.
Natasha Rachel Smith (@topcashbackusa) is a personal finance expert at TopCashback.com. Natasha’s background is in retail, banking, personal finance and consumer empowerment; ranging from sales to journalism, marketing, public relations and spokesperson work during a 17-year career period. She’s originally from London, UK, but moved to Montclair, New Jersey, USA, several years ago to launch and run the American arm of the British-owned TopCashback brand; a global consumer empowerment and money-saving portal company.

What is the Debt to Income Ratio?

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One of the great things about credit is that it lets you make purchases you wouldn’t otherwise be able to afford at one time. But this arrangement only works if you are able to make your monthly payments. That’s why lenders look at something called your debt to income ratio. It’s a number that indicates what kind of debt load you’ll be able to afford. And if you’re looking to borrow, it’s a number you’ll want to know. 

Unless your rich eccentric uncle suddenly dies and leave you a giant pile of money, making any large purchase, like a car or a home, is going to mean taking out a loan. Legitimate loans spread the repayment process over time (or a longer term), which makes owning these incredibly expensive items possible for regular folks.

But not all loans are affordable. If the loan’s monthly payments take up too much of your budget, then you’re likely to default. And as much as you, the borrower, do not want that to happen, it’s also something that lenders want to avoid at all costs.

It doesn’t matter how much you want that cute, three-bedroom Victorian or that sweet, two-door muscle car (or even if you’re just looking for a personal loan to consolidate your higher interest credit card debt). If you can’t afford your monthly payments, reputable lenders aren’t going to want to do business with you. (Predatory payday lenders are a different story, they actually want you to be unable to afford your loan. You can read more about that shadiness in our personal loans guide.)

So how do mortgage, car, and personal lenders determine what a person can afford before they lend them? Well, they usually do it by looking at their debt to income ratio.

What is the debt to income ratio?

Basically, it’s the amount of your monthly budget that goes towards paying debts—including rent or mortgage payments.

“Your debt to income ratio is benchmark metric used to measure an individual’s ability to repay debt and manage their monthly payments,” says Brian Woltman, branch manager at Embrace Home Loans (@EmbraceHomeLoan).

“Your ‘DTI’ as it’s commonly referred to is exactly what it sounds like. It’s calculated by dividing your total current recurring monthly debt by your gross monthly income—the amount you make before any taxes are taken out,” says Woltman. “It’s important because it helps a lender to determine the proper amount of money that someone can borrow, and reasonably expect to be paid back, based on the terms agreed upon.”

According to Gerri Detweiler (@gerridetweiler), head of market education for Nav (@navSMB), “Your debt to income ratio provides important information about whether you can afford the payment on your new loan.”

“On some consumer loans, like mortgages or auto loans, your debt to income ratio can make or break your loan application,” says Detweiler. “This ratio typically compares your monthly recurring debt payments, such as credit card minimum payments, student loan payments, mortgage or auto loans to your monthly gross (before tax) income.”

Here’s an example…

Larry has a monthly income of $5,000 and a list of the following monthly debt obligations:

Rent: $1,200

Credit Card: $150

Student Loan: $400

Installment Loan: $250

Total: $2,000

To calculate Larry’s DTI we need to divide his total monthly debt payments by his monthly income:

$2,000 / $5,000 = .40

Larry’s debt to income ratio is 40 percent.

David Reiss (@REFinBlog), is a professor of real estate finance at Brooklyn Law School. He says that the debt to income ratio is an important metric for lenders because “It is one of the three “C’s” of loan underwriting:

Character: Does a person have a history of repaying debts?

Capacity: Does a person have the income to repay debts?

Capital: Does the person have assets that can be used to retire debt if income should prove insufficient?

What is a good debt to income ratio?

“If you listen to Ben Franklin, who subscribed to the saying ‘neither a borrower nor lender be,’ the ideal ratio is 0,” says Reiss. But he adds that only lending to people with no debt whatsoever would put home ownership out of reach for, well, almost everyone. Besides, a person can have some debt on-hand and still be a responsible borrower.

“More realistically, in today’s world,” says Reiss, “we might take guidance from the Consumer Financial Protection Bureau (CFPB) which advises against having a DTI ratio of greater than 43 percent. If it creeps higher than that, you might have trouble paying for other important things like rent, food and clothing.”

