Home' Trinidad and Tobago Guardian : August 17th 2014 Contents AUGUST 17 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
INTERNATIONAL | SBG23
Although this article was written specif-
ically for an American audience, much of
the advice is quite relevant to T&T.
As the economy slowly
improves, Americans are
racking up more debt. And
experts say they often make
big mistakes when trying to
shed that debt and get back
into the black.
"American consumers deleveraged after the
financial crisis, but they re starting to take on
more debt again," says Ben Woolsey, president
of credit-card advice website CreditCardFo-
Total outstanding revolving credit card debt
reached US$873.1 billion at the end of June
2014, according to the latest data from the
Federal Reserve, up from US$861.5 billion in
the first quarter of 2014.
The average American household holds
around US$15,480 in credit card debt,
US$156,474 in mortgage debt and US$33,424
in student loan debt, according to Federal
Reserve and government data crunched by
personal finance site NerdWallet.com. All told,
Americans owe around US$11.74 trillion in
debt, up 5 per cent from last year.
People who are mired in debt often make
rookie mistakes, especially as many panic, says
Kathryn Davis, president and CEO of BAL-
ANCE, a subsidiary of the non-profit Con-
sumer Credit Counseling Service of San Fran-
Some no-nos: Taking out a payday loan or
title loans; transferring a balance to a new
zero-interest credit card, but failing to pay off
the balance when the higher interest rate kicks
in; and borrowing from a 401(k) retirement
account, especially if it involves paying a penal-
ty. Putting creditors on rotation---paying one
creditor while failing to make payments on
other debt---is another bad idea: After six
months, no one will be happy.
"When people sense that they re in a finan-
cial squeeze, they start putting Band-Aids on
the problem," says Gail Cunningham, spokes-
woman for the National Foundation for Credit
Counseling. Debt settlement and bankruptcy
should only be considered when you ve run
out of all other options, she adds.
Here are six smarter (and faster) ways to pay
• Prioritise payoffs based
on interest rates
For many consumers, it makes sense to con-
centrate on paying off the credit card with the
highest interest rate first, while making smaller
or even just required minimum payments on
their other debt accounts, says Lindsay Konsko,
consumer credit specialist at NerdWallet.com.
Do the math to see how much will be ulti-
mately paid on each card with interest.
"Most people will save paying off the highest
interest rate first," she says, though "it s a
judgment call on the consumer s part." (This
couple cleared US$125,000 in debt over four
years; they decided to pay off the lowest dollar
amount on each credit card first because it
gave them a greater sense of achievement.)
• Treat your debt plan like a diet plan
"Paying off debt is like getting in shape and
losing weight," says Ben Barzideh, financial
adviser at Piershale Financial Group in Crystal
Lake, Ill. Both require discipline and little treats
along the way, and both should target the one
area that bothers you the most.
"Make a to-do list, track your monthly
inflows and outflows just like calories," Barzideh
says. And Konsko recommends little rewards
when you reach debt milestones, like a US$10
manicure or book when you pay off US$1,000
in debt. As with a diet, make sure your debt
repayment plan is not unrealistic. There s no
point in giving up halfway through and going
on another spending splurge.
"People who want to lose weight say, I ll
never eat another chocolate cake, but they
can usually do it for (only) a short amount of
time," says Lynnette Khalfani Cox, author of
"Zero Debt: The Ultimate Guide to Financial
• Don't miss any payments
If you are overwhelmed by your credit cards
or car loan, but haven t yet missed a payment,
make sure you don t.
Becoming a problem won t endear you to
the credit card companies, Khalfani Cox says.
She s speaking from experience: In 2001, she
owed US$100,000 on credit cards, and she
paid them all off within three years. She says
she had one advantage. "I hadn t missed a
payment in 20-something years," she says.
This track record helped her negotiate dou-
ble-digit interest rates to single digits, in one
case cutting an interest rate to 4.9 per cent
from 16 per cent. "A bank would rather get
some interest from you than get 0 per cent
by (you) defaulting," she says.
• Tread carefully around debt
management and debt settlement
Know the difference between a "debt man-
agement" organisation and a "debt settlement"
company that offers legal and financial services,
says Darryl Dahlheimer, program director at
LSS (Lutheran Social Service) Financial Coun-
seling in Minneapolis, Minn.
The former category includes non-profit
organisations that belong to the National Foun-
dation for Credit Counseling, while the latter
is made up of for-profit companies. Confusing
the two could cost thousands of dollars.
The practices of debt settlement companies
have frequently been the target of consumer
complaints and warnings from regulators. Ear-
lier this year, Dahlheimer says, one of his clients
heard about a debt settlement company on
He was instructed to stop paying his creditors
so the company could offer a reduced lump
sum. He made seven payments of US$400 a
month, yet no accounts have been settled,
and the company has charged him a US$2,100
fee. "Unfortunately, this is common,"
Debt management programs aren t com-
pletely seamless for consumers, either: When
you enter a debt management plan, that fact
can be reported to credit agencies, hurting
your credit score. But when payments are
made on time through a program, that can
also help rebuild credit scores.
• Student loan forgiveness
for public employees
Student-debt holders who work in public
service, for the government or a non-profit,
or who want such a job, should find out
whether they re eligible for debt forgiveness.
Under the government s Public Service Loan
Forgiveness Programme, borrowers in public
service jobs may qualify for forgiveness of the
remaining balance of their direct loans after
making 120 qualifying payments on those
loans. (Direct loans are so-called because the
loan comes direct from the Department of
A person with US$150,000 in federal student
loans at 6.875 per cent with a US$40,000-
a-year job who owes US$281 a month in stu-
dent-loan payments could save US$321,000
in principal and interest payments by com-
mitting to public service for 10 years, says
Demetrios Sourmaidis, CFO at StudentDeb-
tRelief, which counsels borrowers on student
loan programs. "People are empowered when
they know their options."
• Refinance debt to get
lower interest rates
"People compartmentalise debt," says Ken-
neth Lin, CEO of personal finance site Cred-
itKarma.com. "They think of mortgage debt
as very distinct from their credit cards and
He suggests consolidating your loans, but
only if you can do so at a lower interest rate.
Your home loan could also help you manage
your other debt. Most mortgages have an inter-
est rate of 5.0 per cent or less, while student
loan debt might be closer to 8.0 per cent, auto
loans could be as high as 7.0 per cent and
credit card debt could range from the teens
to 20 per cent or more.
It might be worth paying off hefty credit
card bills or unexpected medical debt by bor-
rowing money against your home through a
home-equity loan refinancing (you can do this
if you ve built up equity in the home, or if its
value has risen since you bought it). But Lin
warns that you should only do this if you re
100 per cent sure you re not putting your
home at risk.
Even auto loans can be renegotiated.
"Most people understand that you can refi-
nance your mortgage, but they don t under-
stand that you can refinance your auto loan,"
Lin says. "They only think about financing
after they leave the dealer s lot."
You're paying off debt wrong
Paying off debt is like getting in shape and losing weight. Both require discipline and little
treats along the way, and both should target the one area that bothers you the most.
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