Debt Management

Believe it or not, in this health-conscious world we live in, some people overlook certain dietary items.  There is such a thing as good cholesterol vs. bad cholesterol.  Good fat vs. bad fat.  The extreme of one or the other is not healthy in any way. Well, the same can be said for debt!

In regards to debt, too often we misunderstand what is good and what is bad.  Now as a homeowner, you have a unique opportunity to “up” your good debt portfolio and shed your bad debt.

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Is there such a thing as “Good Debt?”

100% yes is the easy answer.  In fact, let’s look at debt and what it means to our credit score first and foremost.  Do you know the standard rule the credit bureaus use in terms of debt usage?

On credit card debt, the answer is 30% of the credit line.  If your usage goes over that amount, your credit score will decrease.  So from a credit score perspective, your usage of credit and what they deem as potentially bad debt can have a huge impact on future purchases and interest rates.  

Bad Debt Examples:

  • Credit Cards: Too many and use too much in carrying a balance.  Plus they are NOT tax-deductible.
  • Student Loans: These work as an inexpensive installment loan.  In some cases, they can be tax-deductible, but typically there is no ability to change the payment amount.  They do not have moving interest rates.  High student loans carry a high cost with no alleviation.
  • 1 Year Same as Cash: On the surface you believe you are doing a good thing.  However, the first negative that the company will not tell you is that they are using a finance company to write the loan.  When a company is viewed as a subprime lender, that decreases your score.  You show immediately as having a full balance — and there’s a ding on your credit score. Plus if you don’t pay it off, massive interest has been accruing.  This is also NOT tax-deductible.
  • Auto Loans: Everyone has them right?  Yes, but there is more than one way to buy a car.  With auto loans, paying interest even a small interest rate on a depreciating asset (meaning losing value) is a lose/lose proposition.  As a homeowner, you have the ability to buy a car or cars as a cash buyer and get a tax deduction.

The chart above does not illustrate the total, it is per credit card by age.  The average homeowner has 6 credit cards, not counting department store cards.

These are just a few examples of bad debt.  We could speak for hours on why you should never have a department store credit card, gas card, personal line of credit at the bank, or 100+ other examples.  It is about choosing your debt wisely. 

Good Debt Example The One You Need!

You may have noticed that in this section it is one example, not multiple examples.  The truth of the matter is your home is about the ONLY good debt on the market today.  Here is why:

  • First mortgage interest is tax-deductible (always consult your tax professional).
  • Credit bureaus do not ding you for being at your max LTV!  If you can get 80%, 90%, or 100%, you will not be penalized by the three bureaus.
  • Taking cash out of your home is nothing like a cash advance.  You will never pay 19% cash out rates like on a credit card.  Plus, the interest is tax-deductible.
  • You can reduce monthly expenditure or payments by 25%, 50%, or more by consolidating debt into a lower monthly payment.  That is a good debt.  By consolidating the debt, you have now improved your credit score.

Debt, like our calorie intake, is all about portion control.  Our financial health short-term and long-term is equally as important as our physical health.  There are numerous areas of bad debt, and so we encourage people to sit with our professionals and let us do a step-by-step assessment of your good debt vs. your bad debt.  You may be amazed at how the savings impact your bottom line.

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Does the rate even matter anymore?  As a homeowner it is a fair question to ask.  We are in many respects in unchartered waters in terms of interest rates.  It can give the industry this feeling that it will last forever.  As the English author Geoffrey Chaucer once said “All good things must come to an end.”  If that is the case, are we on borrowed time?  The proverbial bubble about to burst?

History lesson, since 1971.  Many homeowners do not remember the time when getting a mortgage at a high double digit interest rate was the norm.  To offset that, you could also get a savings account or CD (certificate of deposit) at 15% to 20% as well at that time.  However, when you look at the apex to today, you will notice two important items:

Mortgage Data

First, the data does not include where we are today.  Right now, some have the ability to get a mortgage in the 2% range!  This will be on the opposite end of 1982, when you were staring at 18%.  What can we ascertain from these two points of data?  Simple they are on the extreme.  Neither of these were the “new norm” for getting a mortgage during these periods of time.  Fair point right?  Is there much difference between the two?  Yes, and it is extreme.

In 1982 and through the entire 1980s, consumer spending was very controlled.  Credit cards, personal loans, installment credit was limited.  Yes, people had department store charges, but consumer spending and debt was in alignment.  Today?  