“Requirements vary but usually if you can stay below a 33 percent debt-to-income ratio, you’re fine,” says Detweiler. “Some lenders will lend up to a 50 percent debt ratio, but the interest rate may be higher since that represents a higher risk.”

For Larry, the guy in our previous example, a 33 percent DTI would mean keeping his monthly debt obligations to $1650.

Let’s go back to that 43 percent number that Reiss mentioned because it isn’t just an arbitrary number. 43 percent DTI is the highest ratio that borrower can have and still receive a “Qualified Mortgage.”

What’s a Qualified Mortgage?

Qualified Mortgages are home loans that follow certain guidelines designed to make them safe. The lenders that issue these loans make an effort to determine a borrower’s ability to repay the loan, which is a hallmark of safe, socially responsible lending.

According to the CFPB, in order to be classified as “Qualified” a mortgage must not have loan terms longer than 30 years; include any “interest-only” periods, during which borrowers only makes payments towards the interest (not the principal); “balloon payments,” which are are larger than normal payments that come towards the end of the loan’s repayment period; or “negative amortization,” which can lead to your loan principal increasing over time.

There are some exceptions to the 43 percent DTI rule for Qualified Mortgages. For instance, lenders under a certain size can issue mortgages to customers with a higher DTI. However, if you have a DTI above 43 percent, you will generally find that it’s harder to get a Qualified Mortgage. Not only will you see higher interest rates on your loan, you are more likely to be offered predatory terms—like the ones mentioned above—that make it much harder to repay.

What’s not included in your debt to income ratio?

“Keep in mind that not all payments are included in this calculation,” says Detweiler. “For example, your utilities or cell phone payment won’t likely factor in. Rent may or may not factor in, depending on the type of loan. Also, remember the lender will factor in the anticipated monthly payment from the loan you are trying to get into the calculation.”

That’s why including your current rent is the trickiest part of the DTI calculation. Remember, if you are currently renting but are applying for a home mortgage loan, then your monthly rent payments will no longer factor into your DTI once you own a home.

So while calculating your current debt to income ratio (including your monthly rent) might be helpful, the number that really matters is the debt to income ratio that includes your mortgage payments.

“It’s important though to take into account the amount of money you’re comfortable with paying on a monthly basis,” says Woltman. “Too many times people ask the question ‘How much can I qualify for?’ when in actuality they should be asking ‘How much can I borrow to keep my payment at $XXX per month?’ It’s important to know what you’re willing to spend and work from there.”

Here’s how you can improve your debt to income ratio…

“Borrow less and earn more,” advises Reiss. “If you have debt, work to pay it off, starting with your high-cost debt, such as credit card balances.”

“For anyone looking to improve their DTI when considering buying a house it’s very easy to do,” says Woltman. “Take a look at your credit profile and single out credit cards or loan payments that have low balances but high monthly minimum payments. That not only signifies high-interest rates, but it’s a target for accounts you can pay to $0 and not incur a financial burden paying off.”

“Be careful though,” he warns. “If you have a car lease that only has a few payments left, do not pay that off to lower your DTI because, unless you bought the car, the lender will assume you’re going to lease a new vehicle and still count that payment against you.”

“Borrow less and earn more,” advises Reiss. “If you have debt, work to pay it off, starting with your high-cost debt, such as credit card balances.”

One thing that will really hurt your debt to income ratio is getting trapped in a cycle of debt from a predatory payday lender. To learn more about them, check out the eBook How to Protect Yourself from Payday Loans and Predatory Lenders—or just give us a follow on Twitter at @OppLoans.

 Contributors 

Gerri Detweiler’s passion is helping individuals cut through credit confusion. She’s written five books, including the free ebook Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and her latest, Finance Your Own Business. Her articles have been widely syndicated and she’s been interviewed in over 3000 news stories. She serves as Head of Market Education for Nav, the first and only site that shows small business owners their free business and personal credit scores and tools for building strong business credit.

David Reiss is a professor at Brooklyn Law School and director of academic programs at the Center for Urban Business Entrepreneurship. He is the editor of REFinBlog.com, which tracks developments in the changing world of residential real estate finance.

