debt repayment fast

Paying down debt can be incredibly freeing and exciting. When you are in debt, you are tied to the banks and it’s restricting mentally and in your lifestyle. Get out of debt this year through the simple steps presented in this article. 

What would life be like if you didn’t have debt? How would you spend your time? What would the freedom feel like?

Being in debt restricts your ability to live freely.

Being debt free allows you to do what you want – without being tied to the expectations of a bank or another individual.

This year, there is a lot of uncertainty, and becoming debt free is a great goal to make sure you can live the way you want.

Debt is horrible: it is mentally draining, financially draining, and affects your entire life if you are weighed down by the large barbell of debt.

I want you to experience amazing freedom. Make getting out of debt a goal, and I’m certain you will feel like a weight has been lifted off of your shoulders once you reach that goal.

Think about it: with no debt, you wouldn’t be a slave to the bank, or to anyone. You’d have more money at the end of the month, and with more money, you’d have more options.

Many people ask, “How can I become debt free? What are the steps to becoming debt free?”

Getting out of debt can be a grind and can take a while, but with the right plan, anyone can do it.

In this post, I’m going to give you 9 simple steps for you to follow to start paying down debt this year. With these steps, you’ll be able to gain the knowledge and confidence to be able to get going on your debt pay down.

9 Simple Steps to Pay Down Debt Fast This Year

To do anything in life, it’s important to define exactly what we need to do and then make a plan. For you, I’ve listed 9 steps which can help you easily create a plan to start paying down your debt fast this year.

You can keep scrolling or click on the following links to go to the section you want.

  1. Take Responsibility for Your Debt and Personal Finance Situation
  2. Stop Going Into More Debt
  3. Gather All Information about Your Debts
  4. Learn about Debt Pay Down Methods
  5. Determine Extra Money You Can Put Towards Your Debt
  6. Set-Up Auto Pay
  7. Believe in Yourself
  8. Stay Consistent with Your Budgeting Efforts
  9. Find Ways to Improve in Your Personal Finances

Below, I’ll go into detail to give you more details on these steps.

1. Take Responsibility for Your Debt and Personal Finance Situation

The first step in making this year the best it can be is deciding to take full responsibility of your life.

You are the only person that can positively affect what happens in your life.

If you want more, you need to go and get it – no one else is going to give it to you.

Taking responsibility of your life means making a plan for yourself and working towards it each and every day.

You can’t just sit on the couch waiting for the world to change – you need to get out there and do what’s best for you and your goals.

While you might believe some people are just more lucky than others, you can begin to create your own luck through your work and habits.

2. Stop Going into More Debt

This should go without saying, but I’ll say it anyway: if you’re trying to kill your debt, STOP GOING INTO MORE DEBT!

For example, if you’ve built up significant credit card debt, you likely have a habit of using credit cards all the time.

That statement isn’t meant to be an insult, rather to call out an extremely common issue that many credit card users and people in debt struggle with.

You can think of it like this, you have a bucket full of water that you are trying to empty. When you make a debt payment, you are able to dump some of the water out, but when you get into debt more, the level of water goes up.

If you are trying to empty the bucket, you need to stop allowing it to be filled with water!

The same applies to your debts – you need to stop going into more debt if you want to get out of debt.

3. Gather All Information About Your Debts

Next, you need to start gathering information about your debts. The information you need to know is:

  • the total remaining balance
  • the minimum payment
  • your interest rate

With this information, you can then start to make a game plan to start paying down your debts strategically.

Before making this plan though, you should first figure out which debts you want to pay off, and which ones are ok.

Is Your Debt Good or Bad?

In general, I believe debt is bad – and many other personal finance bloggers and experts believe debt is bad as well.

That being said, I do think there are cases in which debt can be a good thing. (Remember, personal finance is personal – some people hate debt and believe all debts are bad.)

There are two conditions to meet for my classification of “good debt”:

  • First, look at the underlying asset you have which is tied to your debt. For example, if you have a mortgage, the underlying asset is the house you live in.
    • If this underlying asset has the potential to appreciate, or increase in value, in the future, then it’s acceptable, “good debt.”
    • Some assets I’m referring to in this case would be a house (houses have potential to appreciate over time, and provide you shelter), education (you have to be careful here, but more education can result in higher pay), or a business (a start-up loan).
  • Second, look at the interest rate.
    • There is an opportunity cost calculation to do.
    • Follow the financial theory: if your after-tax return on investments is greater than your after-tax cost of debt, then it’s acceptable to keep your debt.

Everything else is bad debt.

Credit card payments with an interest rate of 20%? Bad debt.

A home loan at 4%? Potentially good debt.

A student loan at 8%? I’m going to go with bad debt. There is, of course, the option to refinance student loans to get a more favorable interest rate.

A car loan at 2%? This one is tricky – cars are depreciating assets, but the interest rate is so low it’s probably fine.

Again, personal finance is personal and depends on your goals. If wealth is your goal, it’s okay to carry some debt. If freedom is your goal, crushing your debt should be your #1 priority.

Next, now that you have an understanding of your debts and understand which ones you want to pay off, now you can get onto learning about debt repayment methods and start to plan your debt pay down.

4. Learn About Debt Pay Down Methods

There are two main strategies to become debt free fast:

  • Debt Avalanche Method,
  • and Debt Snowball Method.

These methods are pretty straightforward. After compiling your list of debts, you will then pay a little extra towards a certain debt as determined by whichever method you pick.

By paying a little extra each month, you will be able to take advantage of some huge interest savings (as we will see a little bit later in this post).

The Debt Avalanche Method

Using the Debt Avalanche Method, you pay off your debts by paying extra toward your debt with the highest interest rate first. .

Once you have paid off the highest interest rate debt, you put the entire paid off debt’s payment plus the same extra amount towards the next highest until all debt is paid off.

For example, let’s say you have two debts:

  • Debt #1 with a 20% interest rate, a minimum payment of $200, and balance of $2,000
  • Debt #2 with a 10% interest rate, a minimum payment of $150, and balance of $1,000.

Also, you decide you can put an extra $50 towards your debt a month.

Using the Debt Avalanche Method, you would put $250 towards the first debt and $150 to the second debt.

Over time, the first debt will be paid off faster than it would if you just paid the minimum payment. If the first debt is paid off before the second, then you put all $250 towards the second debt, for a total of $400 a month, until the second debt is paid off.

The Debt Avalanche Method is the mathematically optimal debt pay down strategy.

The Debt Snowball Method

Using the Debt Snowball Method, you pay off your debts by paying extra toward your smallest balance debt first. Once you have paid off the smallest balance debt, you put that payment towards the next smallest until all debt is paid off.

Many people like the Debt Snowball Method because psychologically, you can generally see your debt accounts disappear faster. If you have a $1,000 loan and a $5,000 loan, it feels good to have the $1,000 loan gone.

Let’s go back to our example with two debts:

  • Debt #1 with a 20% interest rate, a minimum payment of $200, and balance of $2,000
  • Debt #2 with a 10% interest rate, a minimum payment of $150, and balance of $1,000.

Again, you decide you can put an extra $50 towards your debt a month.

Using the Debt Snowball Method, you would put $200 towards the first debt and $200 to the second debt, because the second debt is smaller in balance.

The Debt Snowball Method is not mathematically optimal, but is still better than applying no strategy at all.

5. Determine Extra Money You Can Put Towards Your Debt

Through learning and applying a debt paydown method, you can chop off many months and years of payments.

However, if you add extra money, instead of just paying the minimum on your debts, you can accelerate this process of debt repayment even more!

To do this, you need to look at your monthly income and spending. You don’t necessarily need to create a budget, but by understanding how much you spend each month will allow you to identify what needs to change for you to stop buying and save more money each month.