Their average consumer debt was $78,396 in 2019, a 58 percent increase from $49,722 in 2015. Millennials also carry an average mortgage balance of $224,500, the second-highest after Gen Xers, who have an average mortgage balance of $238,344. In terms of credit card debt, millennials’ balances are expected to climb.”  This according to bankrate.com

This means that people are owing more and spending more and creating more debt today, than any time in history.  So what happens when interest rates rise (and they will)?

Look at your own situation.  Ask yourself, are your debts being eliminated or rising?  Savings increasing or decreasing?  Is the equity in your home at an all time high?  Do you know?  What will your financial picture look like when the rates do rise?  Will it make sense to refinance then?

We are on borrowed time.  Not because of some geo-political reason.  It is a math reason.  Nothing stays flat, low, high, or the same forever.  When something is historically high like a stock, it is time to look to sell.  When something is historically low, like mortgage interest rates while maybe your personal debt is at a historical high, it is time to refinance your mortgage!  Time is of the essence, take action today.

“Christmas On a Credit Card” sounds like a snappy catchphrase!  All too often though this is the reality for many families.  They are financing Christmas on a credit card or credit cards.  2020 has motivated more families to spend more as Christmas and Christmas celebrations will be very different.

According to Investopedia, the average family will spend $998 to $1433 this year on gifts.  This will not account for additional holiday expenses.  Since 8 out of 10 people will only make the  minimum payments on their credit card, this is what Christmas will cost you this year:

$1433 at 17.5% interest will take you 3 years and an extra $500 dollars in interest alone!

This also assumes a number of other factors:

  • You have no current balance on your credit card.
  • You will NOT add another penny to the balance.

The reality is that for most, that will not be the case.  92% of homeowners in the US according to CNBC have an average balance on their credit cards of $7200 and growing at 21% per month, excluding holiday expenses.

Christmas on a credit card is not a good idea.  Anything on a credit card is not a good idea.  No pun intended, but credit cards are a revolving cycle of financial insanity.  No matter the strides you make, the balance never goes away!  No stimulus, no tax return, will eliminate the average homeowner’s credit card debt.

So why not take advantage of the cheapest money in the market.  Pay something, a monthly “bill” that will pay you back.  Yes, as a homeowner, your monthly mortgage payment actually pays you back!  Let’s work out a financial plan that will ensure a credit card debt-free life.  Start with our calculator and see for yourself: https://refi.com/calculators/

Finance

Believe it or not, in this health-conscious world we live in, some people overlook certain dietary items.  There is such a thing as good cholesterol vs. bad cholesterol.  Good fat vs. bad fat.  The extreme of one or the other is not healthy in any way. Well, the same can be said for debt!

In regards to debt, too often we misunderstand what is good and what is bad.  Now as a homeowner you have a unique opportunity to “up” your good debt portfolio and shed your bad debt.

Winging it

Is there such a thing as “Good Debt?”

100% yes is the easy answer.  In fact, let’s look at debt and what it means to our credit score first and foremost.  Do you know the standard rule the credit bureaus use in terms of debt usage?

On credit card debt, the answer is 30% of the credit line.  If your usage goes over that amount, your credit score will decrease.  So from a credit score perspective, your usage of credit and what they deem as potentially bad debt can have a huge impact on future purchases and interest rates.  

Bad Debt Examples

  • Credit Cards: too many and use too much in carrying a balance.  Plus they are NOT tax-deductible.
  • Student Loans: These work as an inexpensive installment loan.  In some cases, they can be tax-deductible, but typically there is no ability to change the payment amount.  They do not have moving interest rates.  High student loans carry a high cost with no alleviation.
  • 1 Year Same as Cash: On the surface you believe you are doing a good thing.  However, the first negative that the company will not tell you is that they are using a finance company to write the loan.  When a company is viewed as a subprime lender, that decreases your score.  You show immediately as having a full balance — and there’s a ding on your credit score. Plus if you don’t pay it off, massive interest has been accruing.  This is also NOT tax-deductible.
  • Auto Loans: Everyone has them right?  Yes, but there is more than one way to buy a car.  With auto loans, paying interest even a small interest rate on a depreciating asset (meaning losing value) is a lose/lose proposition.  As a homeowner, you have the ability to buy a car or cars as a cash buyer and get a tax deduction.

Credit Card Debt by Age

The chart above does not illustrate the total, it is per credit card by age.  The average homeowner has 6 credit cards, not counting department store cards.

These are just a few examples of bad debt.  We could speak for hours on why you should never have a department store credit card, gas card, personal line of credit at the bank, or 100+ other examples.  It is about choosing your debt wisely. 

Good Debt Example The One You Need!