Brian Woltman is the Branch Manager for Embrace Home Loans in Basking Ridge, NJ. Over the course of his 13-year career, he has helped countless families achieve their dreams of homeownership. He’s helped everyone ranging from first-time home buyers to seasoned real estate investors. If you’re looking for a mortgage professional that will always look out for your best interests, give Brian Woltman a call today at (908)-295-4891, connect on Facebook or email him at BWoltman@EmbraceHomeLoans.com.

What Debt Collectors Can and Can’t Dodebt-collect2-1024x262

If you’re applying for a loan—any loan—it’s important that you figure out whether you can afford to make your payments. Because if you can’t, you’re going to end up dealing with a debt collector.

Sometimes these collectors work for the lender that gave you the loan, but many times they are actually a second company. The lender sells the debt at a discount to a debt collection agency, who then starts contacting you to try and collect on the money that you owe.

While there are many, many debt collectors that do everything above board, there are also companies that try to bend the rules in order to get people to pay. If you’re past due on a debt and dealing with a debt collector, it’s good to know what rights you have.

“The main statute on debt collection is the Fair Debt Collection Practices Act (FDCPA),” says Braden Perry (@bradenmperry), a regulatory and government investigations attorney with Kennyhertz Perry, LLC.

Perry says, “It’s important to remember that FDCPA applies to only 3rd party collection firms, and not first parties collecting on their own behalf. But many companies don’t know that even if you are collecting first party, you are subject generally to the same fundamentals of the FDCPA through the Consumer Financial Protection Bureau (CFPB) via unlawful, deceptive and abusive acts and practices.”

Keeping that in mind, here’s a quick guide to what debt collectors can and can’t do.

They Can: Contact you by phone, mail, email and text message

“According to the FDCPA, a debt collector can contact you by phone, or postal mail,” says business author Michelle Dunn (@DunnMich). “Some debt collectors also contact using cell phones, email or text, though the law does not cover that.”

The reason that the law does not cover cell phones, email, and text, is because it was written in 1978. The ways that people communicate have changed a lot since then.  And if you prefer to communicate with a debt collector through email, it’s a good idea to use your personal email address.

The reason for this is because your work email is usually not confidential. Your employer can search through your email at any time. Since your correspondence with a debt collector is supposed to be confidential, this can make your work email a no-go.

They Can’t: Contact you any time or place

The FDCPA clearly states that a debt collector cannot contact you before 8 A.M in the morning or after 9 p.m. at night.

Of course, if you’re someone who works a non-traditional schedule, those late nights and early mornings might actually be the most convenient times for you. In cases like that, you can request that the debt collector contact you outside those standard hours. They simply require your permission in order to do so.

Debt collectors also cannot call you at work if you have told them that you’re not allowed to discuss this issue while at your job. If you tell a debt collector that you cannot speak to them at work and they continue to contact you there, that’s a sign that you should be wary.

They Can: Call people other than you

According to Dunn, debt collectors are allowed to contact your spouse and speak to them about your debt. If you have an attorney who is representing you regarding the debt, the collector is also allowed to speak to them.

Other than that, debt collectors cannot talk to anyone else about your debt. (Remember when we said that these communications were confidential?) However, they can speak to other people in order to obtain your contact information, phone number, address, etc.

A debt collector can call your employer to verify that you work there and to find the best way to reach you. But if a debt collector calls your employer and tells them about the debt, they are breaking the law.1

They Can’t: Threaten or harass you

This is a big one. And while it does not happen a lot, it’s one of the practices that have led to debt collectors having a not-so-great reputation.

Plainly put, a debt collector cannot threaten or harass you in any way, shape, or form in order to get you to pay your debt.

These practices include:

  • Threatening to harm your reputation
  • Threatening to make your debt public
  • Threatening violence or physical harm
  • Using obscene or profane language
  • Calling you repeatedly to annoy you
  • Threatening to garnish your wages or seize your property without a court order
  • Threatening legal action if they do not intend to do so
  • Threatening to add false information to your credit report
  • Telling you that you will be arrested if you don’t pay2

As Dunn puts it, “threatening to put someone in jail is different than asking someone to pay in full or by a certain date.”