Your Savings by Paying Extra Each Month

I’ve created an example below where had my hypothetical person has 2 credit cards, a mortgage, an auto loan, and a student loan totaling $246,500.

  • Credit card #1 has a balance $3,500 and an interest rate of 23.49%
  • Credit card #2 has a balance $10,000 and an interest rate of 20.19%
  • The mortgage has a balance $200,000 and an interest rate of 4.00%
  • The auto loan has a balance $8,000 and an interest rate of 5.00%
  • The student loan has a balance $25,000 and an interest rate of 7.00%

By paying an extra $25 a month and applying a debt pay down method, in this example, there is potential savings of at least $49,915!

How is this savings achieved?

Looking at the left hand side of the figure below, you can see in the Avalanche method, we are paying off the highest interest rate debts first.

Looking at the right hand side of the figure below, you can see in the Snowball method, we are paying off the smallest balance debts first.

By paying just a little bit more, debt can be eliminated quick, and our user became debt free with some solid cash savings.

I’ve also included some statistics if you increase your extra debt payments by $100. The difference is fairly substantial just by paying an extra $100 a month!

In our example, our hypothetical person started out with $246,500 in total debt. If no method was used, it would take 290 months (just over 24 years) and cost $371,109 to become debt free.

By paying $25 extra a month, the user is able to save nearly $50k, and chop off 140 months (nearly 12 years) off their payment plan! If the user could find an extra $100 in their budget, they could save an additional $12,000 and be debt free 158 months sooner!

With either choice of repayment method, you will save money, and be on your way to financial freedom!

6. Set-Up Auto Pay

Humans are imperfect; sometimes you’ll forget to pay their bills, or pay late, which causes a host of problems on your credit report.

The solution?

Automate your bills so you never suffer a late or missed payment. These result in late payment fees that go up the more delinquent the payment becomes, and often result in absolutely crushing penalty APR increases.

For example, most consumer credit cards come with an average APR of 14-16%; miss as little as one payment and banks like Citi and Chase will slap you with a penalty APR of 29.99% that will haunt your account for months

Many banks who provide online banking services also include some integrated bill payment solution. With these payment solutions, you can easily schedule out automated payments for the future.

Since we already know how much each of our debt payments are, and when they’re due from gathering the information from before, setting up recurring payments is as easy as visiting a few websites and linking our banking information.

Once your debt payments are automated, another helpful step is to automate all of your other bills as well such as your utilities, phone bill, insurance, etc.

By automating your personal finances, you don’t have to worry about when things are due and you know they’re set up to fit within your budget. This frees up mental energy to devote toward other things like staying focused on your debt repayment, or increasing income to further beef up your payments.

7. Believe in Yourself

Going back to the first step, you are the only person who can affect change and for that reason, you need to believe in yourself.

Having confidence in yourself can be hard, but you can do it.

Belief in yourself is something you can work on over time, and you can improve your belief in yourself through positive thinking and affirmations if you struggle with it now.

The point is that you need to believe that you are enough and you can achieve anything in life.

No barrier is too much and anything is possible with time and effort.

In this case, you are enough to be able to pay off your debt and you will be on the way to creating the financial foundation you want and deserve.

8. Stay Consistent with Your Efforts

Unfortunately, getting out of debt is going to take time and effort. Each month, it’s going to feel like you have a lifetime to go, but it’s important to stay the course and be consistent over time.

If you are using one of the debt repayment methods, you will be able to experience some easy wins along the way as your smaller debts are paid off, and as time goes on, you will get closer and closer to the finish line.

Understand that over time, you can accomplish anything and for you, anything is possible. Being patient, staying consistent and trusting in the process will get you to where you want to be.

With your debt paydown, consistency will be key, and once you are done with your debt repayment, you’ll be so happy you put in the time and effort to get out of debt.

9. Find Ways to Improve Your Finances

After you have set your plan for debt repayment, automated your payments and started on your journey to debt freedom, there is more to learn.

In the future, you want to be able to get out of debt and then STAY out of debt.

Learning about personal finance is the next step after getting on the path to debt repayment. In addition, if you can make more changes to your monthly spending, or earn more money each month, you can speed up the time to getting to debt freedom.

How would that feel if you could become debt free a few months earlier? Would that be great?

The highest performers in the world are constantly trying to improve in what they do, and the more you work to improve your financial situation, the better the results will be.

If you are interested in learning more about how to improve your finances, check out the articles below:

Get Out of Debt This Year and Start Building Your Financial Foundation

I hope that this post has been informative and has given you what you need to start getting out of debt.

The journey to becoming debt-free might be a long one, but I know that you can do it.

Imagine what you’ll be able to experience without the cloud of debt over your head. The ability to do whatever you want without debt will be so amazing, and you’ll be so happy you did it.

Best of luck on your path to debt freedom and let me know if you have any questions.

Readers: are you interested in getting out of debt this year? What steps do you think will benefit you the most from this list?

become debt free with avalanche method

Getting out of debt is a great goal. When starting on your debt pay off journey, things can look tough. By making a debt pay off plan, and using the debt avalanche, or debt snowball, method, you can get out of debt faster and get on to living your best life.

What would life be like if you didn’t have debt? How would you spend your time? What would the freedom feel like?

Being in debt restricts your ability to be free.

Being debt free allows you to do what you want – without being tied to the expectations of a bank or another individual.

Many people ask, “How can I become debt free? What are the steps to becoming debt free?”

In this post, I will be answering those questions, talking about what debt actually is, and providing you two great strategies for eliminating your debt. You will learn how to become debt free using the debt avalanche and debt snowball methods.

Let’s destroy that debt!

personal finance is personal

What is Debt?

First, what is debt?

Debt is money that you owe someone else. That someone could be a bank, another business, or a friend or individual.

For repayment, there are terms and conditions associated with certain kinds of debt.

For example, banks lend individuals hundreds of thousands of dollars for a house and allow those individuals to pay back the money over 360 months (30 years).

In addition, there is an interest rate associated with your debt. This interest is the “cost of the loan” to you – no one is going to give you money for free!

Each month, you will have a payment and this payment will be part principal pay down, and part interest.

get out of debtA Debt Payment Example

Let’s say you have a $20,000 loan with a 6% interest rate and a 10 year term. Using an online calculator, your monthly payment will be $222.04.

Over 10 years (120 months), this will cost you $6,867.01 in interest. If you pay $100 extra a month, you can cut the time you are paying off your debt to 6.25 years (75 months) and you will pay $4,008.09 in interest. By paying an extra $100 a month, you will save yourself $2,858.92 and will be debt free 3.75 years ahead of schedule!

As shown above, by paying extra each month, you can save money and reduce the amount of time to debt freedom.

In addition, once the debt is gone you effectively give yourself a raise; you have more money falling to the bottom line each month for you to save, invest, donate, spend, etc.

Another thing to note: debt is legally binding. If you don’t pay back your debt, there are many negative consequences that can happen:

  • Your credit score will tank and it will be more difficult to have a high credit score. Creditors report your delinquencies to the credit bureaus which are responsible for determining your credit score.
  • You could be sued. Creditors gave you money for you to use and then pay back over time. If successful, the creditor and court can have your paychecks garnished until the debt is repaid – which means you take home less money each month.
  • You might have to declare bankruptcy. Even though you will be able to get out of your debt, your credit will be ruined and your ability to get new credit will be destroyed.

Being responsible with your debt is very important because there are actually some benefits of having debt.

Is all debt bad? Is there such a thing as good debt?

In general, I believe debt is bad – and many other personal finance bloggers and experts believe debt is bad as well.

That being said, I do think there are cases in which debt can be a good thing. (Remember, personal finance is personal – some people hate debt and believe all debts are bad.)

