Back in April of 2009, I was already mad at my debt. It wasn’t until I conjured up the idea of tabulating how much interest I was paying, however, that my eyes were finally opened to the enormous power my debt had over my ability to retain my own hard earned money!

Here is the story of what pushed me over the edge and ignited an unquenchable fire that will burn hot until that glorious day when our last debt obligation is finally met…

The backstory

Already four months into our Debt Free Adventure, I was working tirelessly to gain control over our monthly cash flow. I was angry at our debt, and consumed with the idea of establishing disciplined management over our monthly expenditures. This was not easy.

Because neither my wife nor I were experienced budgeters, getting a handle on ‘where every dollar was going’ was not something that came naturally to us. Maybe you can relate.

Being sick of our paycheck-to-paycheck lifestyle gave us a lot of motivation, but we needed more. We were committed to budgeting, but I knew it would be hard to sustain the necessary level of intensity and passion. After all, changing our relationship with money was akin to reinventing your golf swing.

Regardless, we knew it was essential if we were ever going to master our money. So I set off in search of the necessary motivation. Then one happy day in April, I found it!

I discovered how much my debt cost

I’m not talking about how much my payments were. I’m talking about how much my debt was costing me. How much I was paying each and every month for someone to lend me money. What if that money was no longer vanishing into the silk pockets of banking geniuses? What if it was going straight into my pocket and staying there?

To find and sustain the necessary passion, all I needed to do was calculate how much money I was paying in interest every month, print the amount off in HUGE NUMBERS, and stick it on my fridge. Every month it makes me mad. Every month I strive to make that number go down as much as possible.

Want to know what’s even better? This simple exercise will help bring the whole family on board. Show the number to everyone, and explain how this amount can be yours every single month if you can just buckle down get out of debt. From that day forward, everyone will see that number on the fridge — every month.

This simple idea helped us develop a lasting financial philosophy to apply to our family finances. A financial mission statement of sorts to embody the spirit of our Debt Free Adventure — “sacrifice now to benefit later.” Think of it kind of like the more popular but less cool, “Live like no one else, so you can live like no one else.”

Your homework

That’s right… I’m assigning homework. Don’t worry, it’s easy, and it won’t be graded. Well, I won’t be grading you… I can’t promise the same for Nickel.

Do yourself a solid and set aside 30-60 minutes to complete the following:

1. Write out a list of all debts on which you are paying interest (or will be paying interest, like that six months “same as cash” couch that you bought). For whatever reason, the simple act of writing it down and having a physical copy is much more powerful than creating a spreadsheet.
2. Identify the interest rate of each debt and record them on your list. You shouldn’t need this for the calculation, but it’s good to see those numbers staring you in the face.
3. Record the actual amount of interest paid last month for each and every one of your debts. In other words, separate the principal from the interest and record the latter.
4. Add all of your interest payments together to discover exactly how much your debt is costing you.
5. Get mad at how much your debt is costing you. The goal here is to inspire a lifestyle change resulting in increased financial discipline.
6. Repeat this exercise every month and watch your progress. This will help remind you of how much your debt costs you, and watching that number shrink will help you stay motivated.

Although I started this exercise in April of 2009, I didn’t realize how powerful it was until I did it again six months later. I now intend to do this every month until I am completely debt free.

I know that I told you do this by hand, and you should — at least at first. Over time, however, you should be able to transition to a spreadsheet to more easily track your progress. If you have any clever ideas for a spreadsheet template, please let me know. Better yet, whip something up and drop me a line.

Spread the word

If you already have a handle on all of this stuff… Awesome! Now go help someone else see the light. I know you know someone who needs your help. You’re probably thinking of them right now, so… Go help!

My goal is to get each and every debtor that I run into to complete this exercise as soon as possible. I’m going to be like that annoying buddy of yours who sells Quixtar or Herbalife and will never let a conversation go by without bringing it up. Why? Because I know it will help people.

Make no mistake about it… I want this to become the next personal finance phenomenon. Hopefully, this article and simple homework assignment will inspire you to pursue a debt free life. It worked for me, so please give it a try.

It’s already catching on!

Here’s a quick list of others who have already experienced the power of this exercise:

• Interest Amount Paid – Establish a Proper Relationship with Your Debt – My attempt at working this calculation
• How much Interest are YOU Paying? – My second calculation, sixth months later… Notice how it is $58 less!
• Do You Know How Much Interest You Are Paying Each Month? – Patrick says you should, “get ready to be shocked!”
• How Much Interest Do I Pay? TOO MUCH! – MyJourney said his calculations made him “sick to [his] stomach!”

Now it’s your turn… If you just want to go through the exercise, print off your amounts, and stick them to your fridge… Great. Please let us know about it in the comments. If you are a PF Blogger, go through the exercise, and write a post about it… Maybe I can talk Nickel into adding your post to the list above.

However you do it… Just make sure you do it.

In closing

Think of it this way… That money can either flow out of your wallet OR into your pocket. Which do you prefer? The choice is yours!

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Related Articles at fivecentnickel.com:

» Steps to Early Retirement
» Weekly Roundup – 07/28/06
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» Money Poll #22: Current Debt Load
» Current Debt Load Poll Results
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» Debt Reduction: Penny Wise and Pound Foolish
» Debt Reduction on a Grand Scale

This is a guest post from Adam Jusko, founder of IndexCreditCards.com, a credit card information site where you can compare credit card offers. Please consider following Adam on Twitter for quick credit tips and opinions.

As the founder of a website about credit cards, I’m sometimes asked by financial reporters what advice I’d give to people trying to get out of debt. This used to stump me a bit, because the only true answer is “spend less than you earn and pay down your debt.” But of course, it’s not that easy.

Just as weight loss requires a certain psychological change that goes beyond “burn more calories than you eat,” so too does debt reduction. In fact, when climbing out of debt, you can adapt many of the same strategies used for successful weight loss. Let’s look at a few to see how you can put yourself on a financial diet that will lead to debt loss:

• Take it slow to build new habits – If you’ve ever heard the term “yo-yo dieting,” you know that it’s common for people to lose weight quickly, then put all that weight back on again once the “diet” is over. Why? Because it was a short-term fix, not a permanent change in behavior. The same is true of debt. You can put yourself on a complete financial sacrifice program to pay down your debt quickly, but once the debt is paid, you’ll feel deprived and you won’t have new habits to sustain you over the long haul. So, take it slow. Create a debt reduction program that requires real change in financial behavior but not a program that is such a shock to the system that you’ll never be able to maintain it.
• Make it public (at least somewhat) – A common goal-setting tactic for weight loss (and other goals as well) is to tell someone about the goal you’ve set. Doing so achieves a few worthy objectives: (1) friends & family understand changes in your behavior, (2) they encourage you toward your goal, and (3) you feel more committed because you want the praise that comes with success (or want to avoid admitting failure, depending on what motivates you). It may not be fun to tell of your debt, but people that care about you want to help you reach your goals. So tell ‘em.
• Cut down on sweets – Weight loss isn’t without sacrifice, and neither is debt reduction. If you want to lose weight, you have to lay off the cupcakes (or at least cut down on them). If you want to get out of debt, you have to lay off the new purse or new cell phone or new whatever-it-is-that-you-LOVE-to-spend-money-on (or at least cut down on them). Obvious, but still worth mentioning.
• Exercise – Obviously it’s good for losing weight, but getting out of debt? Yep. You’re more likely to be overweight if you’re in debt, and vice versa. Why? We could talk about endorphins and depression and all sorts of possible reasons, but in the end it doesn’t matter. Exercise is good for everything. Don’t believe me? Here’s at least one study that backs up the positive effects of dieting, which include increasing wealth.
• Use small rewards – Whether it’s losing weight or getting out of debt, it’s hard to wait until you reach your ultimate goal to celebrate. So, don’t wait. Set small goals along the way and reward yourself for staying on the right path. Just don’t make your reward a big money splurge that defeats earlier efforts. One suggestion: coffee with a friend who supports your efforts and will give you the pat on the back you need.

Like weight loss, debt reduction ain’t easy. It takes sacrifice, there’s no way around it. But using small strategies to support your larger goal will help you through the slog and to the other side — where you know a happier life is waiting for you.

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A reader named Hannah recently wrote in to ask about current 0% balance transfer offers. It seems that she took advantage of a 12 month offer last November, and is now looking for another to extend her 0% promo period with a new offer.

Unfortunately, credit card issuers have gotten increasingly stingy with their offers over the past year or so. Most of those twelve month offers have become six month offers, and pretty much all of them now come with fees attached.

While these offers have gotten considerably less attractive, they’re still a great deal when viewed in the context of prevailing credit card interest rates. So… What’s the best deal currently available?

Twelve month offers making a comeback?

A week or so ago, I got an e-mail announcing that the 0% promo period on the Discover American Flag has been increased from six to twelve months. While that sounds like great news, it’s important to note that they’ve also increased the balance transfer fee from 3% to 5%. Thus, it’s not quite as nice as it sounds. Nonetheless, depending on your situation, this could still be a worthwhile option.

Six month balance transfers abound (sorta)

It wasn’t too long ago that I had a list of over 40 great 0% balance transfer offers. That list has now dwindled to fewer than ten and, as noted above, the terms have deteriorated. Pretty much all of them are six month offers, and pretty much all of them have a 3% transfer fee.

Once again, this isn’t great, but it’s arguably better than paying 20% or more on your credit card debt. In case you’re interested, here are four such offers:

• Discover More Card
• Discover Miles Card
• Discover Monogram Card
• Citi Platinum Select Card (+ 0% on purchases!)

If you know of any particularly attractive 0% balance transfer offers, please share the details in the comments.

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The other day, Matt Jabs asked if you should invest while you’re in debt. This is an interesting question, and one I thought worthy of tackling myself.

Penny wise, pound foolish

For starters, you probably shouldn’t be investing while in debt unless you can reasonably expect to outperform the interest rates that you’re paying. In other words, if you’re carrying high interest consumer debt, you should focus on getting out of debt instead of building your portfolio.

Of course, this is a bit of an oversimplification. On the one hand, it ignores important things like building at least a minimal emergency fund. On the other hand, it ignores things like the free money that comes from employer matches on your retirement contributions.

Another consideration relates to contribution limits… There are annual limits on how much you can contribute to things like IRAs, and if you skip a year, you can’t go back and make it up. Would I pump money into an IRA instead of paying of credit card debt at 20%? No, but these sorts of things are still worth keeping in mind, especially when thing .

Developing a strategy

Here’s a thumbnail sketch of how I’d approach things. Note that for the first step, I’m assuming that you have enough to cover all of your minimum payments plus make the 401(k) investment. If not, you should obviously focus on your debts.

• Invest enough to get your 401(k) match
• Pay off all non-deductible, high interest consumer debt
• Jump back on the investing bandwagon

There’s certainly no harm in carrying a mortgage while building up your nest egg. In fact, if you wait until you’ve killed off your mortgage, you’ll find yourself in a huge hole by the time you turn your attention to the future. Not only will you be way behind the curve at this point, but you’ll also have missed out those IRA contributions that I warned you about earlier.

Anyway, enough about my view… What do you think?

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A reader that I’ll call Mary recently wrote in with the following question about dealing with a collection agency:

We were in a horrible car accident last year and our car insurance just now paid the car towing company. This company turned our bill over to collection agency which listed this on our credit report. Now… Who does what? The towing company tells collection agency to delete record on our credit report? Or do we need to do something?

We actually experienced something similar when a local medical clinic sent to collections a bill that we had already paid. Based on our experience, I would suggest starting by reading up on the Fair Debt Collection Practices Act (FDCPA).

Once you’ve done that, I would then request validation of the debt from the collection agency. A quick Google search turns up numerous sample letters that you can adapt for you own purposes. As part of your request, it wouldn’t hurt to note that you have proof of payment.

Be sure to send this letter via certified mail within 30 days of the collection agency’s initial contact. The collection agency will then have 30 days to respond. If they can’t validate the debt, they’re not allowed to:

(1) attempt to collect it,
(2) contact you about it, or
(3) report it to the credit bureaus

If they don’t respond, send a followup noting (politely!) their failure to comply with the FDCPA. Further state that they will be in violation of the act if they attempt to collect and/or report you to the credit bureaus (or fail to remove the listing if they’ve already reported you).

In our case, this is as far as it went. We sent the request for validation and didn’t hear anything. I then sent a followup noting their failure to validate the debt, and further stating that we consider the matter to be resolved. We haven’t heard anything since.

In Mary’s case, it would also be worth following up with both the insurance company and the towing company and asking for their help. It’s important to be polite but firm, and to not give up until you get a resolution. Take good notes of every conversation, and provide documentation wherever possible/necessary.

What did I miss?

Have any of you successfully navigated this sort of situation, or otherwise dealt with a collection agency? If so, do you have anything to add?

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Have you noticed the increased buzz about “becoming debt free” lately? Everywhere we turn, more and more people are talking about clipping coupons, cutting expenses, building emergency funds, etc. This has been especially true over the last year or so.

Why all the hype? Why are so many people looking to rid themselves of their debt which, in many cases, they have been carrying for years or even decades?

Why now?

The economy has had many dips and dives since coming out of The Great Depression, but this time it seems different. Many individuals and businesses are cutting back and making changes they’ve never had to make before.

So what makes this recession different from all the other recessions our economy has experienced since the depression ended in the early 1940s?