They Can: Take you to court

According to Dunn, a debt collector can actually sue you and go to court to collect your debt at any time.

“They can take you to court immediately,” she says, “but most try to collect the debt by traditional means before going to court.  No one wants to go to court, so hopefully the debtor pays before that action has to be taken.”

This makes sense, as taking someone to court can be expensive and time-consuming. But if you are unresponsive to a debt collector or refuse to acknowledge that you owe them a debt, most of them will sue you in order to recoup what you owe.

Do your best to settle your debt before it gets to that. If the collector sues you and wins their case, the court will issue a judgment authorizing a garnishment. This means that the debt collector can take part of your wages out of every paycheck until the debt is fully repaid.

They Can’t: Lie and pretend they’re someone else

If a debt collector calls you and pretends that they are someone else, that is illegal. Full stop.

The reason collectors do this is because it can make debtors seem like they are in more trouble than they actually are. A call from the government saying that you owe money, for example, is going to freak you out a bit more than a call from a regular debt collector.

Some debt collectors will claim that they are attorneys or representatives from a credit bureau. Others will send what appear to be official-looking documents that seem like they are from a court or government agency.

No matter what, any debt collector who claims they are anything other than a debt collector is breaking the law.

If you have a debt collector that is using illegal methods to try and collect on your debt, you should contact one or all of the following:

Note: Some people think that taking out a payday loan won’t hurt their credit. And while payday lenders don’t report your information to the credit bureaus, debt collection agencies do. Failing to pay back your payday loan and having it sent to collections will end up hurting your credit even further. The easiest solution is also the best: Never take out a payday loan!

To learn more about debt collection, check out this article from the FTC.

About the Contributors:

Michelle Dunn, has worked in the credit and debt collections industry for over 30 years.  She started and ran her own third party collection agency and eventually sold her business in order to write full time.  Michelle is the author of many books on the topic of credit, debt collection and starting a collection agency.  Michelle is now a consultant and presenter for the credit and collections industry.

Braden Perry, is a regulatory and government investigations attorney with Kansas City-based Kennyhertz Perry, LLC. Mr. Perry has the unique tripartite experience of a white-collar criminal-defense-and-government-compliance, investigations attorney at a national law firm; a senior enforcement attorney at a federal regulatory agency; and the Chief Compliance Officer of a global financial institution.

References:
1 “Can debt collectors call my employer and tell them they are calling about my debts?” Consumer Financial Protection Bureau. Accessed February 20, 2017 from https://www.consumerfinance.gov/askcfpb/337/can-debt-collectors-call-my-employer-and-tell-them-they-are-calling-about-my-debts.html

2 “Debt Collection.” Federal Trade Commission: Consumer Information. Accessed February 20, 2017 from https://www.consumer.ftc.gov/articles/0149-debt-collection

25 Little-Known Presidential Money Facts

25 Fun Facts About Presidents, Money, and Presidents Who Were Bad with Money

Have you heard the one about the ex-president who was so broke upon leaving office that he had to move in with his mother-in-law? If you had to take a guess, which president do you think got a speeding ticket while in office? Did you know that Thomas Jefferson’s poor financial decisions are the reason we have the Library of Congress?
The president is the country’s CEO. So, historically, how have they been with their own businesses and personal finances? The answers are… mixed. We spoke to Financial Expert Harrine Freeman (@harrine) to get these little-known presidential money facts!

George Washington

  1. When George Washington was elected as the first president of the United States, he refused to accept the office’s $25,000 salary. He was later convinced to take the paychecks in order to set a good precedent for future office-holders. It is now against the law for a US president not to take a salary
  2. That $25,000 salary was two percent of the U.S. budget. If a modern president’s salary was two percent of the budget, it would be around $80 billion.
  3. When Washington married Martha, she was by far the wealthier of the pair. Her money came from her first husband, Daniel Parke Custis, who was almost twenty years older than her and died after only seven years of marriage.
  4. It’s against the law for a living president’s likeness to be printed on U.S. currency. This dates back to George Washington’s refusal to have his portrait printed on the U.S. dollar. In 1866, this tradition was made law by an act of Congress.
  5. Even though George Washington was one of the wealthiest people in the whole country, the nature of farming meant that he had very little free cash on hand. That’s why Washington had to borrow $600 from a neighbor in order to attend his own inauguration.