There are two conditions to meet for my classification of “good debt”:

  • First, look at the underlying asset you are buying or receiving.
    • If this underlying asset has the potential to appreciate, or increase in value, in the future, then it’s acceptable, “good debt.”
    • Some assets I’m referring to in this case would be a house (houses have potential to appreciate over time, and provide you shelter), education (you have to be careful here, but more education can result in higher pay), or a business (a start-up loan).
  • Second, look at the interest rate.
    • There is an opportunity cost calculation to do.
    • Follow the financial theory: if your after-tax return on investments is greater than your after-tax cost of debt, then it’s acceptable to keep your debt.

Everything else is bad debt.

Credit card payments with an interest rate of 20%? Bad debt.

A home loan at 4%? Potentially good debt.

A student loan at 8%? I’m going to go with bad debt. There is, of course, the option to refinance student loans to get a more favorable interest rate.

A car loan at 2%? This one is tricky – cars are depreciating assets, but the interest rate is so low it’s probably fine.

Again, personal finance is personal and depends on your goals. If wealth is your goal, it’s okay to carry some debt. If freedom is your goal, crushing your debt should be your #1 priority.

Strive to be Debt Free and Free Yourself

The word mortgage is derived from a “Law French” term used by English lawyers in the Middle Ages meaning “death pledge“, and refers to the pledge ending when either the obligation is fulfilled or the property is taken through foreclosure.

Literally, mortgage = death pledge.

“A man in debt is so far a slave.” – Ralph Waldo Emerson

Debt is horrible: it is mentally draining, financially draining, and affects your entire life if you are weighed down by the large barbell of debt.

I want you to experience amazing freedom. Make getting out of debt a goal, and I’m certain you will feel like a weight has been lifted off of your shoulders once you reach that goal.

Think about it: with no debt, you wouldn’t be a slave to the bank, or to anyone. You’d have more money at the end of the month, and with more money, you’d have more options.

Unfortunately, today, I had to wake up and go to work because without my income, I couldn’t pay my mortgage. Until I sell my house, or pay off my mortgage, I have to continue working.

Two Strategies to Become Debt Free

There are two main strategies to become debt free fast. The two methods for becoming debt free are the debt avalanche method, and debt snowball method.

These methods are pretty straightforward. First, compile a list of your debts and their interest rates. After compiling this list, you will then pay a little extra towards a certain debt as determined by whichever method you pick.

By paying a little extra each month, you will be able to take advantage of some huge interest savings (as we will see a little bit later in this post).

become debt free with avalanche method

The Debt Avalanche Method

Using the Debt Avalanche Method, you pay off your debts by paying extra toward your debt with the highest interest rate first.

Once you have paid off the highest interest rate debt, you put the entire paid off debt’s payment plus the same extra amount towards the next highest until all debt is paid off.

For example, let’s say you have two debts: one at 20% interest rate, with a minimum payment of $200, and balance of $2,000, and the other debt with a 10% interest rate, a minimum payment of $150, and balance of $1,000. You decide you can put an extra $50 towards your debt a month.

Using the Debt Avalanche Method, you would put $250 towards the first debt and $150 to the second debt.

Over time, the first debt will be paid off faster than it would if you just paid the minimum payment. If the first debt is paid off before the second, then you put all $250 towards the second debt, for a total of $400 a month, until the second debt is paid off.

The Debt Avalanche Method is the mathematically optimal debt pay down strategy.

The Debt Snowball Method

Using the Debt Snowball Method, you pay off your debts by paying extra toward your smallest balance debt first. Once you have paid off the smallest balance debt, you put that payment towards the next smallest until all debt is paid off.

Many people like the Debt Snowball Method because psychologically, you can generally see your debt accounts disappear faster. If you have a $1,000 loan and a $5,000 loan, it feels good to have the $1,000 loan gone.

Let’s go back to our example with two debts: one at 20% interest rate, with a minimum payment of $200, and balance of $2,000, and the other debt with a 10% interest rate, a minimum payment of $150, and balance of $1,000. Again, you will put an extra $50 towards your debt a month.

Using the Debt Snowball Method, you would put $200 towards the first debt and $200 to the second debt, because the second debt is smaller in balance.

The Debt Snowball Method is not mathematically optimal, but is still better than applying no strategy at all.

Your Savings by Paying Extra Each Month

I created an example where the user had 2 credit cards, a mortgage, an auto loan, and a student loan totaling $246,500.

  • Credit card #1 has a balance $3,500 and an interest rate of 23.49%
  • Credit card #2 has a balance $10,000 and an interest rate of 20.19%
  • The mortgage has a balance $200,000 and an interest rate of 4.00%
  • The auto loan has a balance $8,000 and an interest rate of 5.00%
  • The student loan has a balance $25,000 and an interest rate of 7.00%

By paying an extra $25 a month and applying a debt pay down method, in this example, there is potential savings of at least $49,915!

debt paydown faster

How is this savings achieved?

Looking at the left hand side of the figure below, you can see in the Avalanche method, we are paying off the highest interest rate debts first.

Looking at the right hand side of the figure below, you can see in the Snowball method, we are paying off the smallest balance debts first.

By paying just a little bit more, debt can be eliminated quick, and our user became debt free with some solid cash savings.

debt pay down order

I’ve also included some statistics if you increase your extra debt payments by $100. The difference is fairly substantial just by paying an extra $100 a month!

In our example, the user started out with $246,500 in total debt. If no method was used, it would take 290 months (just over 24 years) and cost $371,109 to become debt free.

By paying $25 extra a month, the user is able to save nearly $50k, and chop off 140 months (nearly 12 years) off their payment plan! If the user could find an extra $100 in their budget, they could save an additional $12,000 and be debt free 158 months sooner!

With either choice of debt destruction method, you will save money, and be on your way to financial freedom!

Destroy that Debt! Become Debt Free

While the tone of this post was mostly to eliminate your debt, there are times when having debt makes sense.

Remember, personal finance is personal, and if it makes sense for you to take on debt for a certain period of time, then as long as it fits into your future goals and plans, then do it!

Right now, I have $12,000+ sitting at 0% for 3 years for some windows I got back in November. While yes, it’s a $12,000 expense, since it is 0% interest, I don’t pay an extra dime on interest, and when I pay it off in full in 28 months, I’ll be quite happy.

I ran the numbers and it made sense to me. Those windows have made this Winter in Minnesota much nicer, and they have also increased my home value.

Debt is something that can be used wisely and something you should be very careful with.

You now have a great resource for answering the questions: what is debt, is there a difference between good debt and bad debt, and how you can become debt free using the debt avalanche and debt snowball methods.

Readers: what is your opinion on debt? Are there good and bad debts, or is all debt bad? What debt elimination method do you like better?

 


Pay Off Debt Faster With This Debt Destruction Tool

Pay Off Debt Fast With The Snowball Or Avalanche Method
Pay Off Debt Fast With The Snowball Or Avalanche Method
Pay Off Debt Fast With The Snowball Or Avalanche Method
credit score calculation

Increasing your credit score is not too hard to do once you know the credit score formula and steps to improve your credit score.

Ways To Increase Credit Score

Credit score is another one of those confusing financial concepts. Everyone has a credit score, but not many people actually know how it’s calculated, or how to improve it. Make no mistake, increasing your credit score fast can be tricky, but with the right formula, you can definitely improve your credit score.

In this article, I will discuss what a credit score is, the importance of having good credit, which factors are used in the credit score calculation, and give you 9 actionable steps to improve your credit and increase your credit score.

In addition, I have included some commonly asked questions about credit score at the end of the post.

What is a Credit Score?

A credit score is a number calculated from your credit history. Your credit score is used by lenders to determine your creditworthiness for a mortgage, loan, credit card, etc. Credit scores vary between 300 and 850, with 300 being the lowest credit score and 850 being the highest credit score.

The average credit score in the United States is 687.

