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Re: How can I manage my debt?

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Message 11 of 31

Thank you, @MartinBooker, that's great advice. That brings me to my next question. How much debt is considered too much debt?

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Re: How can I manage my debt?

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Message 12 of 31

Hello @AARPLynne

 

A great rule-of-thumb is to eliminate as much debt as you can in order to prevent yourself from paying more interest on your loans. While everyone can't be 100% debt free right away, it is a good idea to reduce your debt when possible. Too much debt could be defined as any amount that is a burden to pay back.

 

Here are some examples of debt burdens:

 

1. Having a loan that consumes the majority of your monthly income, leaving you to compromise on covering other expenses.

 

2. A loan that has very high interest rates that makes paying off the loan nearly impossible (ex. An auto loan with a 20% interest rate)

 

3. Loans that you believe you will never be able to payoff due to the balance

 

Here are some options in these cases:

 

1. Find a way to refinance the loan for a lower interest rate and lower monthly payments. In some cases you may have to pay extra towards the loan to lower the balance in order to refinance. 

 

2. Sell the item as some loans may have a high interest rate or too large of a balance so selling the item and purchasing another (if the numbers workout), can be a way to get out of the unfavorable loan. 

 

3. Before taking on a loan, understand the interest rate, monthly payment and the impact that this will have on your current budget. Knowing how much you can comfortably afford before taking a loan will help you to avoid a debt burden. 

 

In cases where the debt is not a burden, you still want to be aware of how much debt you incur. The interest you pay could be taking away from your hard earned money. 

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Re: How can I manage my debt?

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Message 13 of 31

@MartinBooker are there times when debt consolidation is a good strategy to paying off debt?

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Re: How can I manage my debt?

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Message 14 of 31

Hello Lynn, 

 

Great question! Debt consolidation can be a good strategy if you have an overwhelming amount of debt accounts and need a streamlined process for payoff. Another situation in which debt consolidation can be helpful is in cases where someone has multiple high interest loans with high balances that could be consolidated to pay less in interest. In some cases, consolidating your debt can lead to a higher monthly payment but a lower interest rate. If this doesn't cause a strain on your monthly budget, consolidating your debt could be helpful. 

 

Debt Consolidation would not be helpful if you pay off the debt and accumulate the same debt again; so take time to address the habits that lead to debt accumulation. Another potential pitfall in debt consolidation is accumulating more debt after consolidating your loans. In some cases, the lines of credit that are consolidated remain open and if the habits that accumulated the debt aren’t addressed, you are at risk of accessing that debt again. This will lead to a large loan from the consolidated debt and additional debt from the current lines of credit or the new lines of credit that you use. Overall debt consolidation could lead to paying less interest and streamlining the payoff process, but throughout the process, be sure to focus on changing the behaviors that caused the debt in order to avoid repeating the same situation or accumulating more debt.

Before deciding to consolidate your debt, organize your loan accounts and make an attempt to manage the debt yourself or with help from family, friends or a professional. One way to get organized is to use a debt payoff chart and take advantage of the debt snowball or debt avalanche. If this does not seem feasible, you can consider consolidation but it is helpful to close or limit your access to any accounts that remain open after the debt consolidation is complete.

 

Here is a debt consolidation calculator and a credit card payoff calculator courtesy of AARP: 

https://www.aarp.org/money/credit-loans-debt/debt_consolidation_calculator.html

https://www.aarp.org/money/credit-loans-debt/credit_card_payoff_calculator.html

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Re: How can I manage my debt?

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Message 15 of 31

Additionally, @MartinBooker, do you have suggestions for how someone can stay out of debt?

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Re: How can I manage my debt?

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Message 16 of 31

Hello @AARPLynne

 

Great question! Debt consolidation can be a good strategy if you have an overwhelming amount of debt accounts and need a streamlined process for payoff. Another situation in which debt consolidation can be helpful is in cases where someone has multiple high interest loans with high balances that could be consolidated to pay less in interest. In some cases, consolidating your debt can lead to a higher monthly payment but a lower interest rate. If this doesn't cause a strain on your monthly budget, consolidating your debt could be helpful. 

 

Debt Consolidation would not be helpful if you pay off the debt and accumulate the same debt again; so take time to address the habits that lead to debt accumulation. Another potential pitfall in debt consolidation is accumulating more debt after consolidating your loans. In some cases, the lines of credit that are consolidated remain open and if the habits that accumulated the debt aren’t addressed, you are at risk of accessing that debt again. This will lead to a large loan from the consolidated debt and additional debt from the current lines of credit or the new lines of credit that you use. Overall debt consolidation could lead to paying less interest and streamlining the payoff process, but throughout the process, be sure to focus on changing the behaviors that caused the debt in order to avoid repeating the same situation or accumulating more debt.

 

Before deciding to consolidate your debt, organize your loan accounts and make an attempt to manage the debt yourself or with help from family, friends or a professional. One way to get organized is to use a debt payoff chart and take advantage of the debt snowball or debt avalanche. If this does not seem feasible, you can consider consolidation but it is helpful to close or limit your access to any accounts that remain open after the debt consolidation is complete.

 

Here is a debt consolidation calculator and a credit card payoff calculator courtesy of AARP: 

 

https://www.aarp.org/money/credit-loans-debt/debt_consolidation_calculator.html

https://www.aarp.org/money/credit-loans-debt/credit_card_payoff_calculator.html

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Re: How can I manage my debt?