Thomas Jefferson

  1. Thomas Jefferson was in debt for pretty much his entire life. In 1815, he was forced to sell his library to the government in order to pay his creditors. Those books formed the basis for the Library of Congress.

James Monroe

  1. President James Monroe was buried in New York City because there was no money to send his remains back to his home state of Virginia.

Abraham Lincoln

  1. Abraham Lincoln was the first president to be featured on a U.S. coin. It was (you guessed it) the penny! Minted in 1909, “Lincoln Pennies” were only meant to commemorate the 100th anniversary of Lincoln’s birth. However, the coins proved so popular that they just never stopped minting them!
  2. As a young man, Lincoln owned a grocery store with a business partner, William F. Berry. After Berry died, Lincoln was left with so much debt that the future president referred to it as “The National Debt.”

Ulysses S. Grant

  1. Early in his presidency, Ulysses S. Grant was pulled over by the police in Washington D.C. and given a $5 speeding ticket for driving his horse and buggy too fast.
  2. After he left the presidency, Ulysses S. Grant lost almost all his money when he invested it in a business that turned out to be a swindle. Grant was forced to sell his old Civil War mementos for money. However, in light of his situation, Grant also had a $150,000 debt forgiven by William H. Vanderbilt.
  3. Eventually, Grant wrote and sold his memoirs in order to pay off his outstanding debts.

William McKinley

  1. While he was governor of Ohio, McKinley co-signed a loan to support a friend’s business venture. The business failed, and McKinley was forced to declare bankruptcy. Three years later he was elected president.

William Howard Taft

  1. When adjusted for inflation. Taft was the highest paid president in history. His $75,000 salary in 1909 would be the equivalent of almost 1.9 million in today’s dollars.

Warren G. Harding

  1. President Warren G. Harding loved to play poker. He loved it so much, in fact, that he once lost an entire set of priceless White House china in a game.

Herbert Hoover

  1. President Herbert Hoover’s first job ever was picking bugs off of potato plants. He was paid one dollar per hundred bugs. Hoover would later study geology at Stanford University and go on to make a fortune in the mining business.
  2. Hoover was worth $75 million (over a billion dollars today) and donated his presidential salary to charity.

Franklin D. Roosevelt

  1. Do you know why President Franklin D. Roosevelt is on the dime? Congress voted in 1945 to place his profile on the ten-cent coin to commemorate the March of Dimes, a charity that FDR founded to combat childhood polio.

Harry S Truman

  1. Harry Truman declared bankruptcy in 1922 when his hat shop failed. It took him 12 years to get out of debt.
  2. Truman was so poor when he left the White House that he was forced to move into his mother-in-law’s home. His only source of income was his Army pension which paid $112 per month. In 1958, Congress passed the Former Presidents Act, which gave him a yearly pension.
  3. In 1968, Truman and his wife, Bess, received the first two Medicare cards.

George W. Bush

  1. In 1989, Bush paid $600,000 to become a co-owner of Major League Baseball’s Texas Rangers. Just before being elected president, he sold his stake in the team for $14.9 million.

General Trivia

  1. Mount Rushmore cost $990,000 to build, which is around $15 million dollars in today’s dollars. Considering the fact that it took 14 years for 400 men to literally carve four giant faces into the side of a mountain, $15 million actually doesn’t seem like too much.
  2. Modern-day presidents receive an annual salary of $400,000, a $50,000 expense account, and a $100,000 nontaxable travel account. They also get $19,000 for entertainment. Ex-presidents usually earn $125,000 per speech.
  3. Did you know that Presidents William McKinley, Grover Cleveland, and James Madison all have their faces on US currency? It’s true! McKinley’s face is on the $500 bill, Cleveland’s is on the $1,000 bill, and Madison’s is on the $5,000 bill. Those bills are no longer being printed, but they are all still accepted as legal U.S. tender.
The next time you’re worried about your finances, just remember good ol’ Harry Truman needing a literal Act of Congress to get his financial ship afloat!
HarrineFreeman2

About The Contributor: 

Harrine Freeman is a financial expert, speaker, counselor, writer, CEO and owner of H.E. Freeman Enterprises, a financial services company that provides personal finance consulting services such as credit repair, debt reduction, budgeting, saving, planning for retirement and financial literacy education. Harrine is also the best-selling author of “How to Get out of Debt: Get An “A” Credit Rating for Free.” She has made over 150 media appearances as a featured financial expert.