Personally, I see it is a buildup of bad financial habits from those in leadership. Our government has been mismanaging money for a long time, and those poor choices are finally starting to catch up to us.

For years now, whenever our country needed more money, the Fed would just print more. Recently, however, international lenders have become privy to (and tired of) our gross financial mismanagement, and confidence in our dollar has dropped.

These things have resulted in a very real shift in American economic power, and have further weakened confidence in the dollar as the standard global currency — and rightly so.

The result

Freedom from debt puts control back into your hands!

This sense of a very large, looming problem is causing more and more Americans to take matters into our own hands. I know that my wife and I have been inspired to act. We’ve had debt as long as both of us can remember, but now we’re doing something about it — and we’re not the only ones!

Along with the great consumer crash of 2009, there has been a great consumer savings boom of 2009!

It’s true. Since the 1st quarter of 2008, the personal savings rate has risen by 5x to it’s highest level this decade. Not only that, but people are cutting expenses and looking to create alternate sources of income as a hedge against job loss.

In my opinion, this recession has had a very positive impact on America. Most Americans were living way above their means… Just like our government. Facing hard times every once in awhile is a good thing, as it helps keep us on our toes and helps us maintain a proper perspective.

Personal finance is personal

Getting out of debt is a personal journey. It will be, and should be, different for everyone. For my wife and I, this Debt Free Adventure has been an awesome experience.

Because we are in our early 30s, we’ve never had to live through a large scale economic downturn as adults. The events of the past few years, and the changes that we’ve made, will affect us in a positive way for the rest of our lives! We plan to never abandon the solid financial principles we’ve learned.

What about you?

Have you recently developed a strong desire to become debt free?

If your answer is yes, I challenge you to answer these three questions:

1. Why are you seeking freedom from debt?
2. How do you plan to get there?
3. What do you plan to do when you achieve debt freedom?

Here are my answers:

1. I want to be in greater control of my own daily life and I don’t want to be a servant to anyone else.
2. My financial philosophy is, “Sacrifice now to Benefit later!”
3. I never plan to retire. Instead I plan to work on my passions at my leisure. Currently, those passions include – blogging, teaching, and speaking about personal finance, true healthy living, and self-reliance. I plan to have enough money in the bank to allow my family and me to live a humble and modest life off the interest, then give the rest away.

I hope you will share why you want to be Debt Free!

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Readers often e-mail me for tips on how to keep their finances manageable. There are so many options out there that it can be overwhelming. I was speaking with my mom about this some time ago, and she felt the same way.

My mom has been responsible with her money, but she felt that she could be doing better. After chatting with her, we decided she should switch banks and automate some of her bills.

Talking with her the other week, she’s really happen with her decision. She has saved both time and money with her new bank and online bill pay. I completely agree with her. Automating your finances can be a wonderful thing if done correctly.

Why do I love to automate my finances? For one thing, I like being in control without having to spend hours tracking down bills, envelopes, and stamps. Here are some other reasons I enjoy financial automation:

I don’t pay late fees

I used to occasionally lost bills or forgot to send checks whenever I had a very busy week. Late fees can be $29 to $39 for credit cards. Even if I called my credit card company to make a last minute phone payment, I was charged a $15 convenience fee for this privilege.

How to fix it: Set up free online bill pay with your bank. Most banks and credit unions offer this money and time-saving feature. Spend an hour setting this up with your bills, account numbers, due dates, and amounts, and you’ll only need a few minutes a month to maintain your system.

I’m saving money and I barely notice

In the past, I would save money for a few weeks and then had an emergency. After getting through the trouble, I’d neglect to re-start my savings, and would go through this again and again. I felt that I was barely getting by, and that saving some money was cutting me to the bone even further.

How to fix it: Have a portion of your paycheck automatically transferred to a high yield savings account. The trick is to wait until after the transfer happens to check your balance — hide that money and you’ll never miss it.

Don’t be a hero. Start out with a small transfer. It’ll take a bit of time, but you’ll become use to the slightly smaller paycheck. You can then increase the amount gradually over time. Just be sure to do your research and select an FDIC-insured bank or a CUNA-insured credit union that offers high interest rates for savings, and also has a solid reputation for customer service.

Retirement savings is a cinch

I started saving for retirement early on, while still in college. Unfortunately, I got distracted and my savings became sporadic as I got into debt. Getting back on the wagon was tougher than I thought.

How to fix it: Call your company’s Human Resources department and sign up for your company’s 401(k) program. Check to see if the company is matching contributions, and set your automatic deduction to be large enough to get the company match. That’s basically free money in your pocket.

If you have the opportunity, also have a small portion of your paycheck automatically transferred into a traditional or Roth IRA. There are tax advantages to having an IRA, so looking into which one is best for you.

To improve the performance of you IRA contributions, try looking for low cost index mutual funds or index ETFs. Besides performing better than many actively managed mutual funds, index funds can also make investing a lot simpler.

How about you?

Do you automate your finances? If so, what are the main benefits for you? If you prefer manually working with your finances, do you have tips on making it easier?

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Today I’m going to start off by asking a couple of questions…

Are you carrying any high interest debt?

Do you have any money in the bank?

If you answered yes to both of these questions, then let me ask another one…

Just how much money do you have in the bank?

The reason I ask is that a surprising number of people are holding excess cash in the bank while paying ridiculous interest rates and failing to get out of debt.

Sure, you need an emergency fund — and you might want one that’s somewhat larger one than normal given the current economy — but you’re making a mistake if you’re sitting on more cash than you really need.

On the one hand, this is a good problem to have. After all, there are tons of people out there who are in debt up to their eyeballs and have nothing to fall back on. On the other hand, if you’re sitting on more cash than you truly need, then you’re paying a ton of unnecessary interest while earning a pittance from your bank.

My advice: If you think I might be talking about you, sit down and carefully consider how much money you really need to have sitting in the bank. $1000? Six month of expenses? Twelve months of expenses? The “right” answer will vary. But if you’ve got more than that amount stashed away, use the excess to attack your debt.

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This is a guest post from Andy Jolls, a former FICO executive and founder of VideoCreditScore. If you like what you see here, please consider checking out his videos and/or subscribing to his RSS feed.

A few years ago, a friend of mine was engaged in 0% credit card hopping. She had accumulated $20,000+ in credit card debt after graduate school and was constantly opening up a new card to avoid interest charges. The logic: people see these 0% credit card offers and think “Wow, I can use those to make a dent in my debt.”

This line of thinking should, however, lead to two questions:

1. If credit card issuers are making these offers so often, how can they be making money?
2. Are there any negative impacts of card hopping, such as damage to your credit score?

The 0% reality

The truth is that most people weren’t careful enough to really take advantage of the “free loan” offered by 0% credit cards. The reality is that most folks transfer their balances and then see their card balances stay about the same, or even grow.

This is probably because people keep putting off their payments knowing they can hop to the next 0% offer. While I could dig for data to support this view, I’ll just stick with some basic logic…

Credit cards essentially offer 30 day “free” loans, and yet they generate billions in interest payments to card issuers every year. It thus stands to reason that a six month 0% offer could easily lead to a profitable business — and it often does.

Effects on your credit score

On the credit score side, the impact of card hopping is probably unknown to many “hoppers.” Credit card hopping creates several different issues. First, by opening so many credit cards, you are impacting the inquiries piece of the credit factors pie. Lots of inquiries means lots of risk and thus a lower credit score.

Second, if you are opening these cards, doing a transfer, and then closing the cards, you are never building aggregate available credit. You could have had 20 credit cards in your life, yet only have $1000 worth of available credit at any given time. People with great credit scores often have total credit limits in excess of $20,000 meaning that you’re usually using just a small fraction of their available credit. Since credit utilization accounts for 30% of your credit score, this can have a big impact.

Finally, the credit history portion of your score will be damaged, as it favors people who have had a few credit cards for years and years as opposed to consumers with lots of cards that have only been open for six months. This is why older people often have better credit.

Ask for a better rate

Another possibility is to use a 0% balance transfer offer as leverage against your current card issuers. Go ahead and contact your creditors and tell them that you have an offer to switch to a 0% card and that you want your interest rate lowered. You may be able to negotiate that 24% rate down significantly.

The 0% landscape

So… If these 0% credit card offers are so profitable, why have they begun to dry up? Well, the current economic climate has transformed consumers who struggle to pay off their debts into defaulters, cutting into profit margings. Thus, credit card issuers have tightened up and 0% cards have gotten harder to find — for now.

Eventually, however, the economy will recover. When it does, zero percent offers will once again become commonplace. As tempting as these offers might be, you should resist them unless you have a firm repayment plan in place. While getting out of debt is an admirable goal, you won’t make any progress without a plan.

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I have just one goal today… To motivate you to attack and reduce your debts.

Debt sucks bad!

For some of us, this simple statement is all the encouragement we need. We’re fed up with our situation, and are ready to spring into action. Personally, I could just stop writing now, having already motivated myself to continue my passionate and fiery Debt Free Adventure.

What about you? Are you properly motivated to get rid of your debt? If not, what will it take? Here are a few tidbits intended to help you establish and maintain a proper relationship with your debt.

How much interest are you paying?

Have you ever sat down to calculate your interest payments and determine precisely how much you pay in interest each month? If not, I encourage you to do so. You might be in for a dreadful surprise — and hopefully some powerful motivation.

Simply figuring out how much interest I was paying to others has been the single most powerful source of motivation in quest to get out of debt. I added up interest paid every month on my mortgages, student loans, auto loans, and credit cards and was disgusted to find that I was paying out nearly $1,300/month in interest alone!

How much are you paying?

Debt is not a game

Lenders spend billions of dollars in research and marketing to figure out the best way to separate you from your money. They’re throwing everything they can at us in an attempt to suck our money right out of our pockets.

Are you fighting back? Are you even prepared to fight? Many people are handing their money over faster than they can earn it! To be successful we need to be equipped with the whole armor of personal finance.

Do you really need hundreds of channels?

Sure, TV can be useful, but let’s be brutally honest with ourselves… TV is an enormous waste of time. Does knowing who won “The Biggest Loser” or “The Amazing Race” help you achieve anything or better yourself in any way? No.

I’m not saying that these things aren’t entertaining… I’m simply challenging you to spend your time — and money — doing things that are more productive. Things that can improve your situation. Things that will make you a better person. Do you really need to pay $100+ every month for TV service?

“The average millionaire can’t tell you who got thrown off the island last night.” -Dave Ramsey

Learn the power of simplicity

Remember back when you didn’t have a pot to piss in? For me, those days were partly nice and partly burdensome. I wanted more money to buy more things, but I also remember the freedom of not being beholden to anyone for anything!

For some reason, right or wrong, our culture drives us down a certain path — go to college, get a job, get married, buy a house, buy a bunch of stuff, etc. My wife and I followed that path for the first few years of our marriage. While that lifestyle afforded us some nice stuff, it also resulted in a mountain of debt.

More recently, we’ve learned the power of simplicity. One day, we stopped to consider our possessions now vs. our possessions as college students. Sure, our stuff is nicer now, and we have more of it, but… We’re also in debt! Simplifying life not only saves money, but it makes us happier, as well.

Less debt equals more freedom

The amount of money you owe to others is directly correlated with the amount of time that you HAVE to devote to earning more money. If you’re unhappy that you have to work a job that you dislike in order to pay for things that you don’t really want, then…

WAKE UP! You don’t have to do it anymore! Start making changes. Sell some stuff, get rid of a car, reduce your housing expenses, and attack your debt. While you might enjoy your job, wouldn’t it be nice to work because you want to instead of working because you have to?

Simplifying your life, living frugally, and spending less than you earn are three things you can do RIGHT NOW to reduce your debt and regain some of that freedom and independence that you used to enjoy.

Always remember… Debt = Slavery

No, you’re not bound in chains and forced to work in a labor camp, but your options are definitely limited when you’re in debt.

Do you own your house? Do you own your car(s)? Do you own your education? Do you own all of the clothes in your closet? Do you own your wedding? Do you own your toys? Do you own the gas in your car?

If you’re carrying any sort of debt, then the answer to at least some of those questions is “no.” So tell me… Are you truly free when you’re beholden to others in this way? Take some time to re-evaluate your debt and ask yourself if the burden you are carrying is worth the benefit of whatever you are in debt for.

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I frequently get e-mails from people who are in over their heads and looking for advice on how to get out of debt. While I do my best to point these people to relevant articles and provide some general guidance, I never hear back from them as to how things are going.

With that in mind, I thought I’d kick off the week by asking you guys to share your debt reduction stories. Whether you’re still formulating a plan, have made some progress, or have already gotten yourself out of debt, I’d love to hear your story.

Our debt reduction story

My wife and I have a rather boring story, and we like it that way. While we use our credit cards regularly, we’ve never carried a balance. We’ve also always paid cash for our vehicles. In fact, the only thing that we’ve ever borrowed for has been our home purchases…

When we bought our first house, we only had 10% to put down, so we used an 80/10/10 (80% first mortgage, 10% second mortgage, 10% down). We scratched an fought to get rid of that second mortgage, which we killed off within a couple of years. Four years after buying our first house, we had a job-related move and we plowed the profits from our first house into our current house. That was roughly three years ago.

About 18 months ago, we then refinanced into a 15 year mortgage. In the time since then, we’ve been working hard to pay off our mortgage early. We’re still have quite a ways to go, but we’ve made great progress.

