Entries Tagged 'bad debt' ↓
August 7th, 2008 — Debt, Goal, Personal Finance, bad debt, credit cards, good debt
Although debt is a dirty word to many, the fact of the matter is that the vast majority of us are in debt in some way or another. No matter how hard we try, there are times when you simply need something and cannot afford to pay for it straight off. For example, school tuition is the most common form of debt, and most of us cannot afford to pay for our educations up front. Discharging debt doesn’t have to be difficult.
So, most of us are dealing with debt in some way or another, but are we managing it correctly? Let’s look at a few signs that may indicate that your debt is taking control of you, instead of the other way around.
1. You can only make the minimum payment each month, and even that is a stretch.
This is a very bad sign, especially if you have more than one credit card. Your monthly minimum payment is only a suggestion from the credit card company and usually is not enough to pay down the interest that the account racked up for the month. This means that you are caught up in a spiral that may take years to correct.
Solution: Consolidate several cards into one low interest card. Make larger monthly payments to pay down that interest as well as the actual debt.
2. You use your cards for the majority of your purchases.
Credit cards should be used really only in times of emergencies or when you would like to take advantage of the ability to get a larger ticket item and pay it off gradually. Many of us fall into the trap of using our cards for gas, groceries or things that we really don’t need. Over time, these purchases really add up.
Solution: Only use that card for a real emergency. Set up a budget for yourself and remove your cards from your wallet if you have a hard time sticking to it. Never spend more on your credit card than you can pay off in a month’s time if you had to.
3. Late payments and over balance fees occur commonly.
Once you’re trapped in a debt spiral, late payments start to become more common as you try to scrape together enough money every month to make those payments. If you’re already close to your limit, a few late fees can put you over the top, and then you’re dealing with over balance fees as well. This can quickly get out of control, especially if you are only making minimum payments.
Solution: Always send your payment in 10 days before it is due. Many card companies use 9am on the morning of your due date as a time cutoff. If that day’s mail doesn’t have your payment, you will be considered late. If possible, try to pay your payments online so you don’t have to worry about it getting delayed in the mail, but watch out for surcharges that card companies will sometimes tack on for online payments.
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August 5th, 2008 — Budget, Debt, Goal, Investing, Money, Personal Finance, bad debt, credit cards, good debt
Credit card debt is a global problem that has led many to the poorhouse. However, with smart management, credit card debt can actually be a good thing. Let’s look at how to have smart credit card debt that will help your finances instead of hurt it. The premise may be a little odd to some people, but there is a way that you can use your credit cards to improve your credit rating and start investing in your future.
First, it is important to realize that credit cards are not free money – this is a problem that affects many when they get their cards for the first time. They run out and run up the balance until they are completely maxed out. The secondary problem with this is that many of these same people will make only the minimum payments on those cards. Suddenly, they are in way over their heads and it could take decades to pay off that debt, depending on how much it is.
Now, let’s take a look at how to use credit cards in the smart way:
1. Never max out your card.
Set a limit for yourself and don’t use the card limit as a guide. You should never have a credit card balance that is greater than three months of your current salary. Less is definitely more when it comes to credit cards. Strive to have a balance of less than $100 on most of your cards. Put aside a special card for emergencies and keep a bare minimum of debt on that card to keep it open.
2. Make monthly payments higher than the minimum amount.
This is an easy way to eat away at your debt and keep your credit rating high. Making regular payments is the best way to achieve a good credit rating, but making higher payments will also help. You should also putting a charge cap on your cards, and try to never spend more than you will be paying for the payment each month.
So many of us use our credit cards for frivolous items that will only lessen in value. If you took that same amount of money and used it to invest, you would actually start seeing a return. Suddenly, your credit cards are working for you and you’ve created a secondary income stream that can reduce your reliance on your paycheck. However, you should start small with your investments and make sure that the risks are as low as possible to avoid having this plan backfire.
4. Take advantage of low interest rates.
Look for credit cards that have a very low introductory rate and then a permanent rate that is fixed and low. These cards are much more beneficial. You need to also make sure that you make those monthly payments on time, since many cards do have an interest penalty if you are late. The lower the interest rate is, the lower your total amount of debt will be.
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July 22nd, 2008 — Debt, Money, Personal Finance, bad debt, credit cards
The average American is currently carrying at least some form of debt, even if it is small. We live in a society where overspending is common and credit card debt has become a right of passage. In many cases, you need to be in debt in order to start building your credit history. Without this, it is hard to get a house or even a car. But the question is – how much debt is too much?
When you are first starting out, you may have a lot of student loans and this further compounds the problem. Ideally, the average person should limit their debt to three times their currently monthly salary. However, this may not be possible in many situations. There are some things that we cannot help but go into debt for, such as a car or school, but there are certain kinds of debt that you can avoid.