Side Hustling Your Way to Zero Debt with Eric Rosenberg from Personal Profitability

Side Hustling Your Way to Zero Debt, with Eric Rosenberg from Personal Profitability

When people think about achieving their financial goals—maybe it’s paying down debt or saving for an emergency fund—they usually think about cutting back on their spending. And don’t get us wrong: cutting back your spending is important. By setting a budget and sticking to it, you can free up additional funds and set yourself up for true financial success. But there’s also a flipside to debt repayment that doesn’t get talked about as often. While decreasing your spending is important, so is increasing your income.

The more money you’re making; the more money you can be putting towards your debt. (This is assuming that you have already set a budget, of course. Paying down your debt without a budget is … not something we recommend. Like at all.) One great way to increase your income is by getting yourself a nice little side hustle. We talked to Eric Rosenberg from Personal Profitability about some of the ins and outs of using a side hustle (extra income you make outside of your day job) to pay down your debt.

Choosing a Side Hustle

Once you’ve decided to earn some extra cash through a side hustle, the next step is choosing which side hustle to pick up. And you’ll have a lot to choose from. When it comes to side hustles, the possibilities really are endless.

“Anywhere you can make money is a good side hustle,” says Eric. “Look at your skills and hobbies first and try to leverage those to earn income on the side.”

So if you’re the crafty or artistic kind, maybe that means starting your own Etsy store to sell handmade jewelry. If you have a large collection of comic books from your childhood, there’s a good chance that at least some of them will fetch a pretty penny on eBay. And if you like scouring local flea markets for great finds, that’s a hobby that could easily be used to make a buck on Craigslist.

If selling items isn’t your jam, how about selling services? Eric has some other suggestions:

“Online freelance services are an easy and safe way to get started from the comfort of your own home. Lawn care or snow removal are also widely needed year round in your neighborhood. You can also quickly become an Uber or Lyft driver (or Postmates if they operate in your city) if you own a car.”

To learn more, head over to Personal Profitability to check out Eric’s list of 137 side hustle ideas.

Keeping That Extra Income

Once that extra income starts rolling in, it can be extremely tempting to use it as extra spending money. And if you’re already living on a tight budget, you may feel like you’ve earned the right to treat yourself. While the occasional treat might not break the bank, using your side income for splurging can easily get out of hand, leaving you back at square one.

Eric agrees that “lifestyle inflation is a tough thing to avoid when earning more,” But don’t worry. Eric has some good advice for how to keep yourself from splurging away all your side hustle money.

“The best way to ensure your side hustle income goes to your debt payoff is to track your business income separately from your personal income. In fact, you should always keep business income and expenses separate for tax and legal reasons. Each time your business has enough cash in the bank to pay you, save 25% for taxes and put the rest right into a debt payment.”

To that we’ll add one more thought: If you do want to splurge every now and again, just add that line right into your budget. Set aside $50 a month for a nice date night at the movies or a mani-pedi. By budgeting for that extra treat, you’ll be able to reward yourself every once in a while and still stay on top of your finances.

Strategize Your Debt Repayment

Paying off your debt isn’t simply a matter of freeing up cash. If you don’t go into it with a solid plan, you’re all the more likely to fail. There are two popular debt repayment strategies: The Debt Snowball and The Debt Avalanche.

With The Debt Snowball method, you’ll put all your extra money towards paying off your smallest balance first. Every time you pay a debt off, you add its minimum payment amount towards paying off your remaining balances. This way, the amount your paying towards each subsequent balance grows larger, like the proverbial snowball rolling down a hill. This strategy gives you some early victories that can encourage you to keep going.

With The Debt Avalanche, you line up your debts in the reverse order: from largest to smallest. And this time you’re not ordering them according to their balances; you’re ordering them according to their interest rates. You pay off the debt with the largest interest rate first and work your way down, paying off the debt with the smallest interest rate last.

