Credit card debt Archives

August 17, 2022August 22, 2022

Pay Off Debt or Build Savings? Prioritizing Your Financial Goals

Deciding whether to save or pay off debt is a very personal choice — and one that depends on many different factors. However, there are a number of ways to weigh your options in order to pick the best one for you. Below, we’ll cover the pros and cons of each route so you can more confidently answer the question: should I pay off debt or save?

Option 1: Pay Off Debt

Advantages to paying off debt include reducing the amount of interest you’re paying over time, improving your credit score, and lessening the stress and psychological burden that comes along with having the cloud of unpaid financial obligations hanging over your head. It also might make more sense to focus on getting rid of debt if it can help you accomplish some long-held financial goals.

In terms of choosing whether to pay off debt or invest, it may help to know that experts generally advise that if the total interest rate on your debt is greater than 6%, you should pay it down first before focusing on savings or investing.

When it comes to how to pay off debt, there are a couple of different approaches you can take. They’re grouped into what’s known as the avalanche and snowball methods.

With the avalanche method, you make minimum payments on all of your debts, and then use any remaining funds to pay off the debt with the highest interest rate. This plan for paying off debt can make the most sense if you’re working toward a long-term goal rather than a short-term financial need.

The snowball method, on the other hand, means that while you make minimum payments on your debts, you then address the smallest debts before taking care of the larger ones. If you’re someone who is inspired to work toward goals by seeing smaller signs of progress along the way, this route might be more appealing to you.

To get a quick idea of which debts may make the most sense to prioritize, a calculator for debt payoff can help. You can plug your current debts, including interest rate and remaining balance, into our Cost of Debt Calculator and get a better idea of how much your obligations are setting you back — as well as how long it will take you to pay them off at your current rate. This tool is also helpful for figuring out which debts to pay off first.

Should I pay off my credit card in full? When should I pay off my credit card?

It’s typically best to keep your credit card paid off for a couple of different reasons. Not only will it help save you money you would be paying in mounting interest payments that add up each month, but unpaid credit card debt can also negatively affect your credit score. If you already have an outstanding balance that you’re able to pay off, it’s a good idea to start here as a first step.

Option 2: Build Your Savings

Choosing to save also has its benefits, however. You may be able to take advantage of compounding interest — the more time your money is in savings, the more your money grows.

You also have better control over your timeline this way, as you don’t have to wait until your debts are repaid to begin getting closer to your bigger goals.

You’ll want to consider what you’re saving up for and whether right now is the best time to pursue it. If it’s your first home, other factors like the current market conditions and the cost of a mortgage versus renting come into play as well, and it may make sense to hold off and handle debts right away.

In any case, setting a target savings goal works toward either a debt payoff or savings strategy, so it often makes sense to begin here no matter what your ultimate objective is — and creating a savings account or emergency fund is a sound decision to avoid debt in the future.

One fairly quick and painless way to begin building your savings is to set up a direct deposit account that automatically puts a percentage of your paycheck into a designated account. If you’re able to afford it, even if it’s a small percentage of your paycheck to start, this can be a smart move.

Another way to save that might seem a bit counterintuitive is to spend money on home improvements that will improve your energy efficiency and cut costs down the road. Even if you don’t make full-scale updates, taking a look at your daily habits with respect to heating and cooling (for example, turning your thermostat down a few degrees or keeping the air conditioner off unless absolutely necessary) can slash ongoing bills and make a difference.

Should I pay off student loans or save?

It can be especially tricky to decide whether to prioritize student loan payments or begin saving, but the most important thing to consider is whether you currently have a comfortably padded emergency fund that will provide a safety net in case of an emergency, or even just a solid cushion in place to handle any major upcoming life events like a move, wedding, or higher education. You should also look at the current interest rates on your loans. If they’re pretty low, you can feel more comfortable starting to save and place your focus back on loans at a later time.

Should I use savings to pay off debt?

Again, it depends. While it can be tempting to dip into your savings to pay off debt, it’s recommended that you maintain a certain amount of emergency funds first before using savings towards debts. Otherwise, you might find yourself unprepared and without enough money to cover an unexpected or emergency situation that arises.

If you decide that paying off debt could help you take steps toward financial freedom, there’s an alternative option to traditional solutions, a home equity investment, that may be a fit. You’ll receive cash in exchange for a share of your home’s future value, and unlike loans for paying off debt, there’s no interest or monthly payments to worry about, so you can start eliminating it more quickly.