The key is figuring out the difference between good debt and bad debt. Good debt is hard to have too much of in most cases, especially if you are putting it to work for you. Bad debt is very easy to rack up, and can be hard to pay off. This should be the smallest part of your debts. So, what is good debt and what is bad debt?
Good debt is money that you spend on something that will give you some sort of return. For example, your student loans are good debt, since they were used to further your education and help you earn a larger salary. A car loan straddles the fence, but it is a necessity, so for the sake of argument, we’ll put this in the good debt column. A home loan is also a good debt as long as you do not overbuy.
Bad debt is debt that does nothing but cost you money. Credit card debt is the best example of this, especially when your cards are used to purchase non essentials. You can look at bad debt as something that will never have any sort of return. A $400 shirt may look nice, but it’s never going to do anything but cost you more money, ie: dry cleaning. In fact, there’s a huge risk that it will even end up being ruined and all that money will go out the door.
It is also important to remove emotional attachment from the concept of bad debt. It is easy to say, but I love that shirt and I wear it all the time. The bottom line is, it is doing nothing for your bottom line, and as such, it is bad debt.
Good debt also includes what is known as leveraged debt. This is a type of debt that you use to create another income stream. Examples of this include investments or dividends that are constantly paying you back. This kind of debt is very good indeed and will only serve to enrich you. While you should never get in over your head with any kind of debt, good debt is a lot easier to handle.
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July 17th, 2008 — Budget, Income Streams, Personal Finance, bad debt
When you’re trying to save for the future and still manage to eat, it can be tough to find that right balance. We all need to plan ahead and having a savings account really is essential. This can be a cushion or that “rainy day” money that you need, and it is never too late to start putting away money towards your retirement. However, a lot of us can get bogged down when it comes to handling our own finances and it is all too easy to be like the grasshopper in Aesop’s Fables and put it off until tomorrow.
You can’t put off saving for your future until tomorrow, because there is a good chance you’ll keep putting it off until you wake up one day and it’s too late. However, there are a few easy tips that you can use to start saving for your future today. It may be a little tough at times, but like anything, practice makes perfect. The more you practice saving, the easier it gets. Eventually, managing your money will come naturally.
Let’s start off with setting a budget and finding which expenses are not necessary. Add up everything you spend over the course of a month. Put all of your necessary expenses, such as groceries, rent, utilities and phone into one column. Now, put everything else in the other. You may be surprised at just how much you are spending every single month. If you have credit cards, it’s very easy to spend more than you’re making. This sets you up to enter a bad debt spiral that will eventually get out of control.
Now, let’s take a look at everything in the second column. Add up how much you spend on things such as partying or shopping. These are items that should be the first to go. Sure, you don’t want to become a recluse, but when you get tempted to go out and spend a bunch of money ask yourself – will I still be able to wear this shirt when I’m broke at 65? Do I want to work until I’m 80 simply because I want to go have a few drinks?
It’s a bit extreme, but these little spending habits can end up giving you that result. Find ways to do things a lot more cheaply and you’ll end up saving a few hundred dollars every month. Put that money into an interest bearing savings account and we guarantee, by the end of the year, you’ll be amazed at how much money you were able to put aside.
Next, you’ll need to focus on ways to create more money than just your standard income. 80% of all Americans live paycheck to paycheck. This means that one lost job can result in becoming homeless. To break that cycle, you need to create multiple streams of income so that you’re not relying on that one source of income to meet your needs. This is the key towards planning for your future.
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July 8th, 2008 — Debt, Financial Security, Income Streams, Investing, Leverage, Money, Personal Finance, bad debt, good debt
Let’s face it, debt has managed to earn itself a pretty bad name in most circles, but in many cases, this stigma is undeserved. Debt, when used properly, can help you secure your financial future. While no one is arguing that improperly used debt is a bad thing, good debt is possible. Commonly, good debt is synonymous with leveraged debt. This refers to the process of using debt in order to create multiple streams of income. You have to spend money to make money and unless you happen to have a bunch just lying around, you’re going to need to go into debt at first in order to secure your future.
There are many benefits that can come from leveraging your debt in order to create multiple streams of income. By going into a little amount of debt, you can take advantage of opportunities that would otherwise not be available to you. Only the independently wealthy have the capability of writing big checks for investments. But they all had to get their start somewhere. No one starts off with everything, you have to work to get it. How many stories have you heard of immigrants with a few cents in their pocket that turned it into an empire? Somewhere along the way they had to go into debt to get the capital they needed to make all of that money.