The Importance of Having Good Credit

Consider the following situation: you are looking to buy a house and go to the bank for a mortgage loan. The loan officer at the bank types in your information and says, “You have a credit score of 653 and as a result, we will give you a loan at 4%. If your credit score was 700 or higher, we could get you a  loan at 3.75%” While 0.25% doesn’t seem like much, it can add up to A LOT more interest over the time you are paying down the loan.

For a $200,000 30-year mortgage loan, a 0.25% interest rate increase will cost an additional $10,000 in interest over the life of the loan! Below is a table with the total interest paid and total cost of a $200,000 30-year mortgage at various interest rates.

Interest Rate Total Interest Paid Total Cost
3.75% $133,433 $333,433
4.00% $143,739 $343,739
4.25% $154,196 $354,196

One other point is if your credit score is very low (less than 600), some banks and lenders will not even consider extending credit because they believe you are not creditworthy! That being said, you can fix this and increase your credit score.

“A man in debt is so far a slave.” – Ralph Waldo Emerson

Next, let’s talk about the factors that go into determining your credit score, so we can talk about how to use these to your advantage if you’re looking for ways to increase your credit score fast.

Which Factors Determine Your Credit Score?

A person’s credit score is calculated based on a combination of factors.credit score calculation

There are five main factors that determine your credit score: Payment History (35%), Utilization (30%), Length Of Credit History (15%), New Credit (10%), and Types Of Credit Used (10%).

Payment History (35%)

Payment history looks at if you have made your credit payments on time. Credit reports show the payments submitted for each line of credit, and the reports indicate if the payments were received 30, 60, 90, 120 or more days late.

The best credit quality borrowers have 0 late payments.

Utilization (30%)

Utilization is the ratio of money owed to the amount of credit available. For example, if you have a credit card with a credit limit of $5,000 and you owe $1,000, you have a utilization rate of 20%. An important note here, utilization does not take into consideration loans.

The best credit quality borrowers have a utilization rate lower than 30% of their total credit limit.

Length of Credit History (15%)

As a general rule of thumb, the longer an individual has had credit, the better their score. Credit scores take into account how long the oldest account has been open, the age of the newest account and the overall average.

If you have accounts that have been open for multiple years, you will have a higher credit score. The best credit quality borrowers have a history of 10 years or more.

Credit Mix (10%)

Creditworthy borrowers will generally have a mix of loans and credit lines on their history. These loans and credit lines could be student loans, auto loans, mortgages, credit cards, etc.

A high credit score will have a number of different loans and lines. I have four credit cards and a mortgage, and have had a student loan and an auto loan in the past. The best credit quality borrowers will have at least 15 open accounts.

Applying for New Credit Accounts (10%)

Let’s say you are a bank and you see someone apply for three credit cards and a mortgage in one week. This probably isn’t good sign. The person who applied for those new accounts probably isn’t in a great position financially, otherwise they wouldn’t need to apply for four credit accounts. As a result, the bank views situations like these as risky.

Inquiries for new credit accounts stay on your credit report for two years. After two years, the inquiries no longer show up on a person’s credit report. Generally, the best credit quality borrowers will have less than four inquiries on their credit report.

investing9 Tips to Increase Your Credit Score Fast

Below are nine tips to help boost your credit score! Some of these tips will take a little time before you see an impact, but others you can take action on immediately to help you increase your credit score fast!

1. Review Your Credit Report and Identify Areas of Improvement

What gets measured gets managed. First, go to AnnualCreditReport.com and request a free credit report from each of the big three credit reporting companies:

  • TransUnion
  • Experian
  • Equifax

By law, you’re entitled to one free credit report each year. After obtaining your report, dive into the details!

Ask yourself the following questions:

  • Do I have any accounts with late payments listed? Are these accounts accurate?
  • Do I have any unpaid bills listed? Is this information accurate?
  • Are there any other mistakes or errors on the report?
  • Which factors need improvement? (Payment history, utilization, credit history, credit mix, opening new accounts)
    • Do you have late payments?
    • Is your utilization rate above 30%?
    • Do you need more credit history?
    • How many different credit accounts do you have?
    • Did you recently open a bunch of new accounts?

Click for more detail on how to check your credit report.

After understanding your current credit situation, you are ready to start improving your credit score! Note: these credit reports will not tell you your credit score for free. If you have a Mint account, you can look at your credit score for free. I’ve found it to be a decent estimation, but slightly lower than real inquiries. You can also see your FICO credit score for free using Discover’s Credit Scorecard tool, which is available to anyone even if you don’t have a Discover card.

2. Correct Any Errors on Your Credit Report

Does your credit report have any errors in your personal information, accounts, or payment history? Are there any missing accounts? Are there any bills which you believe you have paid but the agencies don’t believe you have?

To correct these errors, do the following:

  1. Contact the credit bureau and the organization that provided the information to the credit bureau
    • Both of these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act.
    • The credit bureau must investigate the item(s) in question – usually within 30 days – unless they consider your dispute frivolous. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should:
      • Clearly identify each item in your report you are disputing.
      • State the facts and explain why you are disputing the information.
      • Request deletion or correction.
  2. Follow up with the organization that provided the information to the credit bureau
    • Again, include copies of documents that support your position. Many providers specify an address for disputes. If the provider again reports the same information to a bureau, it must include a notice of your dispute. Request that the provider copy you on correspondence they send to the bureau.
  3. Expect this process to take between 30 and 90 days.

If you know the error is an error, don’t be afraid to dig in. Make sure to keep all documentation and notes on the subject. This woman sued Equifax for $18 million over an error on her credit report!

3. Never Miss a Payment

35% of your credit score calculation is payment history. Keep it simple stupid! Pay your bills on time!

Seriously, this is the biggest component of your credit score. By staying current on all of your accounts, your credit score will go up over time.

credit card pay off4. Keep Your Utilization Rate Below 30%

Your utilization rate makes up 30% of the credit score calculation. Remember, utilization rate is your outstanding balance divided by your credit limit.

If you don’t want to decrease your spending, you can pay down your highest debt, increase your credit limit, or open another line of credit (credit card).

5. Increase Your Credit Limit

Increasing your credit limit will decrease your utilization rate. You can increase your credit limit by calling your credit card company or going in to your bank directly and asking for a credit increase on your credit card or loan. These days many companies make it as easy as requesting a credit increase online right on their website. A good time to do this is when your income has increased – by showing an increase in income, you’re showing that you’re able to theoretically borrow more money responsibly and will more likely be granted the credit limit increase.

Early in 2017, I increased my credit limit $7,500 and saw a 20 point increase in my credit score!

6. Open Another Line of Credit

If you don’t want to increase your credit limit on your current credit lines, you can open another line of credit. There will be a slight hit to your credit score because you are opening a new account, but over time, your credit score will increase because your utilization rate will decrease.

7. Pay Down Your Highest Utilized Account

Paying down your highest utilized account will have a direct impact on your utilization rate. If you have two credit cards, one that is 100% utilized and one that is 10% utilized, the smart move would be paying off the 100% utilized card.

8. Mix it Up

Having a diverse mix of credit accounts shows the credit rating agencies you have a handle on your finances and credit situation. Having a few credit cards, an auto loan, and a mortgage would look much better than only a credit card. That being said, I wouldn’t recommend taking a personal loan out just to build credit… you have to think about interest payments!

9. Stay Consistent

Building your credit will take time (credit history, aka time, is a variable in the credit calculation!) By staying consistent, paying your bills on time, and ensuring errors stay off your credit report, your credit will increase over time.

I’ve been building credit for a few years now. When I started out, my credit score was between 600 and 650. I had a student loan and a credit card. The next year, I bought a house and applied for a mortgage. My credit score was about 680 at that point. The following year, I bought a car and paid off my auto and student loan. Throughout this whole time, I’ve been current on my payments and kept my utilization below 30%. After three years of consistency, my credit score is between 725 and 750.

You can do it! You can improve your credit score!