Your debt reduction story

Please leave a comment letting us know how far you’ve come and/or how far you have left to go. If you have any tips or tricks to share, I’d love to here those, as well. Go ahead, don’t be shy…

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Related Articles at fivecentnickel.com:

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» Reducing Your Debt With Micropayments
» Q&A: Debt Reduction Strategy

This is a guest post from Jim Wang of Bargaineering. If you like what you see here, please consider subscribing to his RSS feed.

Credit scores are becoming increasingly important each and every day. While some people check them compulsively, almost as frequently as they check their investment portfolio, others check them infrequently, like the oil in their car. Regardless of where you stand, that three digit credit score plays a big role in your life, so it’s important to make sure that you have a good one.

So what’s a good credit score?

Good is relative. If you’re not planning on getting a loan, you probably shouldn’t be too worried about your score. As long as you have an average credit score or above, you’re in good shape. In such cases, good enough is good enough.

But let’s say that you want to buy a house, and you’re looking for a 30 year, fixed rate mortgage. What do the rates look like relative to credit scores?

Here’s what MyFICO says:

 
In that case, anything above 760 is “good,” though anything about 700 r†ange are pretty darn good. The point that I’m trying to make is that the definition of good depends on your needs. If you don’t need to borrow, then a 620 is as good as a 850. After all, you can’t walk into the grocery store with your 850 and expect to get anything with that alone, right?

So, the next time you’re fretting about how good your score is, think about what you’re trying to achieve first. Once you have context, it’s worth spending time finding out if your score is good, or at least good enough.

There are several ways you can see your FICO credit score for free, but all of them require that you sign up for a trial membership for some sort of paid service (e.g., FreeCreditReport.com requires a seven day free trial of their credit monitoring service). If you don’t want the hassle, you can always try a site like Credit Karma.

Credit Karma is absolutely free, but it’s not a true FICO score. Rather, it’s an approximation based on your TransUnion credit report. If you’re planning on getting a loan, you’ll want your real FICO score. If you’re just curious or want to see how it changes, the TransUnion-based score is good enough.

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This is a guest post by John of Mighty Bargain Hunter. If you like what you see here, please consider subscribing to his RSS feed.

Americans collectively have well over a billion credit card accounts. Some of those accounts make the credit card companies very, very rich. I’m talking, of course, about those that belong to people that carry large balances every month.

Since we’re all familiar with the evils of credit card debt, I thought I’d balance the discussion with twelve reasons why you shouldn’t get out of debt:

• Those wonderful interest charges. Why on Earth should you earn interest when you could be paying it? It’s a piece of cake: just buy a whole bunch of stuff you really can’t afford and make the minimum payment each month.
• You get to buy everything twice. Remember that espresso maker that you bought for $120? Wouldn’t paying $240 be twice as nice? It makes your espresso taste… Well… Exactly the same.
• Fees are fun. Fees for going over your limit. Fees for cash advances. Fees for paying late. Fees for paying on time. The fun doesn’t stop with the interest charges — not by a long shot!
• Financial independence is totally overrated. Being a slave to your debt has a charm all its own. You never have to worry about being in control of your finances ever again. The credit card companies will take care of that for you!
• A good night’s sleep is for sissies. Who needs a soft pillow when you could b tossing, turning, and waking up in a cold sweat from nightmares of giant point-of-sale terminals crushing that living room set you’re paying for every month?
• New friends at the collection agency. Never feel lonely again: collectors will harass and shame you… And your relatives, and your neighbors. Incessantly.
• There’s no time like the present. You needed that new home theater system right now. Right? Now those bills will be front and center in your finances — and will remain that way for a long time to come.
• Bargain hunters love desperate sellers. Nothing sound better to a bottom-feeder’s than: “Make me an offer.” Except, perhaps: “I need to sell this now.” You get to watch them salivate and then walk away with your stuff — for nine cents on the dollar, just because you need to make that credit card payment.
• You’re just a few small steps from bankruptcy and foreclosure. As much fun as credit card debt might be, bankruptcy and foreclosure are way better. Both are two-ton black marks that remain on your credit report for seven years. It just doesn’t get any better than this, folks.
• Default interest rates rock. The new credit card legislation makes it tougher for issuers to stick you with their default rate, but… When they do, it’s really high. Fall behind on your bills, and you’re the proud new owner of a 30% credit card interest rate. WOW!
• Every day is a tightrope walk. You get to be extra stressed about your job, about getting having a car accident, about getting sick, and about anything else that could be the final nail in your financial coffin.
• Someone has to pay for the responsible card users. Who’s going to cover the cost of that free float and all those credit card rewards? It might as well be you. We salute you, Mr. Up-To-Your-Ears-In-Debt Man!

As compelling as these twelve reasons might sound, some people aren’t willing to remain in hock for the rest of their lives. If you’re among them, then you might want to check out the Carnival of Debt Reduction, which is a weekly collection of debt reduction articles from across the blogosphere.

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About a month ago, we had a pretty lively discussion about whether or not you should pay off your mortgage early. A number of readers made great points on both sides of the debate. Since that time, I put together some thoughts on how to pay off your mortgage early for those that are interested in doing so. Today, I wanted to share some thoughts additional thoughts on the topic.

The source for these thoughts is a recent book called “The Frugal Millionaires,” which profiles 70 anonymous millionaires and their thoughts about money. Interestingly, just like with our prior discussion here on FCN, there are ‘frugal millionaires’ on both sides of the fence. Here’s a taste of what they had to say…

Thoughts in favor of keeping your mortgage…

“When it comes to residences, mortgages can be a way for someone to save cash for investing and therefore possibly allow them to earn a higher rate of investment return than one is paying in mortgage interest.”

“If you can have money at a cheap rate then a mortgage is a great decision…”

“If the money is cheap, it can be smart to arbitrage the cost of the mortgage vs. the benefits of a tax deduction and market gains…”

“The US government tax system is set up to reward those who have mortgages…”

“If the government is going to pay you to own a home, why turn them down…”

Thoughts in favor of paying off your mortgage…

“If you want absolute peace of mind, don’t have any debt…”

“For many people the advantage of the ‘interest deduction’ is a myth perpetuated by by real estate agents, mortgage brokers, and even your friends…”

“Mortgages lose their interest rate deduction efficiency as they get older. This [is because] you are paying more principal towards the end of the loan…”

“Take opportunities to pay off a little of the capital on your mortgage whenever you can — even if it seems like an insignificant amount.”

“I prefer not to have one and say get rid of them as fast as you can. Debt will kill you.”

“There’s a great feeling in living in a home you own outright.”

What say you?

While I know that I number of you have weighed in on this already, I still thought it would be worth asking… As I’ve noted previously, we’re doing a bit of both. We’re paying down our mortgage ahead of schedule, but we’re not committing every last penny to the effort. Instead, we’re directing a sizable chunk of our ‘discretionary’ funds to our investment portfolio.

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Should you payoff your mortgage early? I asked that question a couple of weeks ago, and the majority of respondents said “yes.” With that in mind, I thought I’d put together a list of strategies for doing just that…

Refinance your mortgage to a shorter term

If you refinance your mortgage to a shorter term, say from thirty to fifteen years, you can dramatically reduce the time required to payoff your mortgage. As an added bonus, rates are typically lower on shorter term mortgages.

The downside here is that you will have to pay closing costs, etc. (unless you opt for a “no-cost” refinance). Your mortgage payment will also increase, but what did you expect? You’ll be paying off your mortgage significantly faster, so it only makes sense that you’ll pay more per month.

Biweekly mortgage payment plans

I’ve written about biweekly mortgage payment plans in the past. The trick here is that, by sending in half of your monthly mortgage payment every two weeks, you end up making the equivalent of an extra payment every year.

Don’t believe me? Do the math. Instead of making 12 monthly payments, you’ll make 52/2 = 26 biweekly payments — the equivalent of 13 monthly payments. This will shave years off your mortgage. Moreover, if you’re paid on a biweekly basis, this approach might match your budgeting process better than monthly payments.

The downside to biweekly payment programs is that, while many lenders offer these sorts of programs, most of them charge a fee for the privilege. While it might seem easy to justify such fees based on your long-term savings, there’s a better option…

Overpay a fixed amount every month

When we bought our first house, I started sending in an extra 10% of our total payment as an additional principal payment. Ultimately, this works out to the equivalent of 1.2 extra mortgage payments each year — on par with the biweekly plan, but without the extra fees. Since you’re sending a fixed amount everything month, this is also very easy to automate.

Pay next month’s principal this month

This is an idea that I first read about in “Wealth Without Risk.” It goes like this… When you sit down to make your mortgage payment, send an additional payment equal to next month’s principal.

If you’re not sure what next month’s principal payment will be, just double the amount from this month — that’s close enough. In case you weren’t aware, your mortgage statement should break this down for you, listing the amounts going to principal, interest, and taxes/insurance.

The primary advantage with this approach is that it really puts your mortgage payments into hyperdrive. Over time, the amount you are paying toward principal will increase, meaning that you’ll pay down your mortgage faster and faster as the months go by.

There are two primary disadvantages to this approach. The first is that the amount of your overpayment is variable (increasing each month) such that it can be hard to automate your payments. The second is that it becomes increasingly difficult to keep up with the payments since the overpayment continually accelerates as the interest portion of your payment dwindles.

The haphazard approach

If all else fails, I recommend that you at least take what I’ve termed here the haphazard approach. Whenever you run across a small windfall, simply forward it to your mortgage company as an extra principal payment. Get a check from your reward credit card? Send it in. Get a tax refund? Send it in. Find ten bucks in the gutter? You know the drill… Send it in.

Aside from the fact that this approach doesn’t put any additional strain on your budget, paying down your mortgage with found money can be kind of fun. The downside is that this approach is generally less effective than the alternatives. After all, your additional payments will typically be smaller, and will come at somewhat random intervals.

Closing thoughts

The above list is by no means exhaustive, but it’s a great starting point. If you have any other suggestions, please share them in the comments. If you’d rather invest than prepay your mortgage, that’s fine. In fact, some of the above strategies can be applied to juicing up your investments. For example, make that extra “principal” payment into a brokerage account.

The important thing is to do something.

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Related Articles at fivecentnickel.com:

» More Thoughts on Paying Off Your Mortgage Early
» Pay Off Mortgage Early? Or Invest?
» Are Biweekly Mortgage Payment Plans Worthwhile?
» Debt Reduction: Share Your Story
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» Reaching the Mortgage Crossover Point
» Help a Reader: Mortgages from ING Direct
» How to Decide When to Refinance Your Mortgage

As a followup to last week’s post about finding the best mortgage rates, I just wanted to remind you that there is no such thing as a free lunch. I mention this because those of you that are in the market for a new mortgage are likely to be confronted by offers for a “no-cost” refinance. While this isn’t necessarily a bad thing, it’s important to know what you’re getting into.

What’s a “no-cost” mortgage refinance?

A “no-cost” refinance is one in which the lender or broker covers the closing costs on your new mortgage. Depending on where you live, you can expect to pay 2-3% of the loan amount when closing a typical mortgage, so this is a great deal. Right? Well…

The reason I keep putting the term “no-cost” in quotes is because there actually is a cost — you just don’t typically see it. In other words, the lender doesn’t eliminate the costs, they simply convert them into another form. In most cases, this means that you’ll wind up paying a higher interest rate.

It works like this… Just as you can buy points to reduce your mortgage rate, you can increase your mortgage rate in return for negative points. Each point is equal to 1% of the loan amount. By accepting a higher than market rate on your loan, you can generate cash back that lender can use to cover the closing costs.

Clearly, this approach is most beneficial to those with a short time horizon, as they’ll enjoy the upfront cost savings without having to live with that higher rate for very long. If you decide that the “no-cost” option is best for you, be sure to get a full rundown of the costs that are covered so you can make a meaningful comparison across lenders — not everyone covers all the same things.

“No-cash” is not the same as “no-cost”

Perhaps the biggest mistake that you can make when shopping for a “no-cost” refinance is to wind up with a “no-cash” deal instead. While the names sound very similar, these are very, very different products. With a “no-cash” refinance, the closing costs are rolled into the balance of the new loan.

Because there aren’t any negative points involved with a “no-cash” refinance, the rate will likely appear more competitive on a “no-cost” refinance. Unfortunately, you’ll wind up paying the fees yourself over time plus interest.

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I come from middle-class roots and was brought up with what I’ve recently heard referred to as a “middle-class money mindset.” By that, I mean that I’ve been primarily concerned with:

• Getting an education
• Developing a skill/career
• Honing that skill
• Using that skill to work and trade time for money
• Saving that money
• Working to a ripe old age, and then retiring
• Living happily ever after

More recently, I’ve come to realize that this isn’t what I want out of life. Rather, I want to develop a “wealthy money mindset.” By that, I mean that I want to:

• Embrace the concept of compounding interest
• Always spend less than I earn and avoid debt
• Save/invest as much of my income as possible
• Achieve financial independence
• Spend my “work” week pursuing my passions
• Never retire, but rather continue pursuing my passions
• Give generously

Wealth is, of course, a very personal concept, so your definition might differ from mine. That’s fine — to each his own!

My story

The following is a brief synopsis of how I came to realize that I need to abandon my middle class money mindset and replace it with one of passionate, wealthy living.

After graduating from high school, I secured student loans and worked part-time as a waiter to put myself through college. I chased after the “middle class dream” of getting a degree and building a career in hopes that it would lead me down the path toward wealth and peace of mind. At the time, I had no personal definition of wealth. The only “goal” that I had was that I wanted to do whatever I wanted whenever I wanted. I was truly ignorant and clueless.