You may have noticed that in this section it is one example, not multiple examples.  The truth of the matter is your home is about the ONLY good debt on the market today.  Here is why:

  • First mortgage interest is tax-deductible (always consult your tax professional).
  • Credit bureaus do not ding you for being at your max LTV!  If you can get 80%, 90%, or 100% you will not be penalized by the three bureaus.
  • Taking cash out of your home is nothing like a cash advance.  You will never pay 19% cashout rates like on a credit card.  Plus the interest is tax-deductible.
  • You can reduce monthly expenditure or payments by 25%, 50%, or more by consolidating debt into a lower monthly payment.  That is a good debt.  By consolidating the debt, you have now improved your credit score.

Debt, like our calorie intake, is all about portion control.  Our financial health short term and long term is equally as important as our physical health.  There are numerous areas of bad debt, and so we encourage people to sit with our professionals and let us do a step-by-step assessment of your good debt vs. your bad debt.  You may be amazed at how the savings impact your bottom line.

Managing Debt

If 2020 has taught us anything, even the most “secure” companies and industries are laying people off.  Those left behind regardless of position have been asked to do 2x or 3x as much with the same compensation.  Maybe now, you have the itch to do your own thing!

What is Considered Smart Debt, in Starting a Business?

Debt without question is a natural course of doing business or being an entrepreneur.  Just like our personal lives, there is good debt vs. bad debt.  Let’s break it down:

  1. Credit card balances and cash advances.  No, never.
  2. Kabbage.  This service will lend based on accounts receivable.  High lengthy costs.
  3. Factoring.  Same concept as above, but even more expensive.
  4. Loan against 401k.  No, no, no.  Did we mention NO!
  5. Title loan on your car.  32% interest (varying by state) is a no-win situation.
  6. Borrowing from friends and family.  Only a good idea if you never want to talk with them again.
  7. SBA loan.  Sounds simple on paper.  In reality, it is very difficult to get.  You have to not “need” the loan to get it.

The above are perfect examples, and yet still more exist. Another risk is using the wrong assets to start your business.

Good debt, or smart debt, is about managing  your risk and money.

It is about taking the pressure off your business to have the ability to pay you immediately.  It allows you to have a low-interest rate and a long term that can be tax-deductible.  Good debt?  That is your home.

People would say never put your home on the line!  Well, the reality is your home is always on the line.  Whether you utilize smart debt, good debt, or refinance.  

Here are a couple of ways you can utilize a refinance:

  1. Your ability to pay off all your debt to a single payment.  Savings of a hundred, maybe even a thousand plus per month.
  2. Securing your best asset (your home) to the lowest possible payment with cash out!
  3. Keep your cash in the bank.  Let’s say you have $40,000 in savings and $40,000 in available equity.  Cash is king, keep that in your bank balance.  Borrow $40,000 in the form of a refinance to start and run your business.

Experts are experts.  There is smart risk vs. high risk.  There is smart debt vs. bad debt.  Refinancing your home for rate and term or cash out is the most powerful business tool you have (outside of yourself).  Use good debt smart debt to build your business and your dreams.

If you’ve got debt, you’re not alone. As student loans, medical costs, and overall cost of living continues to rise in America, consumer debt has soared to more than $12 trillion. Hard-working folks turn to credit cards and other means to try to pay off what they owe, but often the high interest rates just make things worse. Thankfully, there are alternatives. A debt relief program is designed to improve financial health over time. Let’s take a look at how these programs can lead to debt relief and even freedom.

Are you considering a home equity loan to regain control of escalating debt? You aren’t alone. Many American families live beyond their means, with 43% of them carrying credit card balances each month. Furthermore, figures from the Federal Reserve reveal that as of March 2019, total nonrevolving consumer credit (loans) in America totals $2,994.9 billion. A home equity loan is one method of debt consolidation, but is it the right option for you?

It can be stressful when you fall behind on your credit card payments because money was tight. But when your credit score drops as a result, you need to take action. FICO uses your payment history as part of how they determine your credit score. In fact, whether you pay your bills on time accounts for 35 percent of that number. While there isn’t an overnight solution, there are ways to fix your credit score.

If you’re up to your eyeballs in credit card debt, you might feel like there’s no way out. You’ve probably heard a lot of advice about all the things you’re supposed to do, but what about tips for things to avoid? Here are some of the things you should not do if you have credit card debt.

It sounds too good to be true: By simply connecting with a representative of a debt settlement agency, the amount of your debts will decrease significantly, and in no time you’ll be debt-free. Well, it’s not that easy, of course. Debt settlement can be a long process that has many pros and cons, and it’s not always the best solution for everyone. Let’s take an in-depth look at the process of debt settlement, as well as other debt relief services, to see what option is best for you.