Are you a homeowner who could use some extra money to begin chipping away at debt or even add to your savings? Take our five-minute quiz to see if a Hometap Investment might be a good fit for you.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

August 8, 2019March 29, 2023

Boost Your Credit Score, Boost Your Financial Health

Last updated March 29, 2023

Improving your credit score can give you access to better rates on your mortgage, better offers on a new loan, and better financial opportunities overall. We’ve rounded up the top five tips that will help you boost your credit score fast.

1. Check Your Credit Score Often

My FICO advises you carefully review your credit report from all three credit reporting agencies. Check for errors and dispute inaccurate information by contacting both your lender and the credit reporting agency.

You can monitor your credit on sites like Free Credit Report that allow you to keep tabs on your credit in real-time.

Do you own a small business? Try these strategies to fuel your business’s credit growth »

2. Close to Your Credit Limit? Pay It Off

Even if you pay your credit card on time, every time, you may be negatively impacting your credit score if you have a balance that’s more than 35% of your credit limit. That means if you have a card with a $10,000 limit, you’ll want to keep your balance under $3,500.

3. Don’t Close Old Accounts

While your credit history stays on your credit report for seven years, closing a card if you still have balances on other cards increases your credit utilization ratio. So, if you have three cards totaling $20,000 in credit and you have $5,000 of charges among them, that’s a 25% utilization. If you close a card and you have $15,000 of credit with a balance of $5,000 among those two cards, you have a 33% utilization. That may reduce your credit score. Check out our video on how credit utilization works.

Lenders also may look favorably on those with an older “credit age,” or the average age of your credit accounts. If you close that account you opened in college, it makes your credit age appear younger.

4. Open Up a New Credit Card

Opening a new card can not only increases your total credit line (improving your credit card utilization mentioned above) but also shows the credit bureau that you have the ability to manage different types of credit. For example, taking on a car loan or opening a credit card account with a store diversifies your “credit mix.” Just make sure you know the interest rate, signup fees, and any additional costs involved.

5. Stay Under—Well Under—Your Credit Limit

Just in case you skimmed over point number two, it’s important to keep your credit utilization low. Opening a new credit card doesn’t mean you have to go on a spending spree. You’ll want to monitor both your per-card and overall credit card utilization.

When you boost your credit score, you’ll find you unlock new opportunities for improving your financial situation. For example, a good credit score allows you to access loans with better interest rates and tap into the resources you already have, such as the equity built in your home.

Of course, staying below your credit limit and paying off high balances means tackling your bad debt. Start paying down debt (and improving your credit score) with your copy of The Homeowner’s Guide to Leveraging Good Debt and Eliminating Bad Debt.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

April 26, 2019June 17, 2022

Good Debt vs. Bad Debt: What You Need to Know

If you’re like most Americans, you likely have some form of debt. While the percentage of Americans with debt varies by age, most groups hover around the 80% mark, carrying an average of $38,000 in debt.

However, not all debt is created equal. Some debts you can leverage to your advantage. Others, you’ll want to pay off as soon as possible. Read on to understand your good debts and your bad debts as well as how you can prioritize your debt payoff strategies and improve your financial portfolio.

Leverage Good Debt

Debts that help you achieve your goals, grow in value, or generate long-term wealth are considered good debts. It’s best to view these debts as investments in your future, investments you expect to come with positive consequences, such as technical or college education. Those with higher education have a higher earning potential, making it worth it for many to take on the student loans and other debt that comes with funding a college education.

Your mortgage is another debt in this category. Beyond providing you housing, your home is a financial asset that’s likely to appreciate in value over time, increasing your wealth.

These debts help you build good credit, but you’ll want to keep an eye on the ratio between your debt and income. LendingClub recommends keeping your total debt under 40% of your gross income. Your debt-to-income ratio is key to unlocking more credit. Keeping your debt much lower than what you make proves that you’re using debt in a way that benefits your financial future.

Another way to benefit from good debt is by leveraging other people’s money (OPM). But wait, if you’re using other people’s money, how do you have debt? As Rich Dad explains, you have two options when you want to invest in something: Use your money or find investors. Investments that leverage funds from others can help you increase returns on an investment and grow your own wealth faster.

Pay Off Bad Debt

The Balance sums up bad debt as anything “consumer-focused.” These are the debts that negatively impact your credit score and, if you’re not careful, can have harmful consequences. Debts you have to pay with cash, such as high-interest credit cards and payday loans, fall into this category.