In May of 2000, I graduated from college with a degree in Information Technology. I had over $30k in student loan debt and more than $5k in credit card debt. As far as the world was concerned, I was finally ready to start my career and begin trading my time for money!

As I continued down the path of modern consumerism, I was indifferent toward my personal debt. Then, about six months ago, I finally had my fill of running on the hamster wheel of life and getting nowhere fast. I started a personal finance blog, committed myself to debt reduction, and vowed to pursue my newfound passion all the way to financial freedom.

My extreme mindset makeover

In a recent discussion with my father I told him that I had rewritten my entire view of money and wealth. Intrigued, he asked me to elaborate. I explained to him that I had come to the realization that I needed to get out of debt, reduce my standard of living, spend less than I earn, give generously, save the difference, and eventually live off the interest. Knowing me from birth, and knowing my traditional spending habits, he was flabbergasted to hear such words coming out of my mouth.

I actually fell off the middle class mindset cliff the day I sat down and figured out exactly how much of my money goes toward interest payments month in and month out. If you’re in debt, I suggest that you do the same. Once I realized how much of my money was going toward interest payments, I was able to put my debts in proper perspective. From here, I:

• Developed a financial philosophy based on sacrifice – The more I sacrifice in the short term, the faster I’ll reach my financial goals. I’d much rather sacrifice when I am young, than worry about money in my later years.
• Discovered the importance of financial mentors – My mentors are people who have already accomplished what I have set out to accomplish, and are currently living the life that I want to be living. Conferring with these mentors helps me to continually transform my financial thought process from that of a middle class man to that of a wealthy man.

I’m now committed to doing the following in pursuit of financial freedom and wealthy living:

• Eliminating all debt including my mortgage
• Simplifying my life
• Saving aggressively, increasing as my debts dwindle
• Giving generously, increasing as my debts dwindle
• Pursuing my passions and developing income from them at my own pace
• Continuing saving/investing until I can live off my nest egg

These last points are going to be unique to each of us, but the general principles of my extreme mindset makeover stand. Now I just have to figure out how much I want/need to save before I start giving the surplus away, but that’s a topic for another day…

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Should you pay off your mortgage early? Or should you focus on investing with your spare cash? This is one of the most hotly debated topics in personal finance, with vocal proponents on both sides. Today, I thought I’d take a look at this issue from both angles and then share our approach with you.

Why you should pay off your mortgage early

One of the biggest advantages of paying off your mortgage early is peace of mind. Once you’ve paid it off, you’ll wake up every morning and fall asleep every night knowing that the roof over your head is 100% yours. For many people, you can’t put a price on that sort of security.

Beyond the comfort/security aspect, paying off your mortgage early is a bit like locking in a guaranteed investment return. For every dollar that you pay early, you’re “earning” the interest that you would’ve otherwise paid on it over the balance of the loan period. This sounds great, right? Well…

The flip side of the “guaranteed investment return” argument is that mortgage interest rates are often quite low, and interest payments on a mortgage are also tax deductible (for those that itemize). These factors make early payments lose a bit of their luster.

Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.

To see how long it might take you to payoff your mortgage, there’s a mortgage payoff calculator at this site for mortgage calculators

Why you shouldn’t pay off your mortgage early

The biggest downside to paying off your mortgage early is the (potentially large) opportunity cost that you’ll face. By this I mean that you’ll be giving up investment returns that might significantly outpace your mortgage interest rate.

In other words, why pay off a 5% mortgage when you could be earning 8-10% on that money? Of course, one only has to look at the past year to know the answer… Those sort of returns aren’t guaranteed, whereas the mortgage savings are.

Another important point to consider is the effect of inflation. Over time, inflation erodes the value of the dollar. This means that your future mortgage payments will effectively cost less than they do now, as the money you’ll be sending in won’t be worth as much in terms of “real” buying power.

What are we doing?

Instead of pretending to know what’s best in your situation, I though I’d tell you what we’re doing. We’ve actually gone back and forth on this issue, but ultimately decided to do a bit of both. And yes, I know that answer is a total cop-out, but it is what it is.

We are currently in the fortunate position of being able to max out our retirement accounts while having enough left over to put some extra cash toward our mortgage and to work on building up a non-retirement portfolio, so… That’s exactly what we’re doing. I view it as a bit of extra diversification.

A bit over a year ago, we refinanced from a 30 year fixed rate mortgage down to a 15 year fixed rate mortgage. In doing so, we cut our time horizon in half. Beyond that, we’ve been sending in an extra principal payment every month, further reducing the time until we’re mortgage-free.

Admittedly, this hasn’t been an easy decision for us, and we’re still tempted to waver at times. After all, now is a great time to refinance, and I also suspect that there’s a good bit of inflation looming just around the corner.

Given the above, we’ve been tempted to refinance into a rock bottom 30 year fixed rate mortgage and pay it off as slowly as possible while we focus on building our investment portfolio. However, a wise man recently reminded me that “pigs get fat, but hogs get slaughtered.” In other words, it pays to be greedy, but not too greedy. In the end, we opted to stay the course.

What about you?

Where do you stand on the mortgage pre-payment issue? Are you looking to get out of debt come hell or high water? Or are you paying off your mortgage on schedule while focusing on your investments?

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Related Articles at fivecentnickel.com:

» More Thoughts on Paying Off Your Mortgage Early
» Debt Reduction: Share Your Story
» Are Biweekly Mortgage Payment Plans Worthwhile?
» How to Pay Off Your Mortgage Early
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» What Would You Do With $1000?
» What is a Mortgage Escrow Account?
» Pay Off Debt or Invest?

As a followup to yesterday’s post about FreeCreditReport.com, I wanted to open up a discussion about whether or not you care about your credit score.

On the one hand, I’ve written extensively about why you should care about your credit score… Like it or not, your credit score does matter, even if you don’t intend to borrow money. In fact, insurance companies, utilities, apartment complexes, and even prospective employers regularly check credit scores when evaluating potential customers/employees.

On the other hand, debt reduction guru Dave Ramsey has disparaged credit scores as being nothing more than “debt scores,” and has gone on record encouraging his followers to “stop worshiping at the altar of the FICO score.” Dave’s point here is that you need to focus on getting rid of your debt rather than worrying about what effect doing so will have on your credit score. I agree, but…

I still care about my credit score. I’m a realist. Like it or not, credit scores play a central role in many aspects of our financial lives, and it doesn’t cost me anything to have a good one. I don’t lie awake at night worrying about it, and I most certainly don’t base major financial decisions on the impact it will have on my credit score, but I do care about it.

The simple truth here is that living a responsible financial life typically results in a high credit score. My wife and I use credit cards as a convenience, but we always pay our balance in full, and have never carried consumer debt. We save and invest aggressively, and we have a 15 year fixed rate mortgage that will be paid off well in advance of its due date. We also have credit scores just shy of 800.

My point here isn’t to brag, but rather to point out that you can have your cake and eat it, too. While it might feel good to thump your chest and claim that you’re looking forward to getting out of debt and having a credit score of zero, it’s not an either/or proposition. In fact, the two are intrinsically linked. As you work to get yourself out of debt, your credit score will likely rise — and that’s a good thing.

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I recently ran across an interesting article about a Free Money Finance reader who has a tremendous amount of student loan and credit card debt and isn’t sure how to handle it. Here’s a slimmed down version of his story:

As a college freshman, I went crazy with student loans… In the end, I totaled $265,000 in student loans (about $56,000 went towards the actual tuition/school)… Adding insult to injury, I ended up using credit cards to fill in the gaps whenever my student loan money ran out…

My salary [after graduating] was $41,000 starting. My overtime helped me rake in approximately $70,000 per year. Considering the fact that I had to work 60-70 hours a week, it wasn’t the most attractive thing in the world, but it brought in extra cash to help me formulate some type of a plan to attack this debt…

I am almost done with eliminating my credit card debt (I have approximately $12,000 to go – it used to be $23,000). I will begin paying on [the student] loans in a few months. The minimum payment will most likely be upwards of $1,800-$2,100 dollars per month.

The story also mentioned that he was terminated from his job as a State Trooper following an on-the-job accident. The good news (if you’d call it that) is that he’s collecting worker’s compensation, and is hoping for a sizable judgment in a resulting personal injury lawsuit.

This might seem like an impossible situation, and some people might just throw in the towel and quit paying down their debt. Instead, I thought it would be more productive to talk about what can be done to help his finances. I’m writing this post as if it’s an email to him, but the information should be helpful to anyone in similar circumstances.

Defer your student loans

If you’re unemployed, this should be your first step as you try to regain your financial footing. This should qualify as having a financial hardship. When calling, check with the customer service representative as to whether or not interest will accrue — since you have some private loans, it probably will. If so, find out how the interest will be treated — will it be added as a lump sum at the end of the deferment?

Finding employment should be your priority

While you’re looking for steady employment, seriously consider spending a few years working with program that can forgive as much of your student loans as possible. Some options I found while searching included:

• AmeriCorps: They have a loan forgiveness program, but it doesn’t appear to cover a huge amount.
• Peace Corps: They have a program that can forgive up to 70% of your student loans – check it out!
• Teach in a high need area: These programs vary from state to state, but it’s a job with health insurance and other benefits, and some federal programs can help forgive your entire student loan.
• College Cost Reduction and Access Act of 2007: If you’ve been employed for 10 years in public service and having been making your student loan payments, you could have the balance forgiven.

I would also recommend checking to see if you could get a job as a State Trooper elsewhere and have it count as public service.

Consider a part time second job or side business

With many of the loan forgiveness programs, the jobs themselves will not pay much, so look for ways to earn extra money while you tackle your debt. Since you’ve worked a lot of overtime in the past, this might not a huge adjustment for you.

Build a small emergency fund, just enough to stay afloat

Dave Ramsey recommends starting off with $1,000 and Suze Orman recently said you should set aside 8 months of expenses. That’s quite a range. So… How large should you emergency fund be? I really can’t say because I don’t know the details of your situation or your comfort level. In general, you should set aside enough to protect you from any problems that might arise and drive you back into the credit card trap.

If you still have that Mercedes that you bought in college, consider selling it to jump start your savings. Replace it with a cheap but reliable used car. When in college, I was fortunate to find a Geo Prizm for $500. Hopefully this will also get you cheap car insurance.

If you have any items that you don’t use frequently, consider having a yard sale or selling them on eBay to further increase your emergency fund and/or accelerate your debt repayments.

Live simply and attack your credit card debt

I’m assuming that the credit card debt has a higher interest rate than the student loans. If it were me, I would live very simply until I completely paid off the credit cards and give yourself a little wiggle room in the budget afterwards.

Automate your debt payments and request that your student loans be changed to a graduated payment or income contingent plan. While getting out of debt might take a long time, it can be done.

Also, given the possibility of a judgment that could wipe out a huge chunk out of your debt, I’d suggest that you plan as if you’re not going to win. If you do win, great, but it could take years to get your share. It’s probably best not to count on that money to solve your problems.

What do you guys think?

Have any of you ever dealt with this amount of debt? Whether or not you have, what sort of advice would you give to this guy?

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“F-R-E-E that spells FREE, credit report dot com, bay-bee!”

Unless you’ve been living under a rock, you’ve probably heard that jingle a bazillion times. FreeCreditReport.com — sounds great, right? Just sign up and get a free credit report as well as a free credit score. But is it really free? Or is it some sort of scam? They’ve gotten some bad press in recent years, so I decided to investigate.

While I dig deeper below, here’s the executive summary:

In my humble opinion, FreeCreditReport.com isn’t a scam. They tell you up front exactly what you’re getting into, and they honor their end of the bargain. You’re signing up for a free trial of their credit monitoring service, which comes with free access to your Experian credit report and credit score. If you don’t cancel before the trial expires, they’ll charge you. But if you do call them and cancel, you won’t be charged anything.

What does FreeCreditReport.com provide?

One of the first things you’ll notice when you arrive at FreeCreditReport.com is the big, yellow button promising you free access to your credit report and your credit score (pictured below). As just about everyone knows, the free credit report itself isn’t that big of a deal. After all, you can get free access to all three of your credit reports by visiting annualcreditreport.com.

But what about your credit score? Free credit scores are a bit harder to come by, though there are a number of promos out there floating around — e.g., the FreeCreditReport.com offer talked about here, as well as the free trial of myFICO ScoreWatch that I wrote about awhile back.

FreeCreditReport.com — What’s the catch?

As always, it’s important to read the fine print. If you look over to the left side of the FreeCreditReport.com homepage, you’ll see a box labeled “Important Information.” Here’s the scoop:

“When you order your free report here, you will begin your free trial membership in Triple Advantage Credit Monitoring. If you don’t cancel your membership within the 7-day trial period**, you will be billed $14.95 for each month that you continue your membership.”

They go on to specify that they are not affiliated with the federally mandated free credit report program (linked above). The footnote indicates that you actually have nine days during which you can cancel your trial membership since it can take up to 48 hours for the credit monitoring to begin.

Signing up for the free trial

I’m as curious as the next guy when it comes to things like this, so I decided to sign up and give it a whirl. The signup process is actually very easy. Simply visit FreeCreditReport.com, click the yellow signup button, and go through their two step signup process.

Step 1 (below) just asks for your name and address.

