To Charge or Not to Charge: Should Credit Card Spending be Restricted for Young Adults?

4 Tactics for Sticking to a Debt Repay Plan

Some people will tell you that consolidation companies are just sharks waiting to take advantage of your financial situation and charge you to pay off your own debt.  While I’m sure some companies are likely out to price gouge their customers, choosing a good consolidation company (or negotiating a debt repay plan on your own) can be a huge boon to your financial life — it helped me pay off $15,000 in student loans and credit card debt within two years.  There is one caveat, however; you absolutely must not miss a monthly payment.

The consequences of missing a payment once you’ve set up any sort of payment plan, consolidation or no consolidation, are many and far outweigh the benefits of using such a program.  Unfortunately, for many young adults with a part-time job or a job that works off of tips, these plans can be tricky, given that your monthly income likely fluctuates.  But working with a company that is willing to negotiate a debt repayment plan can help you lower your monthly payments and save a ton of money in interest in the long run.  So, how do you make sure you stay on the track to total debt freedom?  You set yourself up for success by making your payment plan as sticky as possible.  This is how:

1.  Automate Payments

Have your payment set up with your bank so that it goes through the day after you get paid.  Doing this will make sure that you never even see that money and you’ll get used to living off the remainder of your paycheck.  An additional bonus?  You’ll likely forget you’re even making payments, and when you check your balance on an afterthought, you’ll be pleasantly surprised at how quickly it’s decreasing.

2.  Stop Card Activity

If you’re on a repayment plan, there’s a good chance that you’ve probably maxed out your spending limit.  But if you haven’t, lock your card in a safe place, and make sure you don’t carry it out with you to deter adding to your spending limit and continuing the vicious cycle of accruing more charges on top of your current balance.

3.  Set up a Depreciation Calendar

One of the best ways to keep yourself motivated to pay off a high balance is to watch your balance whittle away as you make steady payments.  Printing out a calendar with the dates of your automated payments is an excellent way to visualize the balance getting smaller.  On the date of each scheduled payment, pen in the new balance.  This will provide a visual aid of your declining debt, and will keep the motivation high to continue snowballing the balance.

4.  Check in with Creditors Regularly

Setting up a recurring date to speak with a consolidation counselor or a debt repayment plan agent will help hold you accountable for your payments.  Speaking with a counselor on the last day of every month is a great way to review your progress and goals with someone in an position of authority, making it more difficult to miss a payment since you’ll have to answer to a real live human being down the road — not just some automaton spitting out a quick warning.

Take Two: Thrive on Behavioral Budgeting and the Future of Financial Management

This is the followup to our interview with Thrive CEO and Founder, Avi Karnani and Lead Scientist, Matt Wallaert.  In our first installment, which you can read here, we talked to them about their work in financial literacy, competition with popular money management site, Mint and how they differ from other financial service companies.  In this installment, we’ll find out more on behavioral budgeting and how it works, and how Thrive is working to make banking a better service industry. Read more

Broke Celebrities: What Can We Learn From Failed Wealth?

Being broke is no fun — especially if the circumstances were totally under your control.  We’ve all been there at some point in our lives.   Spending too much money on a new outfit to wear out and consequently blowing the grocery budget for the month, or eating and drinking out five days a week and having to forgo cell phone access for three weeks. Read more

Thrive on Behavioral Budgeting, Financial Literacy and the Future of Financial Management – Part 1

We recently sat down with Thrive (a free online personal finance manager) co-founder, Avi Karnani and Lead Scientist, Matt Wallaert to talk about Thrive’s offering to the rapidly evolving world of personal finance.  We met up in their office in Chinatown to discuss their recent acquirement, current work in financial literacy, and their competition with one of the most recognized financial management site, Mint.com.  Since we covered a lot of ground, we’re going to publish this interview in two parts:  the first of which is below.  [Part 2 is here] Read more

What’s Your Grade? Credit Karma’s Credit Report Card

Credit Karma has launched a new, web-based tool that turns your credit score into an easy to read report card that grades your credit health. Best of all? It’s free.  Credit Karma CEO, Ken Lin, was excited to talk about the new reporting tool that provides insight for consumers who don’t understand their credit score, but actively want to improve it. Read more

Credit Karma’s Ken Lin on FICO’s New Scoring Model

In the age of the credit crunch, credit scores are the passport to your financial future.  The new year has brought many things, and with it, a new scoring model.  We spoke to Ken Lin, CEO of Credit Karma (a website that lets you check your credit score for free — anytime, anywhere) about the change in the FICO credit scoring model to get a better idea of what the changes are and how they will affect you.