The high interest rates make your debts more expensive, if not outright unaffordable, and, instead of helping you grow your wealth, take away from your wealth. That’s why you want to pay off these bad debts as soon as possible.

For some homeowners, the snowball payoff method is the most effective. By paying off your smallest balance debt and then tackling the next smallest debt and so on, you see small wins that keep you motivated. Others prefer to pay off high-interest credit cards first to ensure the interest doesn’t get out of control. Whatever strategy you choose, try to stay current on bills and monthly payments to avoid paying extra in late fees and additional interest.

Calculate Your Debt Ratio

The less bad debt you have, the better your credit. The better your credit, the more likely you’ll receive approval for home, car, or personal loans, and the more likely you’ll have a lower interest rate on these loans.

Start improving your ratio by paying off the highest-interest loans first, such as those high-interest credit cards; every extra bit you can put toward it helps. Also try to postpone any purchases you can. Keep checking on your debt-to-income ratio to monitor progress and stay motivated.

For homeowners that need funds, Hometap can be a smart way to access cash from their home’s equity to pay down debts, while working toward meeting long-term financial goals.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

April 16, 2019June 22, 2022

Which Debt Should I Tackle First?

From credit cards to student loans, home repair bills to car payments, debt can keep homeowners up at night. But of course, not all debts are created equal. If you’re looking to tackle your debt, which debts should you pay off first? The answer will depend on you—specifically, your motivations, your behavior, and your goals to determine your debt repayment ability.

The Magic Number: Exactly How Much Debt Do You Have?

Like any big goal, in order to make progress, you need to know where you’re starting from and where you want to go. First things first: How much debt do you actually have?

“I recently worked with couple that had a bunch of small loans,” says Crystal Rau, a certified financial planner™ professional (CFP®) based in Midland, Texas. “They like to go out to eat, travel, and shop, and that adds up. When I sat down with them and actually showed them what they were spending [each month], it really blew their minds.”

The more you know, the more you can make progress. Tally up your debts: List them out by amount, interest rate, and how the balance is calculated. That initial understanding enables you to then take stock, prioritize, and make a plan and budget to pay off your debts.

Where Should You Start?

When it comes to home buying, many people think “I bought a house, I feel good,’ but this does not change people’s behavior,” says Nandita Das, professor of finance at Delaware State University and a registered investment advisor. “Read carefully what you’re signing and prioritize your debt.”

Consider your behavior, your priorities, and what would best set you up for success: Are you the type of person who needs to see short-term progress to stay motivated? Or do you prefer to take the long view and work toward a big goal?

Next, select your debt payoff approach, particularly the popular avalanche versus snowball methods to pay off debt. With the avalanche method, your highest-interest debt gets top priority to pay off first. Once that’s paid off, move on to the next-highest interest debt, and so on. This method is good for long-term planners or those who like to work toward a big goal.

With the snowball method, first focus on your smallest-balance debt obligation and eliminate that loan first. When that bill is gone, tackle the next-smallest debt amount, and so forth. This method appeals to homeowners who like to see small wins to stay motivated.

“The ‘avalanche versus snowball’ question really asks whether absolute dollar terms are more important to the [homeowners], or psychological wins,” says Greg Knight, an Oakland-based CFP®. “In absolute dollar terms, go with avalanche and shift extra dollars to the highest-interest rate debt first. If absolute dollar terms are not as important and they need the satisfaction of feeling like they are ‘winning,’ then use snowball to wipe out a few small debts.”

(And it goes without saying: With either scenario, make sure you still pay the minimum monthly payments on all lower-priority debts!)

So, are you an avalanche, a snowball—or some combination of the two?

Check In Regularly

Celebrate small wins and be compassionate throughout the debt payoff process. Progress can take many forms along the way.

“If you have a bad month, circle the wagons and get back on track,” says Knight.

Because life happens and circumstances change, a successful debt repayment strategy can also benefit from regular check-ins.

“Me and my husband do bi-weekly money dates,” Rau says. “Twice a month, we sit down and track our goals and see if there’s anything that needs to be adjusted, and it’s really helpful. Just seeing progress every few weeks can keep you motivated.”

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

April 9, 2019May 20, 2022

How to Pay Off Your High-Interest Loans Faster Than Ever

There’s no better time than the present to set financial goals and get on the fast track to paying off your high-interest loans.