“A journey of a thousand miles beings with a single step.” – Lao-Tzu

Common Misunderstandings and Questions about Credit Scores

There are a number of common misunderstandings and questions people have about credit score. I will address a few of those misconceptions here.

Am I Building Credit Faster by Keeping a Balance on my Credit Card?

NO. You are not building credit any faster by keeping a balance on your credit card at the end of the month.

If you are keeping a balance on your credit card, this could actually have a negative effect on your credit score (your utilization rate will be higher compared to if you paid it off in full).

PRO TIP: Pay off your credit card in full each month. You aren’t building credit if you have a remaining balance any faster than if you have a $0 balance. In addition, if you have a remaining balance, 20%+ will be tacked on in interest to next month’s outstanding balance.

How will Consolidating Debt Accounts Affect my Credit Score?

It depends on the situation. From a financial standpoint, debt consolidation generally is a good thing. From a credit standpoint, things get a little hairy.

If you have maxed out a few credit cards and you consolidate that debt into an installment loan, your credit score will take a slight hit. Your credit score will decrease because you opened a new account and you have no credit history on that account.  After a few months, your credit score will begin to increase because you will be making payments on time, your utilization rate will be lower, and your credit history will be building through that loan.

From a financial standpoint, consolidating debt is generally beneficial. Credit cards generally have 20%+ interest rates. Debt consolidation can reduce the interest rate. As a result, you will pay much less in interest when paying down your debt.

The Mastermind Within is partnered with various financial institutions who specialize in debt consolidation. To see if debt consolidation would make sense for you, you can click here to get connected with these partners.

 Should I Work with a Credit Repair Agency?

It depends. There are a few situations where working with a credit repair company may make sense:

  • If you have legitimate errors on your credit report and don’t want to fix them yourself
    • The main function of any credit repair service is to remove errors from your credit report. These could range from errors in lender reporting to simple errors in your personal information.
  • If you have errors that can’t be verified
    • A little known fact about your credit report is that every detail in the report needs to be verifiable. If an item cannot be verified, you can get it removed from your report.
  • If your lenders are willing to work with credit repair agencies
    • Some lenders don’t like working with credit repair services. Some lenders aren’t willing to negotiate. However, for the lenders who are willing to listen, this is a good way for credit repair services to raise your score.

A word of caution on working with credit repair agencies: if you choose to work with a credit repair agency, make sure you pick one with a high reputation. In addition, make sure you pay them ONLY after the work is done. There are a number of companies that will ask for payment up front and not get the job done.

Click for some more information on credit repair agencies.

saving moneyWill Closing Accounts have an Effect on My Credit Score?

Yes. If you close a credit card, your overall credit limit will go down and your utilization rate will go up. In addition, your credit mix and credit history will take a hit. If you close a loan account, your credit mix and credit history will take a slight hit.

My recommendation on whether to close an account or not is to think about your goals and financial situation and make sure it makes sense for you.

If you have a student loan and want to be debt free, don’t worry about your credit score. Destroy that debt!

If it’s a credit card, you can make one purchase a month and pay it off at the end of the month. I have two credit cards that I spend about $25 a month on just to keep the credit history building. In this case, I wouldn’t recommend closing the account.

Start Improving your Credit Score Today!

With the tips above, you will be on your way to a higher credit score fast. Remember: never miss a payment, keep your utilization rate below 30% and have a diverse mix of credit accounts. Over time, your credit score WILL increase.

Lastly, make sure to pay off your credit cards in full each month, and be careful when working with credit repair agencies.

“The most difficult thing is the decision to act, the rest is merely tenacity.” – Amelia Earhart

Which steps have made the biggest impact on your credit score? Did I miss any critical points?

Erik

Ways to Quickly and Easily Increase Your Credit Score

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How to raise your credit score. Increasing credit score. Easy ways to increase credit score. What is a credit score. Increase credit score. Nine ways to increase credit score.
Easy ways to increase credit score. What is a credit score. Increase credit score. Nine ways to increase credit score.
Easy ways to increase credit score. What is a credit score. Increase credit score. Nine ways to increase credit score.
How to raise your credit score. Increasing credit score. Easy ways to increase credit score. What is a credit score. Increase credit score. Nine ways to increase credit score. What makes up a credit score. Credit score secrets.
How to raise your credit score. Increasing credit score. Easy ways to increase credit score. What is a credit score. Increase credit score. Nine ways to increase credit score. What makes up a credit score. Credit score secrets.

Ways to Quickly and Easily Increase Your Credit Score

Ways To Increase Credit Score
Ways To Increase Credit Score
house

At work today, one of the higher up employees in the mortgage group was retiring. This could be in response to the mortgage business struggling to grow and continue their success, or it could be in response to his old age and wanting to be done with work. Either way, it got me thinking: will student loans be the catalyst to the next recession? How important is the student loans crisis?

Specifically, I want to think about this in terms of mortgages and buying houses. When the economy is going strong, houses are being built and bought, and families are being started. With student debt racking up, many people will have to put off buying a house or buy a less attractive house. To let everyone know, I don’t want to strike fear in anyone’s mind, or try to be a predictor of the future. What I hope to do is cultivate thought by running some numbers.

Let’s get some stats before we go into the numbers:

Let’s start by assuming a few things. Let’s assume that mortgage rates for a 30 year mortgage stay at about 4.5% for the next few years, student loan interest rates are about 7%, and wages grow at roughly 3% each year. Also, we require at least 5% down payment. We will also assume no prepayments of student loans.

First we need to calculate student loan payments. Most student loan payment plans are over a 10 year period. The estimated payment for a 10 year repayment plan is $349.49 a month. Next with a salary of $45,478, we have $3789.83 in pre-tax income per month. In addition, we are assuming no auto loans, no credit card debt, and no other debts (which most people have a least 1 or more of these).

So, our average American is already sitting at a 9% debt to income ratio the first year out of college. Let’s plug some of these figures into the House Affordability Calculator. Below are the results:

This analysis is slightly concerning to me. In Minnesota, a nice 3 bedroom/2 bathroom house in a nice area goes for at least 250k. For the average single person to afford a $250k house, you would need to save up a 20% down payment of $50k in cash and have an income of $55k. This wouldn’t happen until at least year 8, or when the average single person is 30. However, with the national personal savings rate hovering around 5-6%, good luck to the average single person getting to $50k in cash in 8 years!

What this analysis shows me, is that owning rental property will be important in the future as more people are forced into renting (lenders may not want to give loans to younger people due to higher debt-to-income ratios). However, you never know, a correction may happen, rates drop, housing prices drop, and many people could start buying houses!

A few questions I’m pondering on after doing this analysis:

  • Will smaller lenders loosen their lending policies to keep mortgage origination going even if the prospective borrowers are less than optimal?
  • Will property prices start to come down slightly as more people go to renting?
  • Will the economy start to perform well due to new policies put into place by the newly elected politicians, pushing houses higher as people have higher wage growth?

There is a lot that can possibly happen. I guess we will have to wait and see.

What do you think about this analysis and topic? Will student loans weigh on the economy significantly? Will the benefits of student loans outweigh the negatives? Let me know what you think in the comments; I would love to know what you are thinking.

Erik

credit card debt

Getting out of debt is possible with the right attitude, mindset and plan. While debt can feel like it’s crushing you, you can overcome your debt and win with your finances. In this post, you’ll learn some mindset tips for staying positive to help you get out of debt.

get out of debt

Most Americans are in debt.

According to a recent survey from Comet, debt affects all generations, with almost 80% of baby boomers, Gen Xers, and Millennials saying they struggle with mortgage, student loan, credit card or medical debt (or a combination of).

When you’re struggling to make ends meet, debt can feel like a weight wrapped around your ankle, pulling you deeper and deeper.

But it doesn’t have to be like that.

Our debt doesn’t define us – how we react to it does.