Can you give us an overview of the new scoring formula?
It hasn’t been fully disclosed or anything.  They’ve selectively agreed to point out certain things.  But the way it looks like things are going to work, it’s going to be a more holistic view on a person’s credit.  So what that means, is that it takes fewer of the micro late payments and looks at your credit on a more holistic level –  late payments or single late payments don’t matter as much on your credit score, but long term late payments will have a bigger impact.  I think that’s one of the first changes.

I think a secondary change is really around the authorized users and the notion of piggybacking your credit.  I think that’s been one of those things where people have gamed the system — where if you add an authorized user in your credit report, you are in fact transferring some of your good credit over to that person — and basically stop that process or that loophole, if you will.  And really the third component or maybe the global picture, they’re really trying to help lenders better determine who are lower risk people.  I think that’s the ultimate objective.  But at the high level, it’s all about making more of a holistic view on the credit score, rather than the minutia, as well as fixing a few of the loopholes in the hopes of getting a better [read] for lenders.

So, when does this new scoring method go into effect?
Well, it’s interesting.  So what happens most of the times with these scores, lenders will actually test it.  So it launched I think actually today or yesterday, with TransUnion.  I think Equifax is coming down the road, and Experian hasn’t actually released the date.  But normally  what happens with new credit scores is that financial institutions have billions of dollars in their portfolio based on existing credit scores, so they’re generally hesitant to switch over completely or unilaterally to new credit scoring systems without testing it.  What I suspect, is that banks will slowly migrate as they test it.  And what they’ll ultimately do is test this score against the old score and see if there are actually pickups in the performance of being able to detect chargeoffs or risk.  I think once those numbers come in, they’ll be more likely to make a final switch.

What spurred this change, or does FICO regularly and routinely change their methodology?
You know, credit scores haven’t stayed the same, really ever.  I think historically there have always been updates.  There have always been tweaks to get them to normalize for different years or economic conditions.  But even if you look at the current FICO score, its been updated five or six times since its original release in the late 90’s.  So this is a constant, but I think this one is a little bit more radical from the standpoint that they’re trying to address more of the macro level issues instead of the loopholes that we spoke about.  But you have to keep in mind that credit scores are constantly evolving, and its never the case where you have one consistent score from the beginning of time for you.

OK.  I was wondering if it had anything to do with banks lending money to unattractive borrowers and the whole sub prime debacle that we just went through?
You know, I think that probably is a little bit of the underlying effect.  I mean, credit scores, they’ve performed well.  I think the whole sub prime debacle is more of the factor that the banks got a little more greedy.  They were continually lowering their criteria or their threshold in the hopes of making more profits, and it just ultimately backfired.  I think part of this is grounded in the fact that you always want to be able to better mitigate your loss or predict losses based on your credit score.  I don’t think credit scores ultimately brought down the industry.  It was more of a case that the industry was a little too greedy and willing to lower their standards.

Do you think this new method will prove to be more beneficial to people, or do you think that a lot of people will see their scores being lowered?
Its too early to tell, but this score is meant to benefit banks and lenders — quite honestly, right?  Credit scores are always built for lenders.  Consumers are finally becoming aware of it because they know how much impact it has on their financial well being.  But historically these things are built for lenders.  And the ultimate gauge of whether this score is successful, is if it will be able to differentiate good borrowers from bad borrowers.  And that will be the decision.  So from a consumer’s standpoint, it’s important for them to always be aware of what their credit scores are, and making sure their credit reports are accurate.  But I think this particular change will have little impact on the consumer — more of the impact is really going to be focused on the lender and their profitability.

Like you said earlier, it’s going to be focused more on the minutia.  I heard that the smaller problems, like if you have a doctor’s bill for $100 that accidentally went into collections, it would mean less.  Is that true?
Correct.  Right.  It de-emphasizes the smaller aspects and looks more at the macro level trends.  So if you have a long history of always being late or being delinquent on your bills, that’s taken into more of significance, rather than if you have a small doctor’s bill, a collections notice, for a $100 or less — it has less of an impact.  And along the same lines, if you recently missed a payment, but you’ve always paid your bills on time, that will also have a much lower impact on your credit score.

