Spending and Borrowing
I am worried about paying my bills — what should I do?
You never know when something like a job loss or medical emergency could upset the balance of your financial life. If you already are living paycheck to paycheck, now is the time to adjust your spending or take action to relieve your debts.
Before you can figure out where to allocate your money, you need to know your obligations. Sit down and write out all of your monthly bills and debt payments, then add in any necessary spending.
There is a popular adage in the personal finance world that says to “pay yourself first.” That means setting aside a portion of every paycheck to build
an emergency fund that will cover three to six months of expenses and then set aside money for retirement. All luxury or unnecessary spending should only happen after your monthly obligations, including saving, are met.
One of the biggest impacts you can make on your budget is reducing or eliminating debt. Add up all of your debts to see how much you owe.
Because the debts with the highest interest rates cost the most money, one strategy is to
pay those off first. Just be sure to make at least minimum monthly payments on every account. Then, once you’ve slayed the debt with the highest interest rate, you can apply that portion of your monthly budget to the debt with the next highest interest rate. By the time you get to the last debt, you’ll have freed up a good bit of money to knock it out fast.
If you’ve already cut luxuries and still don’t have enough to make ends meet and save or pay off debt, you will need to boost your income. Consider
negotiating your pay or picking up a side gig.
How can I pay off my debts?
The first step in paying off your debts is to get really clear on exactly what you owe (and to whom). This will give you a total picture of your debt. While this might seem scary, it also will give you a “magic number” – this is how much money it would take for you to be totally debt-free.
- List your debts. Include any debt that you are responsible for paying back, such as your mortgage, auto loans, student loans, medical bills, credit cards, personal loans, payday loans and money owed to family and friends.
For each creditor (each person or company to whom you owe money) include the remaining balance, the minimum monthly payment and the interest rate.
- Which of these debts is critical to your family’s survival? For example, paying your mortgage keeps a roof over your head, and paying your auto loan enables you to go to work, so it likely is important to pay at least the minimum monthly due on these debts before putting money to anything else. If your mortgage or car loan is more than you can afford, you might need to downsize to put more money toward your debt.
- How much can you reasonably pay toward your total debts each month (after you meet your critical needs)? Calculate how much you make each month and subtract your essential monthly expenses such as rent or mortgage, transportation, medicine and food.
Do not include any debt payments that are not critical to your current survival. How much money do you have left over to put toward your debts each month? If you have no money at all left over to put to your debt, you need to somehow increase your income, cut back your expenses or consider debt relief and possibly even bankruptcy.
- Prioritize your debts to know which to pay off first. How you prioritize paying back your debts is unique to your situation. Here are some approaches:
- Option A: Start with the debt that is causing you the most stress. Which debt is the most behind in payment? If you put all your leftover money to it each month, how quickly could you pay it off? Sometimes a relatively small debt creates a lot of tension. Even if this debt is to a family member or friend, it could make sense to pay it first to ease your stress. (However, be careful not to fall behind on other debts, which could start the stress cycle all over again, and remember that paying back a family member won’t help your credit score.)
- Option B: Start with the highest interest rate. Pay off the debt with the highest interest rate first, as you continue to make minimum monthly payments on the other debts. When you’ve paid off that first debt, move to the second-highest interest rate and continue until you have paid off all your debt. This creates a snowball effect because once you pay off the first debt, you can add that money to the money you already are paying to the next debt, and so on until you’ve paid off all your debts.
- Option C: Start with the smallest debt. Again, this might seem illogical, but paying a debt off completely – even if it’s less than $100 – can give you a feeling of accomplishment and create the momentum to move on to the next debt on your list.
How can I repair my credit?
Your credit rating may have been damaged because you missed payments or you were late in making payments. While you can’t repair your credit overnight — and you should be wary of companies that make such promises — there are definite steps you can take to get back to financial health.
- Stop adding new credit card debt or other debts (such as payday loans). Continue to pay off your credit cards, but stop using them. Use cash, a debit card (which automatically deducts the amount from your checking account) or a prepaid card from an established financial institution, such as a bank or a credit union. A prepaid card is different from a credit card because you are not borrowing money, you are using money that has been preloaded onto a card.
- Review your credit reports. You can order a free credit report each year from the three main reporting agencies (Experian, TransUnion, Equifax) through www.AnnualCreditReport.com. Examine the reports and alert the agencies if you find errors. Follow the agency’s instructions to clear up mistakes and be patient. It can take a little while, but clearing up your credit reports is very important.
- Pay your bills on time. It’s simple, but paying your bills on time is one of the best ways to improve your credit rating. Set up automatic payments on any recurring expenses – such as rent, utilities, insurance, car payments, etc. to avoid missing payments or sending payments in late.