Mathematically, the The Debt Avalanche method is the absolute winner,” says Eric. “That is what I used to pay off my $40,000 in student loans in two years and six days after graduation. Always focus on paying off high interest debt first and then cascade down into the lower interest rates. While it doesn’t offer the same psychological quick win as the debt snowball, you can’t argue with math!”

And he’s right. With The Debt Avalanche, you can save a lot of money in accrued interest compared to The Debt Snowball. To learn more, check out our blog post, Sweep Away Your Debt With a Debt Avalanche.

Plan for the Future

Once you’ve paid down your debt, does that mean you should just close your side hustle down? For some people out there, that might be the right call. But for others, especially for people who’ve found a side hustle that’s both profitable and enjoyable, that extra money can still be put to sound use.

“If you don’t have one already, start saving for an emergency fund,” says Eric. “You never know when a car may break down or your furnace or hot water heater will go bad. It would be a shame to go back into debt after paying things off because you don’t have savings.”

Further Reading

For more information on side hustling, you can read our blog post, Get Your Side Hustle on in 2017! with Nick Loper from SideHustleNation.com.

And if you want to learn more about how to maximize your earnings, check out Eric’s book, The Personal Profitability Playbook, which you can get for free on the Personal Profitability website.

Eric says, “I built Personal Profitability on four core principles: Earn more, spend thoughtfully, grow your wealth, and live a better life through mindful personal finance. If you treat yourself like a business, you’ll be on set to reach your maximum personal profits!”

About the Contributor: Eric Rosenberg

Eric Rosenberg is a finance, travel, and technology writer currently living in Ventura, California. When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and daughter. You can connect with him at his finance blog Personal Profitability.

Good Money Habits for Single Parents with the creator of “Distilled Dollar”: Part I

good-money-habits

Matt is a licensed CPA and founder of Distilled Dollar where he shares how he and his fiancée went from living paycheck-to-paycheck to building wealth. With his fiancée’s help, he’s distilling down $$$ topics in pursuit of financial independence by the age of 35.

Thanks so much for your time, Matt! Can you start by telling us about your background in finance and your experiences with Distilled Dollar?

Thanks for having me!

My journey in finance began when I picked up a biography on Warren Buffett. I was in the middle of business school and trying to answer the question, “How can this material help me today?” I did what most younger brothers do and leaned on advice from my older brother; he was the one who recommended the book.

Fast forward a few years—and a hundred books later—I felt completely immersed in the principles of personal finance, but I still had no idea how to implement what I had learned. After all, as a millennial, I was graduating college with over 40k in student loan debt. I felt like that one-legged man in an ass-kicking contest.

I graduated college, became a licensed CPA, and found a good job. Happy ending, right? Well, despite all that, I was still living paycheck to paycheck. Bit by bit, I slowly built up positive habits surrounding my finances and made incremental, one percent changes nearly every month. I didn’t beat myself up when I slipped up, and I always realigned my actions to what I believed.

My main belief here is that money should be a source of good in this world. It shouldn’t be something we dread to think about. Distilled Dollar was the result of my fiancée and I struggling with managing and combining our assets. When it came to money, it felt like someone had pressed the reset button when we started dating. Money became a huge stress again, for both of us. It took a good nine months to basically figure it all out. Now we’re emboldened by the confidence we gain from having a grip on our finances.

What experiences do you have working with single parents and their finances?

As a CPA, and even as a college student, I’ve helped with two different programs: VITA and LadderUp. Each organization is designed to help low-income households receive the financial tools and advice they need.

The biggest role I played within each group was preparing federal income tax returns. This meant sitting down with single parents, foreign exchange students, widows, and those with disabilities. From a numbers perspective, I was always able to find a refund or, at the very least, guarantee they had optimized their final tax bill. The much more difficult aspect was answering questions such as, “What should I do with this refund?”

As a CPA, it is easy to find people who automatically assume I have a grasp on personal finance. While I can talk all day about accounting, that doesn’t mean I fully understand everyone’s budgets and goals. This is a common trap people fall into when they trust someone who is presumably great with money. My story is just one example of going from paycheck to paycheck to eliminating financial stress and worry.

What are some of the main challenges facing single parents, in terms of finances and budgeting?