I was also reading that they’re going to be focusing more on the credit to debt ratio.  Does it hurt your score to have a credit card open, but to never use it, if it’s paid off?
So, they’re starting to look a little bit more closely on inactive accounts.  I think the general rule of thumb is if you have a line of credit that’s available to you that you don’t use often, use it every couple of months to show that there is activity so that it continues to contribute to your active credit line.  I think the new model suggests that they are going to be de-emphasizing credit limits if you don’t use them.  So a simple way around that is to buy a tank of gas every other month with your card so that you continue to show usage.  That will kind of mitigate any of the negative impact of having credit lines that sit dormant.

Will the new scoring model change the way they differentiate between labeling scores good, fair, poor and excellent.
I don’t think so.  Historically, credit scores have been normalized.  Meaning that at any given year, they expect the same score to have the same amount of chargeoff.  So I think because everyone is so used to that standard, they’re not going to be changing the definition of good, bad, and poor.

What about precautions?  Are there any new ones that we should follow or should we stick with the same rules that we’ve been doing, like keeping a healthy credit to debt ratio and keeping accounts that are paid off open?
Yeah.  There are so many components that go into a credit score — I think at the last count it was over 200.  And for a consumer to actively monitor 200 or try to you know, eek that last 2 or 3 points of improvement really becomes difficult.  So following the general rule of thumb of not carrying too much debt, making sure your credit reports are accurate, not having too high of a utilization — those general types of tips will be always true.  I think consumers should be more worried about those macro trends, instead of doing X,Y, and Z to get the last three points of improvement.

And is there any advice to someone who’s planning to purchase a house or car this spring, and will need to have a good score?
Yeah.  Well, I think credit scores are more important than they’ve ever been in the last ten years, if you will.  If you’re looking to make a major purchase, I think consumers need to start being aware of their credit scores today.  And anything lower than a 720 for example, on a mortgage is going to be really difficult to get good financing or at least financing at the best rate.  So consumers need to be diligent about monitoring their credit scores probably 6 months to a year ahead of that purchase.  Ideally they’re constantly monitoring their credit score.  They need to be very cognizant of cleaning up their [credit] lines, making sure they’re paying down their debt, and getting to the threshold of 720 plus, so they can get the best rates.

Will consumers be able to get a free copy of their credit score once the majority of the banks transition over to the new scoring model?
Well, this is a really interesting point.  I mean, historically you can only get your FICO score from myFICO.  Experian recently cut off their relationship with them.  So you can only get two of your FICO scores through myFICO.  But even FICO released the fact that they’re actually not planning to release this new FICO score to consumers for another two to three years, so these recent changes kind of, again, support the fact that from a consumer’s perspective, they can’t get too caught up in what they need because they still won’t technically have access to it for a few more years.

Is there anything else you’d like to throw out to our readers?
You know, I think the continuing message that we continue to support is that credit scores are very important for almost every aspect of financial health.  This is a minor change that consumers should be aware of, but they should definitely be aware of those macro level changes in terms of the economy and having good credit.  That’s just one thing that we continue to tell consumers — be diligent about knowing your credit score and really how they work.

Mixing Morals and Debt Management

Getting your debt under control isn’t something that comes easily or quickly.  It’s a long, arduous process, not unlike a diet, that requires constant attention and focus.  For many, it’s the same process that starts and stops each year, a declining goal once the initial excitement has worn off.  But if there’s ever been a year to shore up your finances, 2009 is it.  So to make sure there’s no backsliding, we’ve mixed some time honored morals into the process to help you stay abreast of your financial objectives this year.  Keep reading for four fundamental values and how they should tie directly into your debt management goals.

1.  Discipline

You must constantly keep yourself consistent on monthly payments.  Just like that one slice of pie can throw off your new year’s weight loss resolution, so can one missed student loan payment throw off your debt repay schedule — and mentality.  You’ll make it that much easier for yourself to miss a payment in the future.  The best way to curtail this is to sign up for automated payments.  Don’t give yourself the option of cheating.