- Call your creditors. It might seem counterintuitive to contact your creditors, especially if you are scared or embarrassed about your debts getting out of control, but hiding is not going to help. It is better to be up-front and honest.
- Get credit counseling from a trusted source. Start with a nonprofit debt counseling service such as the National Foundation for Credit Counseling (NFCC) by visiting www.nfcc.org or calling 1-800-388-2227. Or start with the Financial Counseling Association of America (FCAA) at www.credithelp4U.org. You also can research local programs in your area by calling 2-1-1.
How do credit repair scams work?
If you reply to offers of easy ways to repair your credit, you could make your financial situation worse rather than better. Be especially suspicious if the deal involves a fee or up-front payment.
Unsolicited offers can come from predatory people or organizations that find out the details of your financial life through public information. These organizations look for people who are struggling to pay debts and then offer to help repair their credit — at a price, of course.
There are many things you can do to improve your credit on your own, for free or at a low cost. Companies that offer seemingly similar services often charge a lot of money, and they may not provide quality service (or any service). They can also make your credit situation worse than it was by using precious time that you could use to improve your credit history.
The Federal Trade Commission’s article
“Credit Repair: How to Help Yourself” provides sound information to improve your credit history on your own.
Keep in mind these tips:
- Contact the company yourself via a phone call or an Internet address you type in. Don’t click on links to company sites contained in an email message. These may be fake sites set up to look like that of a legitimate company but actually designed to fraudulently get your money or install malware on your computer.
- Don’t be pressured into making a decision quickly. If the deal is genuine, it will be around tomorrow — after you’ve had a chance to think about it and research it.
- Always know whom you’re dealing with. Research companies and individuals who will handle your money before you turn it over.
- If you receive an offer by phone, ask for that information to be mailed or emailed to you.
- If an offer sounds too good to be true, it probably is.
How do debt consolidation loans work?
Debt consolidation loans can serve three purposes:
- Lower your monthly payment
- Sometimes can lower your interest rate
- Combine all of your payments into one monthly bill
If you’re scrambling to remember various payment dates to several different lenders, having only one due date can be advantageous.
The first two purposes sound positive, but can have negative effects. Let’s say you owe four different creditors debt with respective interest rates of 12 percent, 15 percent, 18 percent and 20 percent. A debt consolidation loan may be able to lower your interest rate to 9 percent. However, in order to lower your monthly payment, the loan will have a longer term. Because it will take longer to pay off your debt, you may end up paying more in interest over time despite the rate being lower.
The actual cost will depend on time frames and the difference in the interest rate. Reducing interest from 20 percent to 9 percent is a big drop that could save a lot and blunt the effects of stretching out payments.
If you cannot currently afford your monthly payments, you may not mind paying more in interest due to the longer payoff period. Making on-time payments should eliminate late fees and could serve as a boon to your credit score.
Before working with a debt consolidation company, you should research and fully understand these facets of your agreement:
- Do I have to pay any fees up front? (Companies that charge fees up front tend to be predatory.)
- Are there any service fees built into my new loan?
- What are the late fees and when will they be charged?
- Will my interest rate change for any reason?
Another common way to consolidate debt is to take out a home equity line of credit (HELOC). These loans tend to have even lower interest rates, but they are secured by your house. That means that if you fail to pay the loan back, you could lose your home. Traditional debt consolidation loans are unsecured, meaning there is no potential for collateral loss.
How do I file for bankruptcy? Will it haunt me for the rest of my life?
Filing for bankruptcy is not an easy decision. If you are drowning in debt that you cannot repay, you have the option to file
Chapter 7 bankruptcy, under which your nonexempt assets (i.e., assets that bankruptcy filers are not allowed to keep and must be turned over to a court trustee) are liquidated in order to repay as much of the debt as you can before it goes away.
Another option is
Chapter 13 bankruptcy, under which you set up a plan to pay back at least part of the debt within three to five years based on your regular, reliable income. It is important to note that certain debts, such as student loans and unpaid income taxes, are not dischargeable via bankruptcy.
All bankruptcy cases must be filed at the federal level. Because of the legal and financial ramifications, it is highly recommended that you seek out a lawyer. If you can’t afford your debts, it’s unlikely that you’ll be able to afford legal help on your own. The American Bar Association has
a searchable database of lawyers who can help for free.
Although it is not recommended, you do have the option of representing yourself. Cornell University has some resources available that outline the
Federal Bankruptcy Code and the nuances of the process, but you will also have to research rules of your local court. You will have to fill out paperwork at the federal level, which can be found for free via the United States Courts, and you will need to fill out paperwork for the specific court in which you will be filing.
