Got Debt?

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Now that it's almost Halloween, let's imagine you and some friends finding yourself in a haunted house. You signed the waiver, although you're not really sure how bad it could be. What could possibly be in an old, decrepit house?

You walk inside, and it looks like every other old place. But something's off. There's no Micheal Myers here. No scary ghosts either.

Arrows lead you and your group to a back room of the house.

Along the way, an auto loan comes out of the blue and snatches one of your friends. Credit card debt snatches the other.

You're left standing there at this massive figure coming towards you. It's the scariest thing you've ever seen. It's a STUDENT LOAN!

Okay, I'll spare you the rest of my sad attempt at horror writing. Debt is scary and there's no debating that. Sometimes we as people can end up at this "haunted house" without even realizing it, and that's the scariest part.

I believe the single most important thing about people getting into debt and OUT of debt is education. I would lean toward giving everyone the benefit of the doubt that if they were able to be educated and aware, they would be.

But hey - If that's not you, don't fret. Not your fault you don't know what you don't know. What matters is taking the action now toward a better financial future for yourself.

With all that being said, let's dive into 3 of the most common debts we face.

Student Debt

The Department of Education officially launched its Student Debt Relief application yesterday. Regardless of your opinion on the issue, there's no debating that the cost of a four-year education has steadily increased over time compared to federal assistance like Pell Grants and household incomes too.

Right now, if you have a Federal Stafford Student Loan in your name (student or parent) you can receive up to $10,000 of forgiveness. And if you received a Pell Grant, you could receive up to $20,000. Note this may be taxable depending on what state you live in, and the legislation is still pending in many places. Here are links to the fact sheet and relief application.

Let's say you have private loans, or maybe you don't qualify for the relief somehow. You could always look to consolidate/refinance. This will take your multiple loans and combine them into one single loan. The major benefit of doing this is securing a lower interest rate. And if you are lucky enough to have someone co-sign for you, you could lower your interest rate further. Many cosigners drop off after a year or so of payments.

Lowering your interest rate saves you money. How much depends on your current rate, your refi rate, cosigners, and the amount of the loan. Maybe you're unable to consolidate though. One cool thing is that there are many programs out there at the federal and state level that assist your loan repayment - Especially if you work in the public sector, medical field, or in education.

Credit Card Debt

Credit cards are not evil, or scary (despite what Dave Ramsey says) when used correctly. But if you can't play responsibly, that's when it becomes an issue. Odds are if you have credit card debt you're aware of it. But are you aware that when you carry a balance, interest ON interest accumulates every month? Yikes. It can add up fast.

One common myth I've heard before is that carrying a balance on your credit card raises your credit score. This just is a flat-out lie. (it would increase your credit utilization thus decreasing your score) The only common thing here if you believe that is that you're a doofus and you deserve to pay interest.

You should use a credit card just like a debit card. Only spend what you can afford. But sometimes, life happens and maybe you end up with some credit card debt. Hell, the average American has $5,769 in credit card debt. No shame in that, you gotta do what you do to make ends meet. Being tight on money is expensive. But let's not normalize debt.

So you've recognized that you got some credit card debt. You can perform a Balance Transfer. What you can do here is transfer one or multiple card balances to a single card that offers a lower rate to pay it off. Banks often have specific cards aimed at this market. You can check out balance transfer cards here if interested.

Everything Else

Debt isn't exactly an easy-to-talk-about topic. Let me close out this week's newsletter with two debt payoff strategies you might want to employ.

Debt Snowball: This is where you pay your smallest debts first and move on to the larger one next, then the larger one, and so forth until your largest one is paid off. Mentally, this method helps you keep that progress train runnin'. But mathematically, the debt avalanche option is better.

Debt Avalanche: You pay your debts with the highest interest rates first, agnostic of the size of the debts. This may not be the most psychologically pleasing as it may take awhile to see progress, but this will save you the most money in interest in the long run. I would recommend this method on that alone.

No hip-hop references this week, but a new Jimmy Eat World single titled "Place Your Debts" did resonate with me this week. I'd recommend a listen.

Stay Frosty,

Andrew