Having the right mindset when it comes to paying off debt can make all of the difference. It can be the difference between confidently paying it off, or languishing in our own guilt.

With the right mindset, it is possible to get out of debt and stay out of debt!

5 Ways to Cultivate a Winning Mindset for Paying Off Debt

Cultivating the right mindset for getting out of debt is possible with the right steps.

Below are the 5 ways I believe you can get a handle on your debt, improve your debt mindset, and start to become debt-free:

  1. Come to Terms with Your Debt
  2. Focus on the Long-Term
  3. Give Yourself a Break
  4. Reward Progress
  5. Stay Positive

Let’s dive into each of these points in further detail.

side hustles

1. Come to Terms with Your Debt

The first step in shifting your mindset towards your debt is accepting it.

You may have a lot. You may have a little.

It may be the result of something you did (like taking out too many student loans) or something completely out of your control (a medical emergency).

The important part isn’t identifying who’s at fault; it’s about accepting responsibility for the situation you’re in, and deciding to make a conscious effort in changing it.

Deciding to face your debt head on is one of the biggest challenges in dealing with debt, but it’s an important first step.

Once you’ve done that, things should feel much less scary.

2. Focus on the Long-Term

The second step to improving your mindset towards debt is to focus on the long-term.

Depending on how much debt you have, becoming debt free may be a few years away.

This can make paying it off seem like a daunting task.

When you’re overwhelmed, it’s much easier to slack off, or fall back into old patterns that got you into debt in the first place.

Remembering you’re in this for the long haul, and that knowing it’s not going to be a quick fix, is essential to sticking with it.

A great way to drive this point home is to use a debt-payoff thermometer.

A debt-payoff thermometer is a visual representation of our debt in the form of a thermometer, like this:

Courtesy of A Cultivated Nest.com

As you start to pay the debt off, the thermometer gets colored in higher and higher, signifying your debt is getting paid down.

Once the thermometer is colored in full, you’re debt free!

Having this visual can help show that you’re making progress, even when it doesn’t feel like it.

Just because it’s going to take a lot of time doesn’t mean it’s impossible!

3. Give Yourself a Break

The third step to improving your debt mindset is to give yourself a break and relax.

The road to becoming debt free can be long and difficult, filled with lots of ups and downs.

It’s definitely not a straight path for most.

In short: on your way to becoming debt free, you’re going to mess up.

When we’re trying to better ourselves and we fail, we feel guilty.  This can make it easy to beat ourselves up over mistakes we’ve made.

Maybe you’re not making as much progress as you like.

Maybe you suffered a recent setback because of a financial misstep.

Regardless, if you are earnestly trying to make a change in your life, you shouldn’t hold that against yourself.

Beating yourself up about it does nothing to change the situation, and in fact, only hinders our progress.

You’re going to make mistakes on your journey to becoming debt-free. Give yourself a break.

4. Reward Debt Pay Off Progress

The fourth step to improving your mindset towards debt is to reward progress when you reach your next debt pay off milestone.

Becoming debt free typically has an air of rigidity and inflexibility to it.

When people are trying to become debt free, they typically pare down, restrict their spending, and stop buying things they love.

While this may help you pay off your debt faster, it can also make you miserable. Being miserable all the time is a great way to get burnt-out.

A great way to avoid debt-burnout is to give yourself rewards for milestones you’ve accomplished.

For example, after every 10% of debt you pay off, you could treat yourself to lunch at your favorite restaurant.

Giving yourself rewards for milestones you’ve accomplished is a great way to allow yourself to buy things you love without completely derailing your debt payoff strategy.  It also helps us stay positive about the progress we’re making.

It should be said, however, that the reward should never be large enough to put you back in the red.

Rewarding yourself by buying a new car isn’t exactly helpful 😉

Paying down debt may not be fun, but you should be feeling good about making progress – reward yourself accordingly!

budgeting financial5. Stay Positive about Your Debt and Life

Finally, the last step to having a better mindset towards debt is to stay positive.

Maintaining a positive mindset is one of the biggest factors when it comes to sticking with a goal.

While you will likely face setbacks on your way to becoming debt free, focusing on the negatives will sap you of your energy and optimism.

This negativity wears us down, and makes completing our goals more difficult.

Rather than focusing on the things you’ve done wrong, try focusing on the things you’ve done right.

For example, maybe you went over budget on restaurants this month, but you brought lunch to work every day this week.  I’d definitely call that a win!

By shifting our mindset from dwelling on the negatives to focusing on the positives, we keep our optimism levels higher, making it easier to achieve our goals.

Staying positive helps keep us on track.

Change Your Mindset, Take Action and Get Out of Debt!

Becoming debt free is almost as much of a mindset game as a numbers game.

If you don’t have enough money coming in to pay off your debts, you will never become debt free.

Likewise, if you don’t utilize a mindset compatible with paying off debt, you will find paying it off that much harder.

Coming to terms with our debt, focusing on the long-term, giving ourselves a break, rewarding progress and staying positive are all forward-thinking ways to shift our mindset when it comes to paying off debt.

So – are you going to bury your head in the sand, or are you going to make changes to better your life?

Becoming debt free might be a big journey for you, but with these tips, you can take action today.

You are the creator of your life and you can do anything you put your mind to.

Mindset Hacks to Get Out of Debt

Mindset Hacks to Get Out of Debt

get out of debt

Getting out of debt is tough, but there are a number of purchases you can stop making which will allow you to get out of debt faster.

When you’re drowning in debt, all you want is relief. Being in debt is restricting and a struggle. When looking to get out of debt, sometimes the best way is to stop spending so much, and make a short term sacrifice for a long term gain.

Relief from your debt payments only comes from paying off the debt in full. To become debt free, there are really only two ways to make that happen:

  • Increase your income
  • Reduce your expenses 

While increasing your income is arguably the fastest way to pay down debt, for some people, this may not be attainable in the short term.

If you don’t have a way of increasing your income but you’re trying to pay down debt, it’s likely you’ll have to start cutting expenses.

Cutting superfluous expenses is one of the quickest and easiest ways to save money and keep your debt from growing.

Read on to find six common things to stop buying when you’re trying to get out of debt.

6 Things to Stop Buying When Trying to Get Out of Debt

You are unique and have different interests than other people. However, there are 6 common things which different people tend to overspend on which can be examined to save money over time.

These 6 common expenses include:

  1. Subscription services
  2. Going out to eat
  3. Junk food
  4. Name brand items
  5. Cigarettes and alcohol
  6. Vacations

Let’s dive into each of these common expenses, and give you some ideas for saving money and getting out of debt.

credit card debt

1. Unsubscribe and Save Money on Subscription Services

Subscription services are super convenient and amazing, but can put a massive drag on your debt pay off.

It seems like there are subscription services for pretty much everything nowadays. While most of these are relatively inexpensive, put together, they can add up to hundreds of dollars of expense every month.

If you have any of these subscriptions, you may be spending hundreds of extra dollars a month without even realizing it!

Here are some common subscriptions and their costs. It may surprise you how quickly they can all add up:

  • Food and Alcohol
    • Blue Apron – $40 a week
    • Graze – $10 per snack
    • First Leaf – $12 per bottle of wine
  • Video Services
    • Netflix – $8.99 a month
    • Hulu – $5.99 a month
    • Premium cable channels like HBO Now – $14.99 a month
  • Razors and Beauty Products 
    • Dollar Shave Club – $5 a month
    • Birch Box – $13 a month
  • Gym Memberships
    • Between $10 and $150 a month
  • Investing Apps
    • Most investing apps like Stash and Acorns charge a monthly fee from $1 to $5
  • Video Game Subscriptions
    • PlayStation Now – $8 a month
    • PlayStation Plus – $5 a month
    • Xbox live – $5 a month
    • Xbox Game Pass – $14.99 a month
  • Clothing Subscriptions
    • Trunk Club – $25 per item
    • Thread Beast – $55 a month
    • Le Tote – $79 a month

Subscriptions are dangerous to your budget precisely because of their low cost. It’s so easy to think, “Oh, it’s just $10 a month.”