Bankruptcy can leave a negative mark on your credit report; however, that mark does not stay there forever. Chapter 13 bankruptcies are removed from credit reports after seven years, and Chapter 7 bankruptcies are removed after 10 years. The impact of bankruptcy on your credit score can lessen
over time as you establish good credit.
You may even start to see positive changes to your credit score after as little as one year, but the real trouble comes when lenders and others in authority check your credit report. During those seven to 10 years, you may have trouble:
- Obtaining new loans with reasonable interest rates
- Finding a new employer if they check credit reports
- Finding housing, if landlords check credit reports
- Opening a new bank account
- Opening a new insurance policy
Bankruptcy usually is a last resort, but if you are in more debt than you can manage, it can be a good option — especially if you have few assets and are under extreme stress.
I can’t pay my credit card bills — what can I do?
It might be tempting to avoid the situation, but when you can’t pay your credit card bills you should contact your lender(s) right away to minimize the damage to your credit rating and start digging out of debt.
- Before you miss a payment or realize you can’t pay your credit card bills, contact the lender(s) by phone. Explain the situation and discuss options. If your payment history has been good up to now with this creditor, you might be able to work out a revised payment plan (sometimes called a financial hardship plan) for a limited time.
- If you can pay only a portion of the bill, still contact your lender. Making small payments is better than no payments at all.
- Take notes during the call:
Note the time and date of the call as well as the name and extension of the person with whom you spoke.
Ask if further late fees can be waived if you agree to a hardship plan and stop using the account (i.e., you will no longer be able to use the credit card).
Ask for written confirmation by letter or email that verifies any new payment terms.
Make timely payments and keep track of payment confirmation numbers.
Don’t be afraid or embarrassed to ask for help. Contact a nonprofit debt counseling service such as the National Foundation for Credit Counseling (NFCC) by visiting
www.nfcc.org or calling 1-800-388-2227. Or start with the Financial Counseling Association of America (FCAA) at www.credithelp4U.org. You also can research local programs in your area by calling 2-1-1.
When you can’t pay your credit card bills or other debts, it can feel overwhelming. Instead of ignoring the situation, address it right away. Your situation is unique and how you proceed depends on your income, assets, debts and financial goals. If you are not able to resolve the issue on your own, you might need to research more serious actions such as declaring bankruptcy.
I need a loan — what are my credit options?
The tighter money gets, the more you may be tempted to take out a loan to cover expenses or make a big purchase. Before you sign for a loan, learn about credit options and how each one can affect your financial health.
Banks and Credit Unions
Personal loans from banks and credit unions are unsecured, so they carry higher rates than mortgages or auto loans, which are secured by your house or car. Here are some things to consider before taking out a personal loan:
- Borrowers with better credit usually will get better rates.
- Interest typically compounds annually.
- Shop around to get the best rate.
- Credit unions tend to be more willing to lend and generally do so at lower interest rates.
Payday loans are typically the least desirable for the consumer. Here’s why:
- The advertised interest rate likely adds up to somewhere between national averages of 200 percent and 400 percent annually.
- Financing fees are typically very high.
- If you have to pay the loan off with your next paycheck, odds are you will need another loan to cover the next gap.
Credit Card Cash Advances
Another option is to take a cash advance from your credit card. Here’s what you should think about first:
- Interest rates may be higher for cash advances than simply charging something to your card.
- Interest will start accruing immediately, regardless of whether you pay your bill in full every billing cycle. There is no grace period as there might be for regular purchases.
- You will be subject to additional fees as outlined in your user agreement.
- You also may incur ATM fees when withdrawing the money.
Home Equity Line of Credit (HELOC)
A HELOC functions much like a credit card in that you can spend as much or as little as you want so long as you don’t exceed your credit limit – in this case, the amount of equity you have in your home. However, because it is secured by your home, interest rates tend to be lower than traditional credit cards.
Reverse mortgages are structured for those in retirement. The lender will give you a monthly payment, lump sum, or line of credit and when you pass away, or leave the home, the sale of the home will pay them back. Reverse mortgages:
- Typically have large origination fees.
- Rely on the value of your home rather than your credit score.
Borrowing from Friends and Family
Borrowing from friends or family can be a quick way to get a zero-percent interest loan. As with any loan though, it’s a good idea to agree on repayment terms before taking any money. Paying your loan back on time can help remove any strain it may put on your relationship.
What does repossession mean?
Repossession means that you must give back something that you bought with a loan, but have not paid for in full, or that an asset you have is taken as payment for another unpaid debt. Repossession often happens when a loan is in default due to nonpayment — this does not apply to items you purchased with credit cards. You either can give the lender ownership of the item, which often is something large, such as a car, or the lender can come get the item. Either way, it’s bad for your credit score and bad for your financial situation.