Step 2 (below) asks you to create a username and password, provide your personally identifying information (social security number, date of birth, and credit card information. Your card is not charged unless you decide to keep the service beyond the trial period.

After that, they ask two quick security questions derived from information on my credit report, and then you’re in. While they offer to upsell you at various points along the way, you can simply click “No Thanks” and keep going.

Accessing your free credit report and credit score

Once you’ve gained access, you free to view your Experian credit report and credit score. You can either view your report online or download a printable version. They also provide a link to a “Credit Report Guide,” which explains the types of information contained in each section of your credit report, and they have a link for disputing errors from directly within the site.

So… What did I learn from all of this? Well, for starters, there aren’t really any errors on my credit report. Beyond that, I learned that I have a credit score of 796, which puts me in the 99.5th percentile.

They also give you a breakdown of factors that helped and hurt your credit score. Here’s what they had to say about me…

Factors that increased my credit score:

• You have paid your bills on time and currently do not have any overdue accounts or derogatory information, such as a collection, charge-off, or bankruptcy, on your report.
• You have a good cushion of available credit between your current balance and your credit limits on all open trades. This has a positive affect on your credit score. This cushion shows lenders that you are unlikely to overextend yourself financially.
• The total balance on all your credit cards is relatively low compared to your total available credit limit. This has a positive impact on your credit score.
• Your average credit limit for your major credit cards, such as Discover, American Express, VISA, or MasterCard, is high. This tells lenders that you have enough financial experience, and they will be more likely to see you as a good credit risk.

Factors that decreased my credit score:

• Credit scores are calculated based on various factors in your credit report. Currently, your credit report does not show any significant negative or derogatory information.

How to cancel FreeCreditReport.com

Straight from their FAQs, here’s how to cancel:

If for any reason you are not satisfied, you can cancel anytime to discontinue your membership to Triple Advantage Credit Monitoring and stop the monthly billing. However, you will not be eligible for a prorated refund of any portion of your current month’s paid membership fee. To cancel, please contact Customer Care at 1-888-829-6560.

When I was done poking around, I called them up to cancel. After a brief period on hold, the phone rep pulled up my account, verified my identity, and then tried to convince me to stay for the remainder of my trial period. I simply told him that I had signed up to get the free credit report and credit score, and that I hadn’t seen anything after logging in that convinced me to stick around. He then canceled my account. The entire process took less than three minutes (yes, I timed it).

Just to be on the safe side, I called back and asked to cancel my account. The rep that I got this time around pulled it up just as before, and then said that my account was already showing that it had been canceled a few minutes earlier.

Is FreeCreditReport.com a scam?

So… In answer to the original question… FreeCreditReport.com is not (in my opinion) a scam. Yes, some people may erroneously arrive there looking for the federally mandated free credit reports mentioned above, but they clearly state what they’re all about and they honor the terms of the free trial period.

Closing thoughts

When she heard that I scored a 796, my wife decided she had to check hers. We’ve always run neck-and-neck since our credit histories are so similar, though she has often had me by a couple of points in the past (primarily due to a slightly longer credit history, I think).

Well… When she checked, she found out that her score was also 796. Exactly the same as mine. Consider me disappointed… I had hoped I would finally pass her by. For the record, she also found that the cancellation process was a snap — just be firm and clear about your desire to cancel.

So what are you waiting for? Go check your score and let us know if you can beat us. Just don’t forget to cancel if you don’t want their recurring service.

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As a followup to yesterday’s post on how to get out of debt, I wanted to share with you an interesting article about debt collection practices in Spain…

Shame and debt

Apparently Spain has very lax debt laws, meaning that it can be difficult for lenders to recover outstanding debts by taking deadbeat borrowers to court. Thus, collection companies that specialize in shaming borrowers into meeting their obligations have proliferated.

In one case, a collection agency threatened to send three costumed bullfighters door-to-door to ask neighbors to help pay off the mortgage of a borrower who had fallen behind on their payments. In other cases, they send out collectors dressed as clowns, monks, chickens, or even Buddha to follow debtors around and shame them into paying off their debts.

While these tactics have been highly successful, the Spanish government has introduced legislation to protect citizens against debt collection practices “that attack their dignity or invade their privacy.”

What do you think?

Should these sorts of things be allowed? Or do they cross the line?

Special thanks to my lovely and talented wife, who pointed this out.

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On the way home from work the other night, I heard a radio commercial touting a debt reduction system that (supposedly) works like no other. As I drove along, I couldn’t help but chuckle. After all, they made it sound like there’s some sort of silver bullet out there that will magically make your debt disappear — for a fee, of course.

Guess what? There isn’t. That’s the bad news. The good news is that, with a bit of hard work and focus, you can do it on your own. What follows are some tips for making it happen.

Recognize the problem

It may sound trite, but the first step in tackling your debt is to admit that you have a problem. Unless you’re willing to own up to your situation and commit to changing it, you’re going to be in debt for a long, long time. If you’re married, now’s the time to sit down and have a heartfelt talk about money.

Stop taking on new debt

This is a hard one, especially if you’ve become reliant on credit cards for making ends meet, but… If you want to climb our of the hole, you have to stop digging. If you don’t have the money to pay for something, don’t buy it. Period. If you have to cut up your credit cards to make this happen, then do so.

Build up a cushion

If you’re planning on living without credit, then you’ll need to a cushion to handle unexpected expenses — i.e., an emergency fund. Debt reduction experts such as Dave Ramsey recommend $1000 for starters, though this number might vary depending on your circumstances. If you’re single and on your own, you can probably get away with less than someone with a family.

Just remember… As important as your emergency fund is, you shouldn’t overdo it. Build it up, stash it in a local bank or online savings account, and move on. After all, your debts will just keep on growing until you start wiping them out.

Inventory your debts

In the interest of developing an effective debt repayment strategy, you need to know exactly what you’re up against. Develop a detailed list of who you owe, how much you owe them, and the associated payment terms (e.g., minimum payments, interest rates, etc.). Don’t leave anything off.

Ask for help

Call the creditors on your list and ask if there’s any way they can reduce your interest rate. As unlikely as it seems, this strategy actually works. No, they won’t all agree to it, but some will. And the worst they can do is say no.

Reduce your existing debt

There’s been a lot of debate over the best debt reduction strategies. Some say to attack your smallest debts first, whereas others say to focus on those with the highest interest rates. Guess what? How you do it doesn’t really matter. The important thing is to pick a method and get started.

In order to stay current on all of your debts, and thus avoid unnecessary fees, send at least the minimum due to each creditor every month. After that, take whatever money you have left over and attack your #1 target. As your debts begin to melt away, you’ll be able to direct more and more money toward your next target. Lather, rinse, repeat.

Accelerate your payments

If you’ve made it this far, you’re doing great. Now it’s time to ramp things up. Start by ditching any recurring, discretionary expenses, and cut back wherever else you can. Whatever extra savings you realize should be directed toward your debts.

Some additional ideas:

• Scrape together your spare change and make micropayments
• Take advantage of 0% balance transfer offers to reduce your interest rates
• Have a yard sale or start selling stuff on eBay
• Consider renting out a room to further reduce your expenses
• Pick up an odd job to earn extra money
• Direct any unexpected windfalls toward your debts

Every little bit helps.

That’s all folks…

So there you have it. A thumbnail sketch of my magical system for getting out of debt. And it’s all yours for the low, low price of… Free.

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I recently received an e-mail from a reader named Chris, who is in his early forties. He and his wife are working on paying off a car loan and a mortgage, and

We owe about $10,000 on a car loan and $105,000 on our mortgage, and we have two newer vehicles. I recently calculated that if my wife and I stopped our 401(k) contributions (mine 6% with a 50% match; my wife’s 8% with a 50% match) that we could pay off our car and our mortgage in eight years (maybe a little faster if we’re REALLY disciplined).

Eight years is a bit magical in that we’ll be just shy of 50 years old, and our oldest will be graduating from high school. My thought is that we’ll then start to save for replacing our vehicles and start to make contributions to our retirement funds again. We’d save about $64,000 in interest, so I thought it might be the way to go.

Being debt free has a great draw to us — probably more than giving up the wonderful company match on the 401(k) plans. What are your thoughts?

Without knowing all of the details (e.g., income level, mortgage terms, auto loan details), it’s hard to say for certain. However, I would personally think long and hard before stopping those 401(k) contributions. Not only will they be giving up a ton of free money (the 50% match), but they’ll also be giving up the opportunity to stash that money in a tax-advantaged account, as well as years of tax-deferred compounding on the principal plus the match. Moreover, once those debts are paid off, they’ll have kids in college — this may wind up being yet another impediment to investing.

If it were me, I would most likely maintain the 401(k) contributions, tighten my belt a bit, and focus on getting rid of that auto loan. The mortgage (assuming that the terms are reasonable) is much less of a concern. Not only does it likely have a much lower interest rate, but the interest payments are also tax deductible.

Bottom line: While being debt free is an admirable goal, my view is that you really need to look at the big picture when making decision like this.

What about you? Any advice for Chris and his bride?

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It’s no secret that we’re in the midst of a credit crunch. Banks aren’t lending, foreclosures are on the rise, card issuers are reducing credit limits, and the juiciest credit card offers have all but disappeared. Gone are the days when everyone (and their uncle!) was offering lengthy 0% balance transfers with no transfer fee.

Getting Creative

So what’s a savvy debt reducer to do? Get creative. Building on an idea that I first wrote about over at Credit Addict, you can create your own fee-free balance transfer with any card that offers 0% APR on purchases. There are still a number of such cards available, many with promo periods of up to 12 months.

Once you have your card, simply drop by the US Mint and buy cash with your credit card. That’s right, you can buy $1 coins straight from the Mint, and you can pay with a credit card. They come in boxes of 250 coins, with a limit of two boxes per order, and shipping is free. Thus, you can buy up to $500 per order.

Once your coins arrive, simply deposit them at the bank and use the proceeds to pay down your high interest debt. Bip, bop, bam. You’ve just turn that “0% on purchases” promo into a 0% balance transfer. And best of all, there are no fees.

Miscellaneous Notes

While there’s no explicit limit on the number of orders that an individual can place, it’s possible that the Mint will wise up and limit your transactions if you try to do too much. Also note that shipping initially shows up as $4.95, but it’s deducted on a subsequent page. Oh, and since this is technically a purchase, you should also earn rewards on these transactions. Here again, if you do too much too fast, your credit card company might wise up and limit your transactions.

Finally, I should note that I do realize that the ethics of this trick are somewhat questionable. The goal of the Mint is to get these coins out into circulation, and depositing them at your bank technically does that. Nonetheless, that’s not really in the spirit of what the Mint is trying to accomplish, and you’ll be generating unnecessary credit card processing fees. If you’re not comfortable with this, then don’t do it. But if you are, you can save a good bit of money.

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Late last week, I mentioned MyFICO Scorewatch in the context of Experian’s decision to stop offering consumer FICO scores. This time around, I thought I’d mention it in it’s own right, as it’s a great way to get a free peek at your credit score thanks to their 30 day free trial.

In case you’re not familiar with MyFICO, they’re the consumer division of Fair Isaac, which is the company that invented the FICO credit score. Their ScoreWatch product is essentially a credit monitoring service that gives you two free Equifax Score Power reports per year. These reports include a complete Equifax credit report plus your Equifax-based FICO score. They also alert you whenever your credit report changes, and provide you with an updated FICO score at the same time.

While this sort of service may or may not appeal to everyone, there’s one killer feature that pretty much anyone should love — a 30 day free trial which, at the very least, provides you with access to a free FICO credit score. If you sign up and decide to keep the service, it costs $8.95, or $89.95 per year. But if you cancel within 30 days, there’s no cost to you whatsoever.

So what are you waiting for? Go check your score and let us know where you stand. Mine is 795. Can you beat that?

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A reader named Milan recently wrote in with the following question:

Here’s my situation:

Parent PLUS Loan – $9,892 @ 7.75% APR (fixed)
Stafford Loan – $14,252 @ 4.00% APR (fixed)
Private Loan – $24,357 @ 7.72% APR (variable)

I have $10k right now that I can dump into one of these loans. Do I dump the $10k in the Parent Plus loan, and then snowball the amount I was paying on that loan into my private loan?

Advice appreciated!

This is a great question. The Parent PLUS loan has a very slightly higher interest rate as compared to the private loan. However, the Parent PLUS interest rate is fixed, whereas the private loan has a variable rate. The other thing to consider here is that the $10k lump sum is just enough to kill off the Parent PLUS loan, whereas it would only knock the private loan down by about 40%.

Looking just at the interest rates, I’d be inclined to attack that variable rate loan first — it’s on par with the Parent PLUS loan, but you have significant upside risk. Given the current state of affairs, rates really can’t do anything other than climb (though it may be awhile before that happens). That being said, there’s definitely something attractive about killing off that Parent PLUS loan first.

Debt reduction guru Dave Ramsey would most likely say to go after them in reverse order of the balances, targeting the Parent PLUS loan, followed by the Stafford loan, and finally the private loan. But if it were me, I’d probably do exactly what Milan is suggesting — pay off the Parent PLUS loan first, then snowball the payments into that variable rate private loan, saving the 4.00% APR fixed rate Stafford loan for last.

What would you guys do if you were in his shoes?

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The latest issue of Kiplinger’s has a big section on debt reduction, including a list of tips for getting rid of whatever debt you might have. While a number of the tips are pretty standard stuff stiff, I still thought they were worth highlighting, especially given the current economic climate.