But if you do that for a dozen subscriptions, that’s over $1,000 a year.

Not only that, but tracking all of your subscriptions is a pain. They all have different membership dates, prices, packages, etc. that can make it easy to accidentally let a subscription lapse, forcing you to endure one more month of a service you don’t even want.

If you’re trying to eliminate debt as quickly as possible, you can easily save hundreds a year by canceling unnecessary subscriptions.

2. Eat In and Save More Money

Eliminating or cutting back on eating out is one of the easiest and most effective ways to save money.

There are for two reasons for why eating in more can save more money:

  • the average American does it frequently and
  • spends a lot of money on it

According to the U.S. Bureau of Labor Statistics, the average American spent almost $9 a day eating out in 2015.

That’s over $3,000 a year on food – and this doesn’t even take into consideration meals eaten at home, which accounted for another $4,000.

Those numbers are absurd, especially if you are trying to pay off debt.

Simply cooking your meals at home can save you nearly five times the amount of getting take-out.

According to this article from Forbes, the average take-out meal cost $20.37, while the average meal cooked at home cost just $4.31.

That’s a savings of almost 80%!

Dig in to meals at home to save money and help dig yourself out of debt.

A few great websites for finding delicious recipes are Tasty and All Recipes.

3. Stop Eating Junk Food

Junk food is a waste of calories and a waste of money.

Junk food used to be called junk food because it was cheaply made, low-quality, had no nutrition and was inexpensive.

The junk food made today is still bad for you – but now it’s bad for you and expensive.

Everyone loves comfort food, and there’s certainly nothing wrong with indulging from time to time, but buying lots of prepackaged food is bad for your wallet and your waistline.

If you’re trying to save some money to put towards your debt, ditch the junk food.

get out of debt

4. Buy Generic instead of Paying Top Dollar for Name Brands

You may know that buying generic brand products over their national brand counterparts will save you money, but do you know by how much?

According to this article from Life Hacker, buying the generic store brand version of a product over the well-known brand can save you, on average, 30%.

Whether you’re talking about pantry staples like flour and noodles or sanitary products like paper towels and toilet paper, generic brand products are found to be just as good as a name brand.  Many times you’re simply paying more for the name, the packaging and the licensing, rather than a better product.

In fact, did you know that many store brand products are just name brand products in a different package?

It’s true!

Many nationally recognized brands produce products for “private label brands” like the Kirkland Signature line of products for Costco.

You may be actually getting a name brand product for a private label price!

While the differences in buying generic may be more noticeable for some products compared to others, using store brand products can save as much as 50% – even when they’re the same basic product.

Saving with generic brands isn’t limited to food; it also works with some electronics like HDMI cables and batteries.  According to this article from PC Mag, a generic $3 HDMI cable from Amazon works just as well as a $120 Monster brand HDMI cable, an immediate savings of $117.

If you’re not already shopping general brand products, doing so is a super easy way to save money without changing your buying habits.

5. Cigarettes and Alcohol can be Very Expensive

Nobody’s perfect, and we all have our vices, but let’s face it – some are more expensive than others.

In 2015, the average American spent $349 dollars a year on smoking products and $515 on alcohol.

That’s $864 a year.  Hardly chump change.

Not only is all that smoking and drinking bad for your bank account, it can also be disastrous for your health.

Smokers frequently have significant health issues, including hypertension, heart disease, lung and throat cancer, COPD, stroke, and more.  The side effects of drinking aren’t any prettier, including nerve disease, respiratory infections, liver cancer, dementia, and others.

None of these problems are easy or cheap to treat, either.

So, you effectively pay once when you light up or take a drink, then pay more in the long term when it comes to health care related to your habits.

Clearly, smoking and drinking have serious long-term implications for both your physical and financial wellbeing.  Ditch ’em for the sake of your health and finances.

Here are some resources that can help you kick the habit (smoking/drinking).

money making6. Vacations are Amazing, but Costly if You Aren’t Careful

Vacations provide some much needed rest and relaxation to our stressful lives.

Unfortunately, they can also be ridiculously expensive.

According to this article from Reward Expert, a four day vacation for one averages at least $442.14 in the United States, including transportation, food, entertainment and lodging.

Depending on where you live in the United States, this same trip could cost you as much as $851.21 per person.  That’s almost $3,500 for a family of four, and that’s just for travel within the United States.

While everyone needs a break from time to time, if you’re trying to get out of debt, spending thousands of dollars on a vacation is only going to put you further in the hole.

If we’re not careful, the stress of paying for these vacations after can outweigh the fun we had during them.

Get Out of Debt with These Money Saving Tips!

Getting out of debt is tough, but it’s even tougher when you continue to buy stuff you don’t need.  The last thing you want to do is put yourself in a spending position which makes your debt worse.

If you don’t have a way of increasing your income, cutting expenses is one of the easiest ways to help save money to help pay down debt.

Cutting your spending on things like subscription services, eating out and junk food, buying generic over brand name products, ditching cigarettes and alcohol, and fancy vacations makes it easy to save money so that you can put it towards your debt.

Readers: are there any holes in your budget and expenses which are keeping you in debt? If you’ve paid off debt, is there anything I’ve missed here which you cut and saved money on?

6 Things to stop buying to get out of debt

6 Things to stop buying to get out of debt
6 Things to stop buying to get out of debt
credit card debt

Credit card debt is the worst kind of debt have. In this post, you’ll learn about 5 ways you can get out of credit card debt.

Pay Off Credit Card Debt

Credit card debt is the worst debt to be in. Getting out of credit card debt is possible, but will require some discipline. With 20%+ interest rates, credit card debt can have a negative impact on your personal finances if not handled appropriately.

Debt of any kind can be dangerous if misused.  Credit card debt, however, is particularly sinister because of its extremely high interest rates, which can cripple your ability to build wealth.

The average household in the United States has nearly $7,000 in revolving credit card debt.  That might not sound like much, but make no mistake, $7,000 at with a 20% interest rate costs over $1,000 in interest a year!

In this post, you’ll learn 5 credit card debt payoff hacks to help you manage your credit card debt.

5 Credit Card Payoff Tips to Get Out of Debt

Make no mistake, getting out of debt is tough. However, with the right strategy, you can crush your debt using the following strategy and get on the path to financial success.

The 5 steps to getting out of credit card debt and paying off your credit cards are:

  1. Track Your Money and Live Within Your Means
  2. Stop Using Your Credit Cards
  3. Pick a Payment Strategy
  4. Pay More Than the Minimum Payment
  5. Automate Your Personal Finances

After going through these 5 steps in more detail, you’ll also learn some bonus credit card payoff tips (0% APR Balance Transfer Cards, debt consolidation, etc.)

credit card debt

Credit Card Payoff Tip #1: Live Within Your Means

Living within your means is the bedrock of any debt reduction plan, as well as financial freedom in general.

The reason most people end up with excessive credit card debt is because they adapt to a lifestyle of spending more than they earn.  If you ever want to kill your credit card debt, the first step must be to address the conditions that created it.

The first step is to examine your finances and ensure you have a complete picture of your situation.  Knowing the full details of your income, your expenses, and any debts is critical to make informed financial decisions.

This includes the start and end dates of the billing periods for each account, and when each one is due.

Once you’ve gathered all of your financial information, the second step is to prioritize your spending.

What things are truly important to you?

Once the necessities are taken care of you need to decide where you want your money to go.  In this case we want to devote a chunk of our budget to killing our credit card debt as quickly as possible, while still leaving some wiggle room for lifestyle spending.