2.  Honesty

Being honest with yourself is extremely important not only when paying off debt, but with your personal finances in general.  When I was throwing back payments on my credit card and student loans, I would get a little too optimistic about what I could really afford to chuck at my debt each month.  And in those cases, I would find myself almost penniless at the close of the next pay period because I wasn’t honest with myself about what I could realistically afford to put towards my debt.  It was all done with good intentions, but when those instances occurred, I found myself borrowing $20 or $30 from my savings or overdraft accounts to cover the days remaining til I got my paycheck.

3.  Moderation

You can’t have your cake and eat it too.  If you’re really serious about being in good financial health, you have to make sacrifices.  And with sacrifices comes moderation.  Growing up in a time when a good majority of us were given whatever we wanted, this can seem like a painful cutback.  But it’s worth it.  I cannot count how many times I’ve gone out to lunch and along with a salad or sandwich, have picked up something extra like a brownie or a candy bar — something that pulled an extra couple of dollars out of my wallet just because I thought I may want it later.  It’s not necessary, and those small daily expenses really add up over the long haul.

4.  Dignity

Being financially aware and responsible is something to be proud of.  Rather than hoard worthless material trinkets to feed your pride, focusing on productive and worthwhile goals will give you a higher sort of accomplishment and self worth.  Practicing the art of self-discipline and frugality is difficult enough, but strengthening personal growth endeavors will bring you an unobjectionable sense of pride and accomplishment when you succeed in paying off your debt and reaching your financial goals.

Coping with Crushing Student Loan Burdens

I’ve been reading more and more stories lately on how the high interest loans are putting an extraordinary burden on recent graduates paying off what they thought were federally controlled student loans. These loans were extended via private companies, but carried variable interest rates that, like a lot of mortgages, fluctuate with current interest rates. The ending result? Sky rocketing interest rates on loans for tens of thousands of dollars and none of the benefits you get with federal student loans like deferment and locked-in rates.

The LA Times published an interesting article about a young woman who recently graduated with a degree in photography. After taking out $140,000 in loans, she now has to pay out $1,700 a month towards these loans. And with some of these loans at a debilitating 18% interest rate, paying $1,700 a month isn’t going to go all that far.

To give a frame of reference, if she had taken out the entire $140K in private loans at 18% interest, she would have to chuck away $2,010 a month towards her loan, and then she would only be able to pay it off (at that same rate) after 30 years, all the while racking up a total bill of $618,464 — almost five times the original amount! Add in a missed payment one month, and you can see how this issue is gaining momentum as one of the most serious problems for new graduates — coupled with low employment rates.

While I think that loaning organizations are practicing dubious policies and purposely muddling the information that is given to the students who apply for loans, I also believe that a large part of the blame should go towards schools for not educating students on how to effectively finance their college education and what to realistically expect after graduation. FinAid, an online comprehensive financial aid guide, says that a good rule of thumb for taking out loans is that “…your total education debt should be less than your expected starting salary.”

I think that most students would pass up $100,000 in loans for a photography degree if they understood that they’d likely be making less than $40,000 in their first job after school. It’s unrealistic to think that a six-figure loan will be easily paid off after school unless you’re diving into a career in banking — and I don’t think that colleges are cementing this understanding to their students. According to a quote from the LA Times’ piece, Luke Swarthout (a former advocate at the U.S. Public Interest Research Group) said “The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment.”

I, for one, was never required to take any classes or lectures on how student loans work or where to look for financing. It was just assumed that you would take out loans and they pretty much had the paperwork ready. All they required was a signature. I guess I was lucky that I did indeed have a Federal Stafford Loan with a locked interest rate of 6%. I also went to a state school with relatively low tuition, so my student loan bills were far less of a burden than many of the students that I’m hearing about now.

So, just for argument’s sake, where do you guys believe the fault lies? Is it in the hands of the private loan sector for purposely providing confusing information and not disclosing full loan amounts? Does the blame go to the college for not providing better financial aid counseling? Or does it belong to the students for being too naive when agreeing to these terms?

I’m Debt Free!

I’m not one to toot my own horn, but I will today because, frankly, I deserve it.  Today I became a card-carrying member of the Debt-Free club.  This beautiful day follows an intense two year period of handing over half of my salary towards debt repay, and I am tickled pink to have finally gotten to the point where I don’t have to throw away my paycheck on crap that I purchased eight years ago.  Read more

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