1. Break your debt into small pieces. Whether you choose to pay highest interest or lowest balance first, it’s important to view your debts individually rather than looking at the whole, depressing ball of wax. The key is to stay current on everything, but focus on knocking out one chunk at a time.
2. Track your spending. While you may often run out of money before you run out of month, you probably have more money coming in than you think. By tracking every penny that you spend, you can get a better idea of where everything is going, hopefully cut some extraneous expenditures such that you can throw a bit extra at your debts.
3. Don’t miss any payments. As I said in #2, above, it’s important to stay current on all of your debts. You have a tough enough job ahead of you. Don’t harder by adding penalty fees and higher interest rates to the mix. Also, if your credit score falls, you might wind up paying more for things like insurance.
4. Boost your income. Cutting spending can only get you so far. Another great way to supercharge your debt reduction efforts is to increase your income. Pick up a second job or, at the very least, sell your extra stuff on eBay. Then take whatever extra income you generate and throw it at your debts.
5. Get help. Honestly, I have a tough time with this one as a blanket tip, as there are so many credit repaid and debt reduction scams out there. However, if you’re in over your head, you should consider getting help from a reputable credit counseling agency or financial planner. You can start your search for a decent agency at NFCC or the AICCCA.

To these, I would add… Stick to it. No matter how good your plan, it won’t work if you don’t see it through to the end. This is easier said than done, so take Step #1 very seriously. If you need the psychological boost, definitely consider attacking the smallest balances first to get a few small victories under your belt.

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As a followup to my previous article about what happens to your mortgage when you bank fails. I recently ran across an interesting article from last winter that talks about banks losing track of mortgage paperwork and being unable to foreclose on deadbeat homeowners.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages… More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks… Those loans may be sold several times before they land in a security.

Whenever loans are sold, the sellers are required to sign over the mortgage note to the buyers, but in the recent mortgage boom, that step wasn’t always properly completed.

According to Alan White of the Valparaiso University School of Law:

“Loans were mass produced and short cuts were taken. A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren’t around anymore.”

In fact, more than 100 mortgage companies closed their doors during 2007, and I would imagine that the number has just kept climbing since then. Thus, in addition to all of the mortgages being sold through the normal course of business, the recent uptick in bank failures has created an even bigger mess. While mortgage banks can file a lost note affidavit fully document ownership of a particular loan, an increasing number of people are apparently challenging the ownership of their mortgage note.

Maybe it’s just me, but I’m surprised that people can get away with this. While the details vary from place to place, mortgages typically result in a lien on the property, and are filed with the county courthouse. This should establish that there is (or at least was) a mortgage on the property in question. If you combine that with evidence that the homeowner had been willingly paying the mortgage before going into default, the obvious conclusion should be that the mortgage is legit, resulting in what should be an open-and-shut case.

Of course, common sense and legalities don’t always intersect…

Source: Bloomberg.com

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I’ve talked at length in the past about how your credit score is determined and why it’s important. Aside from paying your bills on time, one of the biggest things you can do to protect your credit score is to keep a close eye on your credit report.

While you’re entitled to one free credit report per year from each of the three major credit reporting bureaus (see #1, below), sometimes that just doesn’t cut it. Take, for example, our run-in last year with a wayward collection agency.

When we first discovered the problem, we burned through our free credit reports trying to figure out what was going on. We then needed to monitor the situation until it was resolved, so we ended up using a free trial of TrueCredit (see #3, below) to keep an eye on things.

Given the above, I thought I’d put together a list of options for getting your credit report for free. Start at the top and work your way down.

1. Get it free, the old-fashioned way. As noted above, you can go to annualcreditreport.com and get one free credit report from each of the three major bureaus.
2. Place a fraud alert on your credit report. Whenever you file a fraud alert, all three credit bureaus will automatically send you a free hardcopy of your credit report.
3. Get it from TrueCredit. A 30 day free trial of TrueCredit provides you with access to reports from all three credit bureaus plus your credit score. Just don’t forget to cancel – here’s how.
4. Get it from MyFICO. You can sign up for a free 30 day trial of ScoreWatch from MyFICO.com, which comes with access to your Equifax credit report and FICO credit score. Here again, don’t forget to cancel.
5. Get it from FreeCreditReport.com, bay-bee! Last but not least, you can sign up for a free trial of TripleAdvantage, which access to your Experian credit report. FreeCreditReport.com has gotten a bad rap in the past, so just know this… You’re signing up for a seven day free trial. If you want a truly free credit report, be sure to cancel before it ends.

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I recently received an e-mail from a reader named Steve. For background, he’s 30 years old and has only recently started getting his financial house in order. Over the past six months, he’s built up a $2k emergency fund at ING Direct, and he’s been working to reduce his debt. That being said, he still has a decent chunk of credit card debt (around $14k) plus student loans ($9k) and a car loan ($9k).

Here’s his quandary:

My question is whether I should buy a house right now, or wait until I get married in a year or so. My thoughts revolve around two scenarios:

1. Continue saving, so I can buy the ring, pay off some credit card debt (I have about $10k), be prepared to pay for the wedding, and hopefully have enough for a down payment for house after the wedding.

2. Exhaust my savings and buy the house, which puts me basically on a month-to-month budget until I get married. This month-to-month still includes paying down my credit card debt at the same rate I’m doing it now.

My concern is that by next year, interest rates will be back up, and that if I wait until then, I’ll have lost money in the long term due to $200k on 6% versus 7%. But, if go that route, then I’ll probably end up financing a ring, a wedding, and a honeymoon — something which sounds quite bittersweet.

If I were in this position, I’d focus on debt reduction (check out NCN’s e-book on the topic) as well as building up some additional savings rather than rushing into the housing market. What better gift can you give to your future bride than a clean financial slate with a sizable buffer?

Not only would buying the house wipe out his financial cushion but, by his own admission, it would force him to take on even more debt down the road. To me, this has penny wise and pound foolish written all over it. And what’s going to happen when the air conditioning breaks down or the roof needs to be replaced? Mr. Murphy has a habit of visiting at the most inopportune times.

As for the direction of interest rates, who knows? In fact, a similar (albeit opposite) argument could be made about the direction of the housing market. Who’s to say that prices won’t continue to slide over the next year? Here again, your guess is as good as mine.

Why not focus, at least initially, on things that you can control? Things like debt reduction, building up that emergency fund, and/or saving up for a down payment. The interest rate concerns really boil down to a fear of the unknown and, while such concerns are understandable, it seems that the decision to buy a house should be based on far more than this.

What do you guys think?

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Not long ago, JD over at GetRichSlowly mentioned that he had been asked how you’re supposed to spend less than you earn when you’re in college and not earning anything. This is a great question, and one that I thought I’d take a shot at myself.

While it’s not mathematically possible to spend less than you earn when you’re not making any money, there are still a number of things you can do to keep yourself from sliding too far into oblivion…

Apply for scholarships

While it’s too late for most struggling students to take full advantage of this advice, anyone finishing up high school and heading to college should consider all possible alternatives when it comes to applying for scholarships. Even if it’s “only” a few hundred (or few thousand) dollars, that translates into less debt at the end.

Consider getting a part-time job

I know, I know. This is probably the last thing that a lot of students want to hear, but… Increasing the income side of the equation is a great way to help balance the books. Even if you can only make a small dent in your expenses, you’ll graduate with less debt and, if you’re fortunate enough to land a job in a related field, you might even pick up some useful work experience.

Minimize your expenses

There are two sides to every coin. We’ve already addressed the income side, but what about outgo? Yes, you’re likely in the hole financially, but that doesn’t mean you should throw in the towel and just keep on spending. You know the drill… Carefully consider your spending decisions, distinguish between wants and needs, and cut costs wherever possible.

Admittedly, picking up a part-time job and cutting your expenses often won’t enough to balance your budget while in college. Rather, a great many students will go into debt while they’re in school. This isn’t necessarily a bad thing, as education is an investment that typically pays generous future dividends. So…

Borrow intelligently

When debt is unavoidable, be smart about it. Stay away from high interest consumer debt (credit cards). Instead, try to limit your borrowing to student loans, which typically offer an interest deferral while you remain a student as well as possible tax breaks when you’re paying them back.

The bottom line… Just because you can’t actually spend less than you earn doesn’t mean that you shouldn’t narrow the gap as much as possible. All too often, debt becomes a slippery slope. Since you can’t afford to stay out of it in the first place, what’s the harm of taking on just a bit more? Avoid that sort of thinking and you’ll have a far richer existence once you graduate and get a “real” job.

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An albatross around your neck. A monkey on your back. Whatever you call it, consumer debt can be a huge burden. While there are a number of different debt reduction strategies out there, I wanted to take a moment to highlight a useful technique that my pal NCN used to dig his way out of debt: micropayments.

Taking a step back, most debt reduction strategies involve ranking your debts (smallest to largest, highest to lowest interest, etc.) and then throwing everything you can at the top-ranked debt while making your minimum payments on everything else. This is all well and good, but what if you want to pay things down even faster?

Enter micropayments… In short, pay what you can afford, and then scrape together whatever else you can during the month and send in multiple, smaller payments to your creditor of choice. Believe it or not, NCN got to the point where he was sending Citibank an extra $5 each and every day via online billpay. By making a game out of finding an extra $5/day, he managed to stay motivated and slay the debt beast well ahead of schedule.

Beyond helping you pay things down extra fast, this approach helps you push your debt reduction limits without getting overextended. If Murphy pays you a visit, you can easily ratchet back on your micropayments and keep your head above water. But if not, it’s full speed ahead.

Not sure where you can come up with a few extra bucks? Get creative. Skip your morning Starbucks, carpool once a week, sell some stuff on eBay, pick up a paper route, do paid surveys online, start a weblog, have a garage sale, etc. Whatever you do, channel that extra money toward your debts. Before you know it, you’ll be out of debt and saving for the future.

Sound good? Then be sure to check out NCN’s post. You should also note that the same concept can be applied to savings goals. And for a more recent take on the micropayment concept, check out the “snowflaking” primer over at paidtwice.

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On the heels of our recent mortgage refinance, we’ve been inundated with mortgage-related junk mail. Among the most common pitches that we receive are offers for bi-weekly* mortgage payment programs.

Almost without fail, these missives are disguised as official-looking notices proclaiming things like “NOTICE OF INTEREST OVERPAYMENT.” They also list the lender’s name at the top, though they indicate in a footnote that it’s listed “for reference only,” and that they have no relationship with the lender. Rather, your loan information “was obtained through public record.” Clearly, these folks want to get your attention, and they don’t mind mis-leading you along the way.

What is a biweekly mortgage payment plan?

In short, biweekly payment plans are designed to help you pay off your mortgage as much as six to eight years early. That’s the good news. The bad news is that these plans come at a price. Enrollment fees are typically in the $300-$400 range, and some companies charge additional fees on each transaction.

How do biweekly mortgage payment plans work?

You normally make a monthly mortgage payment, resulting in a total 12 payments per year. But what if you were to make a half payment every two weeks instead of a full payment once per month? Given that there are 52 weeks in a year, this works out to 26 half payments, or 13 full payments.

So… This is essentially a fancy way of getting you to make one extra mortgage payment per year. By doing so, you’ll build equity faster, pay less in mortgage interest charges, and close out your loan well ahead of schedule.

Are biweekly payment plans really necessary?

The short answer is no, you can do this all on your own for free. While proponents might argue that these plans add discipline to your early payment plans, you can achieve much the same thing by automating your payments.

Some simple alternatives

(1) Call your lender and ask them if they can handle a half payment every two weeks. Some can, others will charge you for this service, and still others will flat out decline (or get confused). Assuming that they can handle it, you can (and should) automate the payments through your online billpay.

(2) Pay an extra 1/12th of your mortgage every month. With online billpay, you only have to set this up once. While it’s a good idea to designate that the overpayment should go toward principal, every lender that I’ve dealt with will handle such payments properly even without further instructions.

(3) Open a high-yield savings account and deposit half your mortgage payment into it every two weeks. Make your payments from this account and periodically apply the excess (plus interest) to your mortgage.

Of course, this all ignores the larger issue of whether or not you should pay off your mortgage early in the first place, but… That’s a topic for another day.

*Note: Biweekly can mean twice a week or every two weeks. Here, we’re talking about the latter.

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I recently ran across an article on Yahoo! that talked about the seven deadly sins that lead to debt. In short, they put together a list of ways that engaging in envy, pride, sloth, greed, wrath, gluttony, and lust will result in your financial comeuppance.

What follows is a brief rundown…

1. Envy

The rich and famous luxury items are accessible now more than ever — and without the wealth they once implied… Consumers can get caught up trying to keep up with the Joneses or the upper-middle-class families they see on TV, believing they should own the same things others own.

2. Forget that pride goes before a fall

Pride can get in the way of preparing for worst-case scenarios. People tend to feel overly optimistic about their ability to pay back debt, stay out of harm’s way and maintain perfect vehicular performance indefinitely… Incredible though it may be, cars do sometimes need repairs, cavities need to be filled and surgeries may be required that insurance doesn’t completely cover.

3. Be slothful with finances

Finances tend to be complicated and require some mental manipulation of the most dreaded of all things: numbers. Failure to pay attention to loan terms and due dates can have severe consequences… Avoidance is easy; paying attention is hard, especially when confronted with unpleasant facts like a hefty credit card bill or struggling to learn something new like investing basics just to enroll in a company-sponsored retirement plan.