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Message 17 of 31

Staying out of debt takes intentionality and awareness. A person who can easily go into debt must safeguard themselves from their habits and behaviors. Here are a few things to consider when aiming to stay out of debt:

 

1. What is my relationship with debt? - Am I someone who does not mind carrying debt of any kind? Am I completely opposed to debt? Do I say that I’m opposed to debt but often find myself back in credit card or personal loan debt?

 

Being able to identify your relationship with debt will help you use the proper tactics to stay out of debt. For example, once I am aware that I don’t want debt but keep going further into debt, now I have to identify and address my habits and behaviors that is keeping me in debt.

 

2. What am I doing to go into debt? – Is it emergencies because I do not have saving in an emergency fund? Do I continue to buy items that I see on TV and can’t seem to stop ordering new things on my credit card? Am I spending all of my income on my family which leaves me to use debt to cover my expenses?

 

Once we find the issue, we have an opportunity to address it. In the first scenario, we have to be intentional about saving so that we don’t have to use debt when an unexpected expense arises. In the second scenario, we may need to put s spending limit on our cards (this can be done with the some banks and credit card companies) or avoid the channels that cause us to spend money. You may have to go as far as getting that channel blocked if it’s a cable provider. In the third scenario, you may have to set boundaries with your family so that you can cover your expenses first.

 

3. What are ways to combat myself? – You may be the person that should not carry your credit cards out of the house because you will use them without planning. It’s also a good idea to lower your debt limits if you won’t be able to control your urge to borrow more money. Lastly, you can avoid the places that cause you to spend the most. If the mall is where you like to go walking, but you always tend to shop while you’re there, you may have to switch to a mall that doesn’t have your favorite store or do a complete change of scenery for your walk -- like a museum.

 

Tell us about ways that you have successfully stayed out of debt?

 


@AARPLynne wrote:

...do you have suggestions for how someone can stay out of debt?


 

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Re: How can I manage my debt?

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Message 18 of 31

Martin, how can we use debt to our advantage? Are some debts worse than others?

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Re: How can I manage my debt?

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Message 19 of 31

Good Morning Lynne,

 

Great question! Debt is a tool that can be helpful or harmful depending on how it is used. Debt can be used to your advantage if it is purchasing assets that produce monetary value. For example, if I purchase a rental property that is cash flowing or has more value than the loan balance that I carry (You owe $60,000 but the property is worth $130,000). Although this debt can work in your benefit, it’s still debt which has risk involved such as defaulting on the loan if you can’t pay the debt back. Debt will also allow you to purchase assets like a home that you may not be able to buy in cash. Some things to consider when taking steps to use debt to your advantage is:

 

Will this debt make me money? – A good exercise before taking out a loan to make a purchase is to consider if you finance this item, how will it work to your benefit financially?

 

Do the numbers work in the short and long term? – Make sure that you’re not making an investment with debt that will leave you with financial or emotional strain later. You may try to use debt to start a business but the business will take years to return a profit. Are you prepared to maintain the business until it has a positive return?

 

What are my risk? When you aim to use debt to your advantage, you want to think through the worse possible scenario if things go wrong. What could you possibly lose? Sometimes you can lose more than you expect. If you default on the business and have a desire to start another, you may have to rebuild your credit (or financial reputation) before starting again.

 

A proper business plan and analysis should be done prior to using debt to profit because there are risks involved. For larger purchases such as a home to live in, be sure to do long term planning as well to make sure that your home is good buy.

 

Re: Are some debts worse than others?

 

When it comes to debt, some debt carry higher consequences than others. The consequences from debt is typically higher interest rates which leads to higher monthly payments. For example, your credit card can carry an interest rate of 18% to 25% while your mortgage can be below 5%. Your credit card is considered consumer debt and is usually used on items that will not rise in value financially so this debt is not as favorable when you’re pursuing a loan.

 

A type of loan to avoid is a predatory loan. These are loans that carry extremely high interest rates, have higher-than-normal monthly payments and can be attached to things of value that you own. An example is what is known as a “car title loan” where you use your car as collateral to secure the loan which means that if you default, your car will be owned by your debtor. Another type of predatory loan is known as a “Payday loan” which can carry an interest rate of over 150%. By the time that you finish paying back a $400 loan, you can over $3500. These loans tend to target individuals that are in desperate situations and in need of money or individuals with lower credit scores. Many states have laws against payday loans. Predatory loans can be given as personal loans, credit card loans, auto loans and home loans. Be sure to know the details of your loan before signing up.

 

Another debt that can be harmful is defaulted debt that is showing up on your credit score. Loans that are defaulted typically go to collections and show up on your credit report this way. This type of debt will decrease your ability to borrow money until it is paid back and could be garnished from money that you are receiving. For example, defaulted student loans can lead to Social Security or paycheck garnishment. Be sure to check your credit report, which you can do for free with all three bureaus one time a year at www.annualcreditreport.com to make sure that you do not have any outstanding debt in collections.

 


How can we use debt to our advantage? Are some debts worse than others?

 

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Re: How can I manage my debt?

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Message 20 of 31

Good morning, Martin! It's been a great week--we thank you for providing such valuable information for the AARP Online Community. My next question is, if someone finds themself overwhelmed by debt, what can they do?

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