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Tag: Credit Card Debt

  • Prepare for the Unexpected: Why Buying Life Insurance Early is a Smart Decision

    Prepare for the Unexpected: Why Buying Life Insurance Early is a Smart Decision

    Thinking about life insurance makes most people cringe. Nobody likes to plan, let alone pay, for something completely dependent on their death.

    Though that time seems far away for most of us, in many cases, getting accidental life insurance quotes and then choosing a plan is the best way to protect your family in case something happens to you.

    Who should get life insurance?
    The easy answer here is that anyone with a family or loved ones who depend on them should get life insurance, but it is also beneficial for those with large debts or loans.

    If you were to pass away and you have someone else depending on your income such as a spouse or children, it’s a good idea to invest in life insurance so they would have money to live on after your death.

    The other reason life insurance may be a good idea is if you have a home mortgage or a significant amount of student loan or even credit card debt. In this case, if you were to die, you don’t want to leave your loved ones with a massive debt to pay, so life insurance is a good option.

    What types of life insurance are available?
    Generally speaking, life insurance can be broken down into term and whole life insurance. The main breakdown goes like this:

    Term life insurance: This is the most affordable option. You pay a premium each month, and your beneficiaries get paid if you die within the term of the plan. Most plans are about 10 to 30 years, and if you outlive the plan, you can renew it year by year or start another plan.
    Whole life insurance: This plan extends until you die, and it has a cash value. As long as you pay your premiums, your premium rate and the death benefit don’t change. You won’t have increases in your premium as you get older, but this is countered by a base level of higher premiums compared to term life insurance.

    When looking at these two types of plans, the next step then becomes how to decide between them and which type is the most affordable in the long term.
    How to Choose the Type of Life Insurance

    The general recommendation is that term life insurance is the way to go for good coverage at a reasonable price. Because whole life plans are far more likely to need to pay out (because they span all the way until death), the premiums are much higher.

    As far as spending the extra money on whole life insurance, though, these have a cash value and are meant to be a form of investment. However, there are better ways to invest your money.

    Rather than spending more on life insurance, it’s typically better to put that extra money toward a 401(k), a Roth IRA, and other investments.

    The purpose of life insurance is to replace your income, not to be an investment. So find the most affordable term life insurance plan and put the rest of your money in sound investments.

    When should you buy a life insurance policy?
    The younger you start your policy, the better. If you are single, you should probably wait until you have a spouse or some dependents. But after that, youth is in your favor.

    With term life insurance, if you are young, you can find a variety of relatively low-cost life insurance plans. For example, Allstate has a 20-year, $250,000 plan for a healthy 25-year-old that costs $11 per month. A similar plan at State Farm is just over $15 per month.

    The other point to consider is that the earlier you start your term policy, the lower your rates. If you are 25 years old and you get a 30-year plan, you can keep the same low rates until you get a new plan at age 55.

    As you age, rates go up, as you are more likely to die when you get older, statistically speaking. Thus, expect the plan you get at 55 years old to have a higher rate than the one you got in your 20s.

    What happens when the insurance term ends?
    With term life insurance, there is a fixed term. This can range based on the company and plan you choose, but let’s say you have a 30-year plan. At the end of those 30 years, you’re still alive, so what comes next?

    There is no cash value to term life insurance, so you don’t cash out any money if your term expires and you are still living. Your family only gets money if you die within that 30-year term.

    So if you have outlived your plan, the next step is to talk to your company about options for getting a new plan. Price competitors for life insurance quotes to see who can give you the best rate. Make sure to go with a reputable, reliable insurance company.

    Luke Williams writes and researches for the insurance comparison site, Clearsurance.com. His passions include writing about personal finance, insurance, and other ways people can save and invest their money.

     

  • 7 Strategies to Reduce Credit Card Debt

    7 Strategies to Reduce Credit Card Debt

    We are a society of consumers.  The average American household is over $100,000 in debt. Gradually, the mentality has changed from ‘saving towards’ to ‘paying off’, allowing creditors to take advantage of individuals with eyes bigger than their wallets. We eat nice dinners, take luxurious trips, and add to our wardrobes.  But at what cost? I want to tell you the story of a man digging out of credit card debt.

    This is my story.  In less than five years, I have paid off $20,000 in principal debt to credit card companies and creditors.  My balance sheet still isn’t clear, but I am confident my experience will benefit other debtors. The nuances of credit and debt are complicated, but the basics can be digested in a matter of minutes.  Take the time to wrap your head around these seven strategies to reduce credit card debt.

    #1 Make a Debt Reduction Plan

    If you’re serious about freeing yourself from credit card debt, paying down debt has to be the priority.

    Calculate Your Timeline

    Unlike a loan, credit card debt doesn’t have a repayment timeline built in.  It is essential that you set one for yourself. Set your own minimum monthly payment (higher than the required one) and use a debt repayment calculator to project when you will be free of credit card debt. [Alternately, you can enter your $0 balance deadline and have the calculator show you how much to pay off every month.]

    Earmark Money from Each Paycheck

    It is a mistake to pay off your credit card after you have handled other expenses.  Once you have decided how much to pay each month, make your credit card payment an automatic deduction from your checking account.  You’ll be forced to budget around your debt-reduction priority.