Follow these five steps to pay off your loans faster than ever.

Step 1: Understand Your Interest Rates

There’s a cost to using someone else’s money. That cost is interest. Interest is calculated different ways. You may see it quoted as an annual percentage rate (APR) but it can also accrue on a daily, monthly, or quarterly basis. Other lenders tack on interest cost to the outstanding amount you owe on a loan.

Interest rates are often based on your credit score and debt-to-income ratio. The better your score, the lower your interest rate. Higher scores indicate to lenders that you’re a higher risk. But don’t be fooled by low numbers. Home interest rates average about 5% today. That means a 30-year loan for $300,000 requires you to pay $279,000 in interest.

The average interest rate on a credit card is more than triple that at 17%. The average American has $6,000 in credit card debt. If you only make the minimum payments, you’ll pay $8,000 in interest—money that could be going into your savings or investment accounts to make you money. Add up your credit card debt and see how much you’re currently paying in interest.

Step 2: Pay Off High-Interest Debt

With a grasp on your interest, it’s time to focus on paying down debt, starting with your highest-interest debts. Investor.gov considers high-interest debts those with 8% interest or more with no tax advantages. First, figure out the minimum you need to pay for all your debts (the last thing you want is additional fees from not paying lower-priority debts!). Then, calculate how much more you can afford to pay toward your highest debts.

Paying off your highest-interest debt first is called the avalanche method. Another option, the snowball method, is to pay off your smallest balance debts first. “In absolute dollar terms, go with avalanche and shift extra dollars to the highest-interest rate debt first,” says Greg Knight, an Oakland-based CFP®. “If absolute dollar terms are not as important and [you] need the satisfaction of feeling like [you] are ‘winning,’ then use snowball to wipe out a few small debts.”

How much can an improved credit score save you?

Step 3: Consolidate Debt

Consider taking out one new loan to repay your outstanding debt. Then, you can focus on paying off this new debt with one monthly payment. Debt consolidation often lowers the overall interest you’re paying, particularly if you have lots of high-interest credit card debt.

Step 4: Avoid Additional Debt

If you don’t have the funds for it, don’t buy it. That doesn’t mean to put down the credit cards. It does mean paying your credit card bill in full every month. As Trent Hamm from The Simple Dollar explains, “Leave your card at home most of the time, and when you do use it, use it for specific purposes” like gas and groceries.

Step 5: Boost Your Budget

New year, new budget. The goal is to earn more and spend less so you can allocate your additional funds toward your debt. One way to earn more is to pick up a side gig, even for just a few hours a week.

The Hometap Option

Debt stress can keep up any homeowner up at night. For some homeowners, tapping into their home’s equity through a Hometap investment is a smart way to pay off debt without taking on any interest or monthly payments.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

YOU SHOULD KNOW…

April 6, 2019June 17, 2022

5 Tips When Consolidating Credit Card Debt

“Debt consolidation means taking out one new loan large enough to repay some or all of your outstanding debt,” according to Credit Sesame. “You get the money, pay off your accounts, and then make a single monthly payment to pay off the new debt.”

But from personal loans to balance transfers, there’s no one-size-fits-all approach to consolidating your credit card debt. Here’s what to consider before deciding to consolidate your credit card debt as well as five ways to do so.

When to Consolidate

Credit debt consolidation may make sense if your debt is spread across multiple cards, making it hard for you to keep track of who and what you owe each month. With one monthly payment, you can ensure you’re paying down your debt and not accruing any unwanted interest.

You may also want to consolidate if you can lower your overall interest rate. Most credit cards have high interest rates, so it’s worth looking into consolidation options to see if you can save some cash.

When to Think Twice

If you’re in debt because you spend more than you earn, your solution isn’t credit debt consolidation. Instead, it’s reducing your spending or increasing your income—or both. ConsumerFinance.gov suggests taking a look at your spending habits to pinpoint why you’re in debt and where you can save.

Credit debt consolidation also isn’t a solution for avoiding interest rates. According to ConsumerFinance.gov, there’s a time limit to the promotional interest rate for most credit balance transfers. Once the promotional period ends, the interest rate on your card is likely to go up—along with your payment amount.

5 Ways to Consolidate Credit Card Debt

1. Check Your Credit Report and Scores

First things first: Check your credit reports and scores for accuracy. As Credit.com notes, an error could prevent you from qualifying for the debt consolidation help. Dispute any error you find.