4. Get greedy when borrowing

Why buy an economy car when you can get a loan for twice as much and ride around in style? Over-buying (read: greed) is a trap into which consumers can easily stumble… Often when making big purchases, the price seems so overwhelmingly high that smaller add-ons or upgrades start looking like great deals in comparison.

5. Feel wrathful at everyone but yourself

Blame others for your own financial missteps… To the peril of individuals, lenders won’t cut you off when you’ve had enough. Criminal nondisclosure of loan details aside, lenders aren’t in the business of making sure you save money and don’t overspend… To avoid messy situations, develop a budget with both savings and debt pay-down strategies — and stick to it.

6. Be gluttonous

You deserve that cookie so go ahead and eat it and maybe a couple more for good measure. While you’re at it, buy the bedroom set you can’t afford but deeply desire… Just like eating food for no good reason other than the fact that it is set in front of you, people buy stuff just to buy it… Big-box stores are vast dens of temptation, offering lots of everything at sale prices.

7. Let lust lead you into spending

It’s estimated that Americans spend between $10 billion and $13 billion on adult entertainment… That’s a lot of money that might be put to better use in retirement accounts across the country.

Not a bad list, save for the last one. Honestly, I’d have to say that lusting after the newest doohickey or gewgaw is a far bigger money suck than “adult entertainment.” Hmmm… Maybe we should ask Eliot Spitzer about that…

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The most recent issue of Money Magazine had an interesting article about early retirement. Included was a small sidebar with tips for getting out of the rat race well before traditional retirement age. While there wasn’t anything earth-shattering about these tips, they serve as a good reminder:

1. Live below your means. Keep an eye on both small and large expenditures, live in a low-cost area, send your kids to public instead of private schools, opt for less expensive vacations, etc.

2. Set lofty goals. Saving 10% of your income isn’t enough if you want to retire early. Instead, aim for 20-25%.

3. Be allergic to debt. Carrying debt is not the path to early retirement. Pay it off and then stay debt free (see Step #1).

Even if you don’t manage to retire early (or don’t want to), these are great steps for building wealth.

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A few weeks back I noted that we’d been called by collection agency, and that we later learned that we’d been sent to collections for a bill that wasn’t actually overdue. We subsequently sent a request (via certified mail) for validation of the debt, as per the Fair Debt Collection Practices Act (FDCPA).

A few days later we received confirmation that our request had been delivered to the collection agency (we also sent a letter to the original creditor). It’s critical that you dispute the debt within 30 days, or it will be assumed to be valid. It’s been a couple of weeks, and we still haven’t heard anything back from them. No more calls, and no validation of our debt (yet).

And guess what? If they can’t validate the debt, they’re not allowed to:

(1) attempt to collect it,
(2) contact us about it, or
(3) report it to the credit bureaus

I haven’t re-checked our credit reports to see if this supposed debt has shown up there, but that’s on my list of things to do. Unfortunately, I used up our free credit reports when I first caught wind of this. Assuming that it’s been reported, I will (of course) dispute it. Moreover, depending on how far I want to push this, I’ll be able to sue them for $1,000 for a violation of the Fair Credit Reporting Act (though I don’t know if it’s worth the trouble in this case — I just want a clean credit record).

Right now, here’s my plan of action… Give them a full 30 days to respond to my request. At that point, if I still haven’t heard from them, I will send them a copy of the original letter, my certified mail receipt, and proof of delivery, and a letter stating that they have not complied with the FDCPA, and are now in violation of the act if they make further attempts to collect from us and/or report us to the credit bureaus (or fail to remove the listing if they’ve already reported us).

After that? I still haven’t decided. We’ll just take this one step at a time.

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I’m a deadbeat. Or at least that’s what a local collection agency has been led to believe. Remember that call from a collection agency? As it turns out our local Urgent Care facility turned us over to collections less than a month after we received a bill from them.

To make a long story short, we took our son in to be seen for an illness in late December of last year. The insurance handling was a comedy of errors, and it took until late summer for the Urgent Care facility to get it sorted out. It’s important to not here that it was all their fault – they started out by billing our insurance using the wrong taxpayer ID number and went from there. All the while, our account was in limbo. So… The proper amount finally showed up in our account with a “Date of Service” in August. This resulted in a bill being generated in September. And less than 30 days after receiving that bill, I initiated payment via online billpay.

And now this… We received a statement from a local debt collection agency dated October 8th stating that we our bill is “seriously overdue” and has been turned over to them for collection. The letter further stated that if I question the validity of the debt that I have to notify them in writing within 30 days — this is one of the protections afforded by the Fair Debt Collection Practices Act (FDCPA). I’ve thus sent them a letter via certified mail laying out the situation and saying that I’ve already paid this bill. I’ve likewise sent a certified letter to Urgent Care billing office.

The tricky thing is that the transfer of this debt to the collection agency and our payment seem to have crossed in the mail. Thus, we’ve paid the bill to the original creditor, but the collection agency has purchased that debt and thinks that we owe them. This all happened so fast that I’m not even sure if the Urgent Care facility has received our payment yet. I’m guessing that this will take awhile to get straightened out, and I’m hoping that it won’t find its way to our credit report in the mean time.

Words cannot express how pissed off I am right now.

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In digging for information on how to deal with a wayward debt collector, I ran across a good bit of information on the Fair Debt Collection Practices Act. Here’s a plain English rundown of the protections that the FDCPA affords if a creditor turns your account over to a third party debt collector…

First off, according to an article from Bankrate.com, collection agencies can’t:

» Call before 8 a.m. or after 9 p.m.

» Talk to anyone but you (or your attorney, if you have one) about the debt.

» Threaten to garnish wages or seize property unless they actually intend to do so. Garnishment is illegal in some states, and in others requires a court order. In many cases, property seizure is not permitted. Check with your state attorney general’s office or state consumer protection office to find out what is legal in your state.

» Threaten to sue unless they are actually taking legal action. In some states, third-party collection agencies may not sue.

» Threaten you with arrest or jail.

» Use obscene language.

» Annoy or harass you with repeated calls.

» Call at work if you have asked them to stop.

» Falsely claim to be an attorney, a representative from a credit bureau or a member of law enforcement.

After digging though the FDCPA myself, I also learned that they can’t:

(1) Threaten you with violence or other criminal means of physical harm or harm to your reputation or property.

(2) Repeatedly or continuously call you with the intent to annoy, abuse, or harass you (although it seems like “intent” is a bit nebulous and hard to prove).

(3) Publish a list of debtors.

(4) Contact you (except for very specific purposes) if you notify them in writing that you want to cease further communication.

(5) Use false, deceptive, or misleading practices in connection with the collection of any debt (this includes the false threats of litigation mentioned above).

Beyond this, they also have to provide you with “validation” of the alleged debt (assuming that you ask for it in writing). Such validation includes the amount of the debt, the name of the creditor to whom the debt is owed, a statement that the debt will be assumed valid unless you object to it within 30 days, a statement that they will obtain verification of the debt or a copy of the judgment against the you if you object to the debt, and the name and address of the original creditor (again, if you object).

There are actually a number of other useful tidbits contained within the FDCPA, so I encourage you to give it a quick read if you’re ever faced with a call from a collection agency.

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Related Articles at fivecentnickel.com:

» Still Waiting on Debt Validation from the Collection Agency
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A reader recently wrote in with the following question:

How do you feel about Dave Ramsey’s program? I am in horrible debt and want to become debt free in the next 4 years.

That’s not a lot of information to go on, but here’s my response…

Dave offers some pretty sound advice in the form of his so-called “Baby Steps“:

Step 1: Save up $1,000 to start an “Emergency Fund”
Step 2: Pay off all debt (except the house) using the “Debt Snowball” (smallest to largest)
Step 3: Save up three to six months of expenses in savings
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts
Step 5: Save up college funding for your children
Step 6: Pay off your home early
Step 7: Build wealth and give! Invest in mutual funds and real estate

My biggest (and really only) criticism of Ramsey’s approach to debt reduction has been that his Debt Snowball doesn’t make good mathematical sense — the better approach (from a purely mathematical standpoint) would be to pay down the highest interest debts first rather than focusing on the smallest debts first.

This being said, killing off small debts first give you an early taste of success and keeps you hungry. If you need this sort of psychological boost to stay the course, it’s probably better to take Ramsey’s more conservative approach.

In the final analysis, there really isn’t a wrong way to pay off debt. The most important thing is to simply get started.

This article is part of my Money Q&A Series.

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A reader recently wrote in with what he termed a “complex question” about creative strategies for debt reduction.

My wife and I have FICO scores around 750. We have about $28K of debt on top of $238K in two mortgages (191K & 47K). The first is at 5.75% for another 5 years, while the second is at 11.25%. I just thought about loaning ourselves the $28K from our 401K in order to pay that portion of the debt off (temporarily), closing all open credit lines, then applying for AmEx cards that offer 4.99% lifetime rate on balance transfers in order to balance transfer back the $28K plus some of the second mortgage. Now the questions… How long would the loan be necessary before applying for the cards to ensure maximum credit from AMEX? How much credit might we expect?

First of all, it’s nearly impossible to predict how long it will take to secure new cards and get the balance transfer to come through. In fact, nothing is guaranteed, so there’s a risk of not being able to get enough new credit to pull this off.

Setting those issues aside for the moment, I’m not sure that cancelling the cards is the best course of action. Since he and his wife have high credit scores, it’s possible that they’d be able to get low (or no) interest balance transfers straightaway, without having to play games with their 401(k). This would also circumvent the risk of borrowing from the 401(k) and then being unable to come up with funds to pay it back.

Another strategy would be to apply for one or more 0% balance transfer credit card offers up front. While these offers won’t necessarily provide 0% for life, there are a ton of 12 month offers that can be rolled over to a new offer if/when they expire. These funds could then be used to kill off the high interest credit card debt as well as a portion of the second mortgage. The key here is to avoid piling up more debt while trying to dig themselves out from under. Moreover, you need to be dedicated to paying it off aggressively – you can’t borrow your way out of debt, but you can minimize your costs while paying it off.

Of course, the above depends on their ability to secure the additional low interest credit. But with high credit scores, they might be able to do it. A final tip would be to time the additional credit applications to happen on the same day. The prevailing wisdom is that this will increase their odds of getting the credit that they need, as the left hand (one card issuer) won’t necessarily know what the right hand (another card issuer) is doing.

If you have any thoughts on the above situation, feel free to share them.

This article is part of my Money Q&A Series.

Photo Credit: Brett L.

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In case you haven’t heard, Capital One has recently been increasing credit card interest rates for their cardholders. While it’s not unheard of for card issuers to raise rates if you engage in risky financial activities (universal default, anyone?), Capital One appears to be jacking up their rates across the board. In some cases, this involves turning cards that formally offered 4.99% fixed rates into variable rate cards that charge nearly triple that amount in interest.

Remember… Credit card issuers can and do change the rules from time to time. “Fixed” rates are often only fixed until they change the rules (typically with 30 days notice), so be sure to read any correspondence that you receive from your credit card issuer(s).

And if you’re currently carrying a balance on a Capital One card, you might want to check into this. If it turns out that you’re facing an uptick in interest rates, then you need to think about finding a credit card that offers low APR balance transfers.

[Source: The Consumerist]

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This article is a guest blogger submission written by NCN of NoCreditNeeded. If you want more information about NCN and his many websites, be sure to check out his “About” page. And if you like what you see, why not subscribe to his RSS feed?

Two years ago, I decided to stop borrowing money, get out of debt, and change my financial future. As a married guy with two kids, I figured that it was time to “get my act together.” Before I could begin the process of getting out of debt, however, my wife and I really needed to be on the same page, have the same goal, and agree to the same plan of action. So, we sat down and began to discuss our current situation, our spending habits, and our future goals.

My wife is a very ‘practical’ person but, like me, had never really given our finances much thought. We both figured, “If we can make the payments, what’s the big deal.” So, you might ask, what was the magic bit of insight that turned us both around? What was it that made us both say, “We’ve GOT to do something?”

We started to talk about all of the jobs that we had both held and the amount of money that we had earned over the past fifteen years of our “adult” lives. And then we looked at our savings account. Total amount = $500. We then looked at our combined debt total. Total amount = $11,500.

So, after working a combined total of 30 years, we were $11,000 in the red! Our eyes were opened to the fact that we were blessed with good jobs and good salaries, but we were being poor managers of our own finances. So, we decided to change our financial habits.

Now, two years later, we are debt free, we have a fully-funded emergency fund, and we’re in the process of fully funding two Roth IRAs, two ESAs and a 403(b) account. In other words, it can be done. You can change your future, your marriage and your finances. How? Begin by taking a look back at where you’ve come from, take stock of where you are, and then create a plan for where you want to go.

For most people, the hardest thing to do is to stop going in one direction and then start going in another. It’s like making a “U-Turn.” Sometimes its hard to admit we are headed in the wrong direction and even harder to stop and ask for directions. But, for us, turning around was the best decision we ever made. Now, instead of worry about our finances, we manage them. Instead of arguing about expenses, we budget for them. Instead of ignoring tough financial decisions, we face them. Together.

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Yesterday afternoon I received the following question in my inbox:

I’m 43. I’m looking to payoff my mortgage. Can I withdraw from my Roth IRA to payoff my house without penalty? I have $52K in a Roth IRA. My mortgage payoff would be $77K. I have enough in savings to make up the difference. Can I withdraw without a penalty. Is it wise to do so?