    #2 Pay Off Debt Before You Save or Invest

    Financial strategy is ultimately up to you, but I advise against continuing serious savings/investment while you are trying to pay down your credit card debt.  It’s all about the math. If you’re earning 4% interest on $20,000 investments while simultaneously paying 12% interest on $20,000 debt, you’re losing money. Unless your investment has a specific purpose that requires immediate action, I suggest focusing your financial attention on paying off credit card debt.

    #3 Identify High Interest Balances (And Attack Them)

    In order to minimize interest payments (and ultimately how long you’re in debt), concentrate on paying off debtors that are charging you the most interest.

    Pay More Than Your Required Minimum

    Credit card monthly payment minimums are set slightly higher than the amount of interest charged that month, so paying them addresses very little of your principal debt (the balance you eventually need to decrease to 0). Increasing your monthly payment above the required minimum begins to drastically cut your total amount of interest paid.

    Focus on Credit Cards with High Interest Rates

    While it may be tempting to pay off credit cards with higher balances, you should focus on the ones with higher rates.  Assuming you’re going to make the same payment amount, hacking away at the principle that is charging a higher percentage will save you money.

    #4 Investigate any Penalty Interest Rates

    Like their credit report, most people don’t take the time to read their entire credit card statement.  You should.

    When you do, you may see various interest rates being charged to different portions of your balance (some much higher than others).  Often this is a result of penalties (from payments dates), overdrafts, or cash advances.  These penalty interest rates can be up to three times your normal purchase rate.

    It is critical to reduce this high-interest debt by paying more than your monthly minimum.  

    You will simultaneously reduce the amount of debt accruing interest and the aggregate (whole) interest rate you are being charged.

    #5 Consolidate Your Debt

    Debt consolidation can be a real ‘out-of-the-frying-pan’ proposition.  Read carefully to avoid getting in more financial heat than you were in before.

    Beware Credit Consolidation Offers

    If you’re in debt like me, you get a lot of mail from agencies who claim to be able to consolidate your debt and reduce your monthly payments.  Avoid these.  While they are probably not illegal and not necessarily a scam, they often come with hidden clauses than may affect what you owe (and your credit score) in ways that are not initially apparent.  Trusted financial institutions are more reputable sources of information regarding debt consolidation.

    Consider 0% APR Credit Cards

    Some credit cards entice borrowers with offers of 0% APR (interest) for an initial period of time.  This allows you a break from high interest to reduce the principal of your debt. Make sure to read the fine print regarding any balance transfer fees and the interest rate after the duration of the 0% promotion. Be aware that credit cards may decline you, even if they have previously sent you correspondence containing language like ‘You Are Approved’. Do your diligence and read up on some of the best credit cards from Chase and other reputable lenders.

    Credit Cards with Rewards

    Many credit cards also offer members rewards like travel benefits and cash back.  Since you’re focused on debt reduction, I don’t recommend lavish personal spending.  However, if you make reimbursable charges for work, certain personal credit cards can generate benefits that will help you save money and pay down balances.

    #6 Monitor Your Credit

    The G.I. Joe cartoons that I grew up watching taught me that ‘Knowing is Half the Battle’.  I can attest to the fact that knowledge (in this case self-knowledge) is your most powerful tool for financial salvation.

    Study up on Your Credit Report

    Your credit report is way more than your score.  Your credit report has a lot of substance to inform your journey out of credit card debt.

    While debt usually has a negative affect on your credit score, debt and credit do not necessarily have an inverse relationship. I had a lot of credit card debt but a pretty decent credit score because I was making my monthly minimum payments.  Your credit score is a measure of ‘how you handle debt’. Put another way ‘are you a good borrower’?

    One of the biggest credit score factors is the percent of your total revolving (e.g. credit card) credit you are currently utilizing.  For example, someone with $20,000 total credit and a $5,000 balance (25% utilization) looks much better to potential lenders than someone with $10,000 total credit and a $5,000 balance (50% utilization).  For more info on credit scores and reporting, read up on some bonafide financial journals.

    Don’t Pay for Credit Monitoring

    There are plenty of great free credit monitoring services.  Don’t use a site that charges you a monthly fee.

    #7 Don’t Backslide  

    Don’t Confuse Credit with Money

    It is a big mistake to think of a credit card with a $10,000 limit the same way you’d think of $10,000 in your checking account.  Don’t get excited about freeing up credit and then spend it. Keep on track.

    Downshift Your Lifestyle

    It’s time to pay the proverbial Piper.  If you’re like me, you indulged in some luxuries above your pay grade when you were racking up that credit card debt.  While you’re focused on reducing your debt, you won’t be able to spend the same. Fear not, there are plenty of free and cheap distractions to keep you busy between scrupulous analyzing your credit reports and credit card statements.

    The Take-Away: Avoid Credit Card Debt

    In my experience money might not be able to make you happy, but debt sure can make you miserable. Since paying off over half of my credit card debt, I feel better.  I’m confident about the financial future of my family and generally more optimistic.

    I’m not saying don’t use credit cards.  Credit cards can be a fantastic tool for making specific purchases as long as those purchases are within your budget to pay off.  Keep in mind that a balance on your credit card only accrues interest if you fail to pay the card off entirely every month.

    Take some advice from a Prodigal Son and stay out of credit card debt.  If you do find yourself there, do your homework and start chipping away at the balance.  Debt reduction can be a lot of work, but it’s always attainable with the right attitude and coaching.

    A firm believer that freedom of information improves business, travel and life, freelance writer Ben Lovell is committed to sharing best practices.  Read more of his articles at the Gothic Optimist.