2. Contemplate a Personal Loan

You can take out personal loans to pay off credit card debt. According to Credit Karma, a personal loan may offer a lower interest rate than your credit cards’ interest rates. You may also have a longer time—even several years—to pay off the loan.

3. Read the 0% APR Fine Print

As Discover reveals, an introductory APR of 0% might only apply to credit balance transfers. That means any new purchases you make may be charged the—often very high—standard APR. Check cardholder agreements beforehand to know what 0% APR applies to—and what it doesn’t.

4. Look Into Home Equity Loans

If you own a home, you can take out a loan that gives you a line of credit with your home equity as collateral. A home equity line of credit (HELOC) begins with the draw period when you can access the funds in your credit line. The draw period typically lasts 10 years but can range from five to 20, during which time you may only need to make interest-only payments.

However, as NerdWallet warns, you need to consider fees plus interest, which add up over the years. If your goal is ultimately drawing down your debt, you’ll need to make payments on interest and the principal.

5. Consider Home Equity Investments

Products like Hometap offer homeowners a way to access their home’s equity today without taking on additional monthly payments.

The path you choose to consolidate your credit card debt depends on your situation and what is going to provide you the greatest benefit. If you’re serious about consolidating your debt, make a budget, stick to it, and consider giving plastic a rest.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

March 18, 2019June 17, 2022

Paying Student Loans vs. Investing: Where to Put Your Money First

When you graduate from college you can expect to leave with two things: a diploma and an average of $39,351 in debt. That’s before interest. While student loan debt averages vary based on a number of factors, about one in four Americans has some form of student loans.

If you have student loans, you know chipping away at the interest is frustrating. It’s tempting to invest your money so it can grow versus throwing all your extra income toward your loans. A LendEDU study examined the expected debt-to-income (DTI) ratios of nearly 10,000 student loan borrowers at time of graduation, concluding that 16 percent of those borrowers will have a DTI over 20 percent solely from student loans.

To pay down loans and build wealth in a way that makes sense for your financial situation, take these factors into consideration.

Time for Math

When paying off debt, including student loans, you need to put all your debts on the table. Some may make financial sense to pay off as quickly as possible. Other debts may not be as pressing.

To figure out how to prioritize which loans to pay off as well as where investing fits in, you need to compare your after-tax cost of debts (based on any tax breaks you may get from debts) against your after-tax expected return on investments. Remember, your expected returns will vary greatly depend on where you’re investing money and your investment strategy.

Use the Student Loan Hero Student Loan Payoff vs. Invest Calculator to make the math a little easier.

When to Pay Your Loans First

If interest from any one of your loans or other debts is higher than the amount you expect to earn from an investment, it makes sense to pay that debt first. But there are also other factors you’ll want to take into consideration beyond the math.

If the mere existence of your loans stresses you out, it’s worth working toward becoming debt-free before investing. It’s also worth reducing debt if you like a guaranteed ROI. As The Motley Fool explains, paying off your loan sooner saves you on interest. You know exactly how much money you’re saving in interest whereas investing comes with no guarantee.

When to Put Your Money Elsewhere

If you have credit card debt with high interest rates, you’ll want to focus on paying that off first. Most credit cards have higher interest rates than student loans. If you still have extra money after paying credit cards, consider investing if you expect to earn more than the amount of your student loan interest. This will also help you diversify your wealth and ensure you’re planning for your future, not just trying to keep up with your past.

MarketWatch points out that the problem with paying student loan debt is you may keep interest from piling up but you’re not building any equity. This significantly impacts your ability to grow wealth as you’re missing out on time you can’t get back. Lifehack created a chart that shows how you can earn significantly more money by starting early, even if you invest less money than someone who starts investing later in life.

See how your student loan balance compares to homeowners like you in our 2021 Homeowner Report.

For loans that are particularly large, Money Under 30 urges you to “get on with the rest of your financial life.” The same applies if you’re early in your career. You may find paying down debt and investing, especially to receive an employer 401(k) match, makes the most sense.

Funding Your Needs

Revisit your strategy often as your circumstances change, you pay off loans, and take on new debt—or your rate of return isn’t as high as you anticipated. You can always change your mix of where you’re putting your money. Of course, you always want to make the minimum payments so you don’t get whacked with fees (aka even more debt) or hurt your credit score.

As a homeowner, you also have the opportunity to tap into your home’s built-in wealth to fund today’s needs like paying off student loans while also diversifying your portfolio.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.