There are a couple of questions here, so let’s take them one at a time…

First off, can he do it? As it turns out, first-time homebuyers can withdraw IRA funds to help finance their purchase. As far as I’m aware, however, you cannot withdraw funds to pay off a house that you bought previously without incurring a penalty. That being said, you can withdraw Roth IRA contributions at any time, without taxes or penalty. Moreover, as long as the funds are properly “seasoned” you can also withdraw Roth IRA conversions (typically five years after the conversion event) regardless of your age. But the same is not true of Roth IRA earnings, so be careful or you might wind up having to pay the piper.

Next, should he do it? Without knowing the full details of his situation, it’s hard to say with certainty. However, my view is that it’s pretty much always a bad idea to willingly pull funds out of an account with such favorable tax treatment. There are also those that argue you shouldn’t pay off your mortgage any earlier than absolutely necessary. While I don’t adhere to such a hardline view myself, one thing is certain… Once the money is out of the Roth, it’s out, and you can only put it back via regular annual contributions (currently at $4k/year). While being mortgage-free is an enviable position to be in, having a shortage of retirement savings is a decidedly unenviable position in which to find yourself.

Update: His mortgage rate is a very competitive 5.875% (presumably on a 30 year mortgage).

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It’s been a little while since I’ve written about 0% balance transfer credit card offers, so I thought I’d do a bit more digging and see if I could find any new offers.

If you’re curious as to why you should care about any of this, check out my primer on how to profit from 0% balance transfer credit card offers. In short, you can either use them as a debt reduction tool, transferring your high rate balances onto them and saving a ton on interest payments while you kill them off, or you can use them to as a source of cash for arbitrage wherein you generate income in a high-yield savings account while paying nothing in interest.

Anyway, what follows is a list of three new 0% balance transfer offers in addition to the list that I dug up previously.

1. IberiaBank Visa Classic Card
2. IberiaBank Visa Gold Cash Back Rewards Card
3. IberiaBank Visa Platinum Rewards Card

If you’re looking for more options, be sure to check out my full list of 0% balance transfer credit cards.

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The Georgia Supreme Court has upheld the conviction of two lenders charged with violating the state’s ban on payday loans. The two lenders, who were convicted of more than 40 violations, argued that the law violates the federal equal protection clause by unfairly targeting businesses located in Georgia. According to prosecutors, the two men subtly changed their business practices after the law was enacted. One puported to run a check-cashing service, and began referring the lending fee a “CheckGuard.” The other attempted to disguise the loans by including an option to buy a parcel of real estate that he owned — not surprisingly, no customers ever exercised that option. Both mean were given 15 years of probation, making them first Georgians to be successfully prosecuted under the law.

According to District Attorney Joe Mulholland:

“I’m not going to go out and celebrate, because I’m sure I’ll be doing this again next week. It’s kind of like the war on drugs, it’s never going away.”

[Source: Access North Georgia]

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Have you ever accidentally missed a credit card payment and ended up with a late fee plus finance charges? If so, you should definitely try calling the card issuer and pleading your case. Unless you’re chronically late, odds are they’ll agree to refund both the late fee and the finance charges. And if not, you’re only out the few minutes that it takes to make the phone call. This actually happened to us recently with our Citi Driver’s Edge MasterCard…

Last month I somehow failed to make the payment on our card. Naturally, we got whacked with a $39 late fee as well as finance charges — wow, that credit card interest sure piles up fast!

I was, of course, really bummed. After all, we’ve never paid a late fee or an interest charge to a credit card company. Was the streak about to end? Not if I had anything to say about it!

I picked up the phone, called up Citi, explained that we’ve never been late on a payment before, and asked them if they could do anything about the fees. The CSR said he’d check and see if he could get it automatically credited back, paused for a few seconds, and then said he’d taken care of it.

Thus, our streak is alive… We’ve still never paid a late fee or interest charge to a credit card company.

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This week Georgia lawmakers narrowly rejected a bid to repeal a state law banning payday loans. Supporters of House Bill 163 have argued that the state went too far in banning payday lending back in May 2004, and they want to bring the industry back, albeit with new regulations.

According to an article on Georgia.gov:

Usury laws limit the interest rate amount a lender can charge. In Georgia, an unlicensed lender cannot charge more than eight percent interest on a loan of $3,000 or less.

They go on to state that:

The Industrial Loan Act of 1955 essentially made payday lending illegal, by requiring state licensing and registration and by imposing strict usury limits on small loans. In 2004, the Georgia General Assembly passed some new provisions to increase the fines and criminal penalties for people making small loans at illegal rates of interest. The law went into effect in May 2004, and though it is under review in the federal courts, it is currently in effect. Referred to as the Payday Lending Act of 2004, this law authorizes felony and racketeering charges against violators, as well as fines of up to $25,000 per violation and a possible jail sentence of 25 years.

The new bill would’ve authorized payday lenders to charge a service fee of $15 per $100 loaned for each “deferred presentment services transaction.” In other words, every time someone needs to extend their loan, a lender could charge 15% of the balance. Unfortunately, when you compound this out, it becomes a pretty serious annual interest rate.

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There’s been a lot of talk recently about taking advantage of 0% balance transfer credit card offers. When it comes to getting rid of credit card debt, the utility of these balance transfer offers is pretty obvious — simply tranfer balances from higher-rate cards to a 0% credit card and save a ton on interest while you pay off your debt.

Simple enough. But what if you don’t have any high-interest credit card debt? Can you still take advantage of these offers? As many of you already know, the answer is a resounding YES.

What follows is an outline of the steps involved in accessing the funds from a 0% balance transfer and using them to earn extra money (so-called credit card arbitrage) or savings (e.g., saving on your HELOC), as the case may be. At the very end, I’ve also included a list of some of the best balance transfer credit cards for playing these sorts of games.

Getting Your Hands on the Money

The easiest way to access your 0% credit line is to request a balance transfer check from the credit issuer, and then simply deposit it in the bank. Citi is probably the easiest in this regard. I’ve also heard that you can get balance transfer checks from Chase, though I can’t say for certain that this is the case.

The alternative is a bit more creative, but still doable for pretty much any card issuer. If you can’t get the money straightaway, you’ll need another credit card (let’s call it Card #1). The good news is that this card doesn’t need to have an outstanding balance (in fact, you don’t want it to have a balance). When you apply for you 0% balance transfer credit card (Card #2), simply request a balance transfer from Card #1 to Card #2. This causes the issuer of Card #2 to make a payment against Card #1, creating a negative (credit) balance. The next step is to request a credit balance refund. In some cases (e.g., you used Citi for Card #1), you can do this online. In other cases (e.g., AmEx as Card #1) you may have to call to make your request.

Once you get your balance transfer check or your credit balance refund, you’re ready to roll…

Making (or Saving) Money With Your Balance Transfer Funds

As with getting your hands on the money, there are a couple of ways you can go here… First, you can simply deposit the funds in a high yield savings account, where you can easily pull down up to 5% APY (or more). The earnings from the account (minus taxes) represent your profits — be sure to avoid fees (below) if you want to maximize your return. My personal favorites in the online banking realm are ING Direct and HSBC Direct.

Second, you can use your balance transfer to offset existing debts. Simply transfer high interest credit card balances to your 0% card and they work to pay them off like there’s no tomorrow. If you don’t kill off the debt before the offer expires, apply for a new 0% offer, transfer the balance again, and keep pushing. Alternatively, you can use the money to pay off secured debts — car loans, your HELOC, etc. Simply sock the money into your

In these latter cases, your profit comes in the form of savings on interest that you would have otherwise been paying.

Things to Look Out For

The biggest gotcha when it comes to balance transfers is fees. Many card issuers charge a balance transfer fee (typically in the ballpark of 3% of the amount transferred) whereas others don’t. Obviously, if you’re looking to maximize the value of your balance transfer, you’ll want to avoid fees. The good news is that there are a number of fee-free balance transfer options, as well as others that normally have a fee, but waive it for new applications. Check the list at the end for some great no-fee options.

Maintaining the System

Here’s where you need to be careful… Most, if not all, 0% offers are contingent on you playing by the rules, not the least of which is paying the minimum amount due on time each and every month. Slip up and the interest rates can rebound to their normal levels. So read the terms carefully, and be sure to follow all of the rules.

The Downside

Aside from running the risk that you might mess up and miss a payment, the biggest downside to this scheme is the possible negative impact that it can have on your credit rating (i.e., FICO score). As you may or may not know, credit utilization (the percent of your available credit that is currently tied up) is a major component of your credit score, and maxing out one or more 0% credit lines can pump up your utilization.

As with all ratios, you can reduce your credit utilization in one of two ways. First, you can borrow less. Second, you can increase your available credit. Obviously, the former is somewhat antithetical to the idea of profiting by borrowing a bunch of money at favorable rates. That being said, it’s also important to keep in mind that you likely have other credit cards lying around that you won’t be using for your 0% games. To the extent that you don’t run up charges on these cards, they’ll help offset the heavy usage of your other cards. This positive effect on utilization is one of the reasons that you shouldn’t cancel old credit card accounts (the other reason is that credit scores are also influence by the average age of your accounts — the older the better).

Your Card Options

Even though interest rates have rebounded from their historic lows, there are still a bunch of 0% balance transfer credit card offers out there.

Just to get you started, here are some of my favorite 0% balance transfer cards:

» Discover More Card
» Citi Platinum Select Card
» Discover Miles Card

(If you’d like to look more widely, see my post on 0% credit card offers.)

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Nearly two years ago I wrote an article that refuses to die. It was called “Dave Ramsey is Bad at Math,” and it took a critical look at various debt repayment strategies. Truth be told, I actually intended that article to be a critique of an undeniably dumb debt repayment scheme that was outlined in “The Automatic Millionaire” by David Bach, but I just couldn’t resist the provocative title. To date, that post has garnered hundreds of comments.

While I still stand by my mathematical results, which show that Ramsey’s Debt Snowball approach to debt reduction is not the most efficient way to pay off your debts, there are undeniable pshychological benefits to to Ramsey’s approach. In fact, I explicitly recognized these psychological benefits in my original article, but I admittedly still came down on the side of the math. But as many people were quick to point out:

“It’s not about the math! If people were good at math, they wouldn’t be in debt in the first place.”

It’s also worth noting that the Debt Snowball is just a small part of an overall debt reduction strategy, which Ramsey has formalized in his ‘Baby Steps.’ So even if you don’t agree with the Debt Snowball per se, there’s still a lot of wisdom in the system.

Anyway, back to the matter at hand… Perhaps the biggest thing that I’ve learned in the time since I first published the ‘Bad at Math’ article is that people are really passionate when it comes to Dave Ramsey. A lot left some really insightful comments, and I really can’t say it better than them. Thus, I’ve trolled through the comments section and plucked out of snippets in support of the psychological benefits Ramsey’s strategy.

Here we go:

“Yes, you save money by paying off the highest interest rate debt first, but you’re missing the psychological reward of not having to cut a check for those trivial debts month after month.”

or…

“…it doesn’t matter witch method you use ‘highest interest rate,’ ‘lowest amount,’ or ‘hang your bills on the wall and throw a dart at them.’ It is that you do something and get control of your money. Personally Dave’s ‘debt snowball’ will be a huge motivator, but is all about changing behavior.

or…

I find Dave Ramsey to be a good motivational speaker. I have been listening to him everyday just to keep me on track. Listening to people who have paid of their debt, and are in some cases worse off than I am, is very motivational. I’m in it for the emotional aspect of it.

or…

“You are using your head way too much. Personal finance is 80% behavior and 20% head knowledge. Yes, it would save a little bit of money to pay off the high interest rates first, but it’s about a whole lot more than that. If you go on a diet and the first week you lose a few pounds, you think, great I can do this, this works. It’s the same thing, you eliminate a payment and you start to see that you can do this stuff.”

or…

“It is emotion that got you into the mess, and it is emotion, not math, that will get you out. I am not saying to totally ignore math, but you have to get quick wins to stay motivated… I can tell you from experience though, Ramsey’s method works and my life has never been better financially because of his common sense approach to personal finance.”

or…

“Ramsey’s approach certainly doesn’t make the best financial sense. But as a CFP who has worked with individual clients for over 10 years, I know that lack of self-dicipline is the greatest factor in financial failure.”

or…

People are not computers. People need positive reinforcement and the emotional boost given by getting bills paid off and starting with the smallest ones does just that. I can tell you from experience that I have tried and failed with other methods of getting out of debt but I am sticking to the debt snowball.

or…

The reason Dave does not do the math, and instead says attack the smallest first is simple. He states that he wants you to have “success” as soon as possible. That way you will continue and not quit. He mentions you could do the math, but by knocking off the smaller ones first you will have the perceived effect of results, sooner. Like the old saw: What we percieve… we can achieve.

or…

I think what Dave is doing with the ’snowball’ is giving people motivation and hope. Beacuse paying the lowest balance debt first give you the feeling that you are making difference…

So there you have it. And if you’re still not convinced, then consider the words of NCN from NoCreditNeeded, who dug himself (and his family) out of more than $11k in debt by following Ramsey’s principles:

“The reason that Dave’s plan works is that it provides visible evidence of progress. There is a huge psychlogical lift that occurs when you see an entire debt paid. As someone who paid off over 11K in less than a year, I can promise you that Dave’s plan really does work.”

(NCN communicated this directly to me, so it’s not in the earlier comments.)

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