You know that repossession looks bad on your record, but what does repossession mean for your lifestyle? When you have something repossessed, not only do you still have the debt – which in some cases doesn’t go away just because you don’t have the item – now you don’t have the item, either. At the very least, if you have something repossessed, you could still owe the balance of whatever was left on the loan.
To avoid repossession, you first could try to work with the lender to come up with a payment plan that fits your budget. Some lenders would rather have small payments over time than no payments at all.
If you are not able to reach an agreement with the lender, you could try selling the item yourself and using the money to pay back the debt. This could be a good option if the item still has enough resale value to cover your debt and possibly even have some money left over. At least if you sell your car and pay off the remaining balance, you will not have to continue to pay the lender for something you no longer have.
Another option is to quickly raise cash by selling something else of value, taking on more hours at work or getting another job to raise income.
What should I do if I missed a credit card payment?
As soon as you realize you missed a credit card payment — or that you are going to miss a credit card payment — contact your lender. Work with the credit card company to avoid collection calls and minimize the damage done to your credit rating.
Before you call the credit card company, figure out how much you can pay and when you can pay it. Examine your income and expenses and create a spending plan. Be realistic and don’t commit to a payment that you really can’t afford. You might put off the stress momentarily, but you could be in the same situation and miss another credit card payment next month. (Only this time, you’ll have less flexibility with the lender.)
It’s better to pay a little on the date you say you will, rather than promise to pay more because that’s what you’d like to do.
Once you know how much you can afford to pay, call the lender and ask about possible options:
- Can I pay the amount in full, but late?
- Can I pay a reduced amount? When is the latest I can pay it?
- Can I pay nothing for the foreseeable future?
- Can you waive the late fee?
- Can you restore the interest rate to what it was before the missed payment?
- Can you remove other penalties and fees?
You’ll have more luck if your credit payment history has been good with the lender before you miss a credit card payment. But even if you have been late or have missed payments, it still is worth trying. If the lender agrees to new terms, request the changes in writing.
To rebuild a better credit history with each creditor, be sure you live up to any renegotiated terms and make future payments on time.
Where can I get a truly free copy of my credit report and credit score?
You can get your credit report and score for free, but you won’t be able to get both in the same place.
Free Credit Report
Federal law mandates that everyone can get free access to their credit report from each of the three major credit bureaus – TransUnion, Experian and Equifax – each year. While many companies boast that you can get yours free through their service, the only guaranteed way to access it at no cost is through
AnnualCreditReport.com, which is the website authorized to provide reports by federal law.
You can access your credit report from each bureau once per 12-month cycle. Some people check all three at once, while others prefer to check in with one bureau every four months on a rotating basis. Checking your credit report in this manner will not affect your credit score.
Free Credit Score
There are many ways to check your credit score for free. Check the online portal of the financial institution where you have a checking, credit card or investing account.
It’s important to note that you have at least one credit score from each of the three credit bureaus. For example, if you pull up your free credit score from your financial institution, it may be using Experian data, while the potential lender pulls up TransUnion. If you work with more than one financial institution, it may be worth checking with each one to see if they pull from different credit bureaus.
You should also keep in mind that depending on the financial product you are applying for, your credit score will look different. For example, your auto credit score weighs past installment loans on vehicles more heavily than the credit score that mortgage lenders would see if you were applying for a home loan.
I need more money now — should I reduce my contributions or stop paying into my 401(k)?
When you need more money on a month-to-month basis, you may wonder if you should reduce contributions or stop paying into your 401(k) or 403(b) retirement plan.
Unless the money you are contributing to your retirement plan could be used to help you avoid dire financial outcomes such as losing your house or your transportation to work, it’s a good idea to keep contributing to your 401(k) or 403(b) plan.
If you don’t, you will lose money by not contributing. Your contributions are taken out pretax. If you stop contributing, part of that same dollar amount will be deposited into your bank account, but another portion will go to taxes. If you keep contributing, all of your money will be going toward your own future.
When you think about your future, you need to remember that your contributions will be compounding interest. Let’s assume the market will give you 6 percent returns annually and that you have 20 years left until retirement. If you reduce your contributions by $200 per month, you will have $91,129 less when you retire (assuming a 3 percent inflation rate).
If you do decrease the amount of your contribution, you should not go below the minimum required to get your employer’s match. An employer’s match to your retirement fund really is free money that you would be throwing away. Not only is it free money, but it is also subject to compound interest. Again, you’re not just missing the contribution today; you will be missing out on the long-term gains that would otherwise help you in retirement.
Even if your employer has reduced or eliminated a match, you should try to save through the existing plan or establish a Roth IRA for further contributions.