With so many responsibilities to juggle for single parents, it’s difficult to gain a foothold on personal finance. Luckily, the subject isn’t very complex, and much of that complexity is often used as a marketing ploy from banks or individuals. The basics of it are simple. If you don’t budget, then you should sign up for a free service that will track your spending for you. Mint.com offers a completely free budgeting tool and doesn’t even require a credit card to start their service.

The overall goal is to gain honest clarity as to where your money is going. Once we gain perspective, then we can start to plug the holes in our leaky bucket. This process of pulling back the curtain has led to the biggest gains financially, and it mostly came from money I had already earned but never kept.

What are your top 3 tips for single parents who are new to budgeting?

My first tip is that you should budget. Many people dismiss it because of the extra bit of work, but the truth is that people who budget have money. As I mentioned above, budgeting shows us the holes in our bucket that need to be patched up immediately.

My second tip is to start small. I’m all about one percent improvement, because for me that sticks. I’m not able to make drastic changes in my lifestyle overnight. If I do, then I know I’ll always snap back like a rubber band. Instead, try saving one percent of your paycheck for one month. Put the money in the bank, or if you’re dealing with credit card debt, put an extra one percent towards your debt this month. Next month, add another one percent. Over time, you will not notice the change in your lifestyle, but you will start to see the money growing.

My third tip is, know your “why.” Money you’re saving needs to have an emotional connection, or else we’ll just grab it and spend it. If that money can be used towards a child’s education for example, then all of a sudden it becomes more meaningful. Making that decision to save an extra one percent becomes even easier with an end result in mind.

I’m adding a fourth tip here, which is to automate as much as possible. We often become stressed from paying bills, so we decided to automate all of them. We know we’re paying them, but we don’t feel that ping of stress each time we click “pay,” since that is now done for us.

Check out Part II of our conversation with The Distilled Dollar!

Millennial Money Management: Part II

A Q&A with Stefan Sharpe of the Millennial Budget

millennial-money-management

At OppLoans, we’re talking to Stefan from The Millenial Budget about the financial reality of millenials today. We’re getting his take on how recent grads can deal with overwhelming debt and the steps they can take today to set themselves up for financial success tomorrow!

What advice do you have for millennials who are just graduating with mountains of debt?

Forget about what your friends are doing. This is harder said than done. If you have a mountain of student debt, your only focus should be paying it off as fast as you can. That means live with your parents if needed, go easy on the entertainment expenses, and make extra payments. One common mistake I constantly see is that students do not take advantage of the six-month grace period. They think this is a "free" pass for six months so they ignore their loans. However, during these six months, interest is still accruing which means your total debt is climbing higher. Pay off those loans as quickly as you can, you will thank me later.

How can college students prepare their finances to deal with that impending debt?

During freshman and sophomore year, student debt and money is the least of concerns for many college students. For me, those years were all about getting the college experience. However, by junior year, and most certainly senior year, students realize the challenge they will be faced with. My advice is to first set up an emergency fund. You can find a complete walk through on what this is and how to fund it here. The reason for this is that you need to have a safety net in case something happens. The last thing you would want is to take on more debt when you are already drowning in student loans. After this is set up, I would put any extra money you have into your loans.

What are your top 3 tips for tackling student debt?

My top 3 tips would be:

  1. Pay early, pay more. I have said it many times already, start paying off your loans early! The quicker you pay down your loans, the less interest you pay. This can amount to thousands in savings. What would you do with an extra thousand dollars in your bank account?
  2. Don't forget about your tax deduction. The interest portion of student loans is tax deductible. Make sure you are getting that money back!
  3. Every dollar counts. Every time you skip your morning coffee or that night out with your friends adds up. Even if you save an extra $25 a month and apply it to your student loans, it will all make a difference in the end.

Any other words of advice for young people hoping to take charge of their financial situation?

Do not accept the norm. Too often we are told that we work until we are 65 and then retire, or we need that fancy new car and big house. While this may have been the standard for older generations, the millennial generation is far different. We have access to far more wealth than before. If we make use of this increased access to wealth properly, many of us can retire well before 65. Do not settle for average. I certainly will not be. If you are interested in taking control of your money, make sure to stop by my blog. Like my tagline says, "Grind today. Relax tomorrow."

Thanks, Stefan!