You can use this same proven formula in your own personal finance. You don’t have to be a financial genius and you don’t have to be wealthy to start making money right now. One of the best ways to illustrate this point is investing in the stock market. Let’s say that you have the opportunity to purchase shares in one of the hottest new companies. You’ve got a little saved away, but it will only purchase you a handful of shares. However, if you were to take out a loan, you could easily buy numerous shares. When these returns start to come in, you’ll have a much larger return, simply because you were able to invest more.
This is one of the main benefits of using debt leverage to secure multiple streams of income. You wouldn’t normally have the opportunity to make large investments that will have larger returns. While you can certainly play it safe, it simply makes more sense to take that small risk for the larger return. If you manage your finances correctly, this won’t be a big sacrifice to you. We’re not saying run out and get into debt over your head in hopes of becoming a millionaire.
You need to manage your debt effectively if you want it to work for you. That means starting off with one stream of income and then when that starts to return, leveraging a little more for the next opportunity. Soon, you’ll have numerous forms of income coming in that will more than cancel the debt you got into to start the whole process.
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July 1st, 2008 — Debt, Money, Personal Finance, bad debt, credit cards, credit score, good debt
For many Americans, dealing with a low credit score can be incredibly frustrating. It’s tough to get any loans and in some cases, it may even affect your prospects for employment. If you’re sick of dealing with a low score, it’s time to starting putting into motion some techniques that will help your score go up. Some people have reported a bounce of more than 120 points after using these tips, but everyone’s credit is different. However, any jump up is a jump in the right direction.
1. Request a copy of your credit report and thoroughly examine it.
Errors are incredibly common on credit reports but the good news is that you can fix these. Go through each item on your report and make sure that they are accounts that belong to you. If not, start disputing them. The big three credit reporting agencies all offer online dispute services, so you can easily get these errors off of your report. It may take up to three months for the whole process, but this is the best way to quickly get your score back up.
2. Don’t close off your old credit cards.
Most of us have been trained that all debt is bad and we immediately close off our cards when we’re trying to get back on track. While it’s perfectly fine to pay off your cards, closing the account will definitely hurt your credit. It’s actually smarter to keep a small amount on those cards and make monthly payments. You’ll get the benefit of good reporting and the accounts won’t be marked as closed.
3. Get a small personal loan.
If you have the money to pay back a personal loan, go to your bank and request a very small loan. It’s the principle of the thing that matters here, not the actual loan. You’re going to use this to rebuild your credit. It’s best if you use this loan wisely and make an investment that will create another stream of income. That way, while you’re repairing your credit, you’ll be making money.
4. Open a secured credit card.
If your credit is so bad that most credit card companies won’t even charge you, open up a secured credit card. Use it sparingly and pay it off every month. You’ll get the benefits of glowing monthly reports and you really won’t be out much.
When it comes to fixing your credit score, it won’t happen overnight, but you can make a great deal of progress by following the above tips. You should see a change in your score in as little as three months, and it will just keep getting better as you keep making those payments. Creditors will see that although you may have made some past mistakes, you’re back on track and a much less risky prospect.
Remember, not all debt is bad. When you leverage your debt with your future in mind, this is the easiest way to make money and improve your credit.
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June 26th, 2008 — Budget, Debt, Diversification, Leverage, Money, Wealth, bad debt, good debt
On the surface, this seems like an oxymoron. How could you possibly use debt to create more money? It actually isn’t an oxymoron, but you’re going to need to change your perception of debt and classify into two different categories for this to make sense. There are many ways that going into debt can actually end up securing your future, just as there are many ways that going into debt will ruin your future. Let’s look at both to discover how to turn your debt into wealth.
First, let’s discuss the kind of debt that you are probably most familiar with. Bad debt is the kind of debt that most of us get into after overspending on things that we really don’t need. It’s easy to get caught up in commercialism and want to have all the things that we think we deserve. Many of try to live like millionaires on a small percentage of their budget. With poor management, debt quickly grows out of control and before long, we find out that we are in way over our heads. Bad debt is very common, especially among people who are just starting out and have yet to learn this very valuable lesson.
The second kind of debt is much different. This is the kind of debt that you use to invest in something. The first kind of good debt you’ll probably get into is your home. While it really doesn’t have many measurable returns, unless the property value increases, it does have emotional returns and serves as a good lesson in how using debt can help you get better off in the long run. Think of this as an introduction in how to use debt to grow wealth.
There are many ways that you can leverage your debt to start creating alternative streams of income. For example, let’s say that you are living paycheck to paycheck and you have the opportunity to invest in a stock that is destined for greatness. You may have a couple of bucks put aside, but it’s barely enough to buy one share. You can let this opportunity pass you by, or you can leverage debt to help you take advantage of this future stream of income.
What’s better – going into a little debt to reap big returns or spending the rest of your life wishing that you had the money way back when before that stock took off? Managed properly and used for the right reasons, debt is a very powerful tool. If you want to make money, you are going to have to have money. Unless you came into this world with a silver spoon and a trust fund, chances are you don’t have a lot of it just sitting around. That doesn’t mean that you can’t become wealthy.
By leveraging debt and using it well, you can easily achieve your dreams of greatness. Just make sure that you don’t overextend yourself or make bad decisions.
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June 24th, 2008 — Debt, Money, Mortgage, Personal Finance, bad debt, credit cards, good debt
When you see the word debt, undoubtedly the first thing that pops into your mind is a credit car bill or a car payment. For many, debt means a mortgage or other high dollar expenditures. However, there are two main forms of debt and they are very different from one another. You cannot paint them with the same brush since they are fundamentally different at their various cores. In order to better understand debt, let’s take a look at these types and discover how debt can actually be good for you, when managed properly.
Bad Debt – This is the kind of debt that most of us are familiar with. You start out in life with a boat load of student loans, and most likely a few credit cars. Pretty soon you’ve got a car payment and later a house payment. You’ve got all of these expenditures weighing on you and they add up very quickly. The interest payments make it hard to get ahead and before you know it, you may be in well over your head. At this point, most people strive to get out of debt anyway possible and start researching opportunities to consolidate their debts to make it easier to pay them all of.
This is referred to as bad debt because it works against you. The only exception would be a mortgage, since this is actually something that is going towards building your future. Bad debt is the kind of debt that results from overspending on things you really don’t need – things that can never provide you with any sort of return. Spend too much on these frivolous items and you’ve got quite a problem on your hands.
Good Debt – This is a completely kind of debt. Good debt is commonly referred to as leverage. This refers to the fact that you are going into debt in order to make more money for yourself in the future. Case in point, let’s say that you have the opportunity to invest in a new business. This business is forecast to produce $250k a year for the next ten years. It will cost you $25k to get in to the opportunity, but you don’t have that kind of cash just lying around.
You can get a loan for that $25k and turn it around to the tune of 10 times your original investment. This is good debt – the kind of debt that works for you. By using your debt to leverage multiple streams of income, you can have even greater results. The key is figuring out the kind of returns you want to get and how far you’re willing to leverage that debt.
In the right hands and with the right techniques, debt is a very powerful tool that can help you make more money, not less. When handled incorrectly, debt is nothing more than an albatross that will bog you down financially. Good debt is something that will free you from financial worries.
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June 18th, 2008 — Debt, Income Streams, Investing, Personal Finance, bad debt, good debt
While most of us get the general principle that we need to go into debt if we want to build up our credit, it’s tough to know exactly how far you should go. When you’re first starting out, it’s all too easy to get buried in bad debts that run into tens of thousands of dollars and it can take years to undo the damage that has been done. However, there are some simple rules of thumb that you can follow to help you determine how much debt you can safely use and what you’ll need to avoid in order to stay on top.
First, it’s important to understand the difference between bad debt and good debt. Yes, there actually is “good” debt, but you’ll need to be smart about your choices. Good debt is debt that can be leveraged to create income for you. Bad debt is the kind of debt that happens when you overspend on frivolous things that won’t make any sort of return. It’s perfectly fine to go into good debt, and in fact, most of the world’s millionaires have used this very technique to get where they are today.
Why is there such a disparity between these millionaires and the average American that’s trying to figure out how to make ends meet? The key is in how they use their debts. While there are exceptions to the rule, most business people don’t run out and blow a loan on the latest this or that. They use that loan to make an investment to create another stream of steady income. Over time, you can build up multiple income streams using this technique and you can end up making more money with these than you can with your old job.
The average American however may not know this. They’ve been trained to overspend, to run out and blow their paychecks on the latest clothes or electronics. All the time they’re spending, the interest rate charges are piling up and they’re getting deeper and deeper into debt. At the end of the day, a shirt may look nice, but it’s certainly not going to secure your future.
So, how do you know how much debt you can comfortably go into? If you’ve already established that your going to use that money wisely on new opportunities to create more income, you’ve got a little more wiggle room. It’s a good rule of thumb to use your salary as a guide as to how much debt you can comfortably handle. At first, try not to exceed three months of your current salary. This will help you learn the ropes and you won’t have the risks of getting in over your head.
As you start to make money from your multiple streams of income, you can invest this back into making more money or you can just pay off the old loan and get a new one to keep the process going. Never go into debt for the wrong reasons – and never let your debt get out of control.
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