How to Cut Your Expenses Fast to Get Out of Credit Card Debt

The quickest way to slash your spending and free up room in your budget to supercharge your debt payoff is by cutting your largest expenses.

Typically, the three biggest expenses people have are their housing, food, and transportation.

Have an expensive mortgage? Try moving to a smaller or less fancy home, or house hack and let your roommates subsidize your housing costs.

Eating out several times a week? Try meal prepping on the weekends so you can have meals ready to go instead of spending that extra money.

By reducing your expenses, you can prevent yourself from needing to take on any additional credit card debt.

Credit Card Payoff Tip #2: Stop Using Your Cards

This should go without saying, but I’ll say it anyway: if you’re trying to kill your credit card debt, STOP USING YOUR CARDS!

If you’ve built up significant credit card debt, you likely have a habit of using them mindlessly.

That statement isn’t meant to be an insult, rather to call out an extremely common issue that many credit card users struggle with.

When people stick to a cash-only strategy they’re confronted with the physical reality of having to hand over their hard-earned money to someone else every time they make a purchase.

Credit card users, however, don’t get this same reinforcement, as the act of swiping a card requires much less thought.

Another reason to stop using your cards is because your debt repayment will take significantly longer if you continue adding to your balance.

Imagine trying to push a boulder uphill; the larger the boulder and the steeper the hill, the more difficult the job of pushing it will be and the longer it will take.

Every time you swipe your credit card while trying to pay down your debt, your boulder gets bigger and the hill gets steeper!

Credit Card Payoff Tip #3: Pick a Debt Payoff Strategy

There are two main strategies to become debt free fast. The two methods for becoming debt free are the debt avalanche method, and debt snowball method.

These methods are pretty straightforward. First, compile a list of your debts and their interest rates. After compiling this list, you will then pay a little extra towards a certain debt as determined by whichever method you pick.

By paying a little extra each month, you will be able to take advantage of some huge interest savings (as we will see a little bit later in this post).

Using the Debt Avalanche Method, you pay off your debts by paying extra toward your debt with the highest interest rate first. .

Once you have paid off the highest interest rate debt, you put the entire paid off debt’s payment plus the same extra amount towards the next highest until all debt is paid off.

For example, let’s say you have two debts: one at 20% interest rate, with a minimum payment of $200, and balance of $2,000, and the other debt with a 10% interest rate, a minimum payment of $150, and balance of $1,000. You decide you can put an extra $50 towards your debt a month.

Using the Debt Avalanche Method, you would put $250 towards the first debt and $150 to the second debt.

Over time, the first debt will be paid off faster than it would if you just paid the minimum payment. If the first debt is paid off before the second, then you put all $250 towards the second debt, for a total of $400 a month, until the second debt is paid off.

The Debt Avalanche Method is the mathematically optimal debt pay down strategy.

The Debt Snowball Method

Using the Debt Snowball Method, you pay off your debts by paying extra toward your smallest balance debt first. Once you have paid off the smallest balance debt, you put that payment towards the next smallest until all debt is paid off.

Many people like the Debt Snowball Method because psychologically, you can generally see your debt accounts disappear faster. If you have a $1,000 loan and a $5,000 loan, it feels good to have the $1,000 loan gone.

Going back to our example with two debts: one at 20% interest rate, with a minimum payment of $200, and balance of $2,000, and the other debt with a 10% interest rate, a minimum payment of $150, and balance of $1,000. Again, you will put an extra $50 towards your debt a month.

Using the Debt Snowball Method, you would put $200 towards the first debt and $200 to the second debt, because the second debt is smaller in balance.

The Debt Snowball Method is not mathematically optimal, but is still better than applying no strategy at all.

The Debt Blizzard Method

If you want, you can combine these two debt payoff strategies and use a relatively new method called the Debt Blizzard.

The Debt Blizzard is a newer strategy which is a hybrid of the snowball and avalanche approaches.

When using the Debt Blizzard method you score a “quick win” by paying off the card with the lowest balance first, then prioritizing any other cards based on their interest rate.

learn to invest
Photo from Lewis Thompson at Webaroo

This may seem overly complex, but the debt blizzard method strikes a good balance between the pros and cons of the other two methods.

Credit Card Payoff Tip #4: Pay More Than the Minimum

How do you get out of debt fast?

PAY MORE THAN THE MINIMUM PAYMENTS!

I can’t overstate the importance of this step!

Creditors make money when you carry a balance through the interest you pay.

The minimum payments listed on your credit card statement is usually around 2-3% of your total balance. This minimum payment is typically barely enough to cover the monthly interest on most consumer credit cards.  If you only make the minimum payments, it will take you years longer to kill your credit card debt!

Earning more money is another great way to beef up your credit card payments.  While there is value in cutting unnecessary spending to free up money in your budget, you can only cut so far before it becomes unsustainable.

Your income has no limits!

There are also virtually unlimited ways you can earn more money. You could ask for a raise at your job, pick up a side hustle, or house hack.

Credit Card Payoff Tip #5: Automate Your Finances

Humans are imperfect; sometimes you’ll forget to pay their credit card bills, or pay late, which causes a host of problems on your credit report.

The solution?

Automate your bills so you never suffer a late or missed payment. These result in late payment fees that go up the more delinquent the payment becomes, and often result in absolutely crushing penalty APR increases.

For example, most consumer credit cards come with an average APR of 14-16%; miss as little as one payment and banks like Citi and Chase will slap you with a penalty APR of 29.99% that will haunt your account for months

Credit cards generally have the ability to set up automatic payments directly from your bank account, and many banks who provide online banking services also include some integrated bill payment solution.

Since we already know how much each of our credit card bills are, and when they’re due from step one, setting up recurring payments is as easy as visiting a few websites and linking our banking information.

Once your credit card bills are automated, another helpful step is to automate all of your other bills as well such as your utilities, phone bill, insurance, etc.

By automating your personal finances, you don’t have to worry about when things are due and you know they’re set up to fit within your budget. This frees up mental energy to devote toward other things like staying focused on your debt repayment, or increasing income to further beef up your payments.

credit card pay off

Bonus Tips for Paying Off Your Credit Cards

While you will be able to pay off your credit cards using the 5 steps above just fine, there are a few other strategies you can use to destroy your credit card debt.

These bonus credit card payoff tips are not for everyone, and please make sure you do your due diligence before diving in.

Balance Transfer to 0% APR Credit Cards

Many credit card companies offer cards with introductory offers of 0% APR for a certain period of time, often as a promotional tool to entice you to sign up.

Once the promo period ends, the APR will increase to predetermined rate according to the terms of the credit agreement. The limited time offer means that unless you can completely eliminate your balance within the promo period you’ll get smacked with interest charges.

I’d recommend this strategy only if you know you can fully pay off your balance in time.

At 0% interest, the credit card companies are practically giving you money for free, but make no mistake, you’ll have to stay disciplined to make sure you pay these cards down.

Also, there may be a balance transfer fee, but at least you won’t be stuck paying 20%+ if you decide to go this route.

Debt Consolidation to Decrease Your Interest Rate

Another way to reduce your credit card bill payments is to consolidate your debt.

Debt consolidation works by a provider issuing a loan that covers the full balance of your various credit cards rather than you paying your cards individually.

Debt consolidation can be advantageous for a couple of reasons:

  • First, it simplifies the process of killing your credit card debt by rolling all of your debts into a single payment.
  • Second, it can save you money because debt consolidation loans generally have much lower interest rates than credit cards.

A problem with this strategy is it can significantly increase the amount of time it takes to completely payoff your credit card debt.

While you’re saving on interest and typically paying less per month, the amount you owe is unchanged; smaller payments make a much smaller impact on your total balance.

I’d recommend this strategy only if you’re carrying a large number of different credit cards, have cards with extremely high interest rates, and/or can accept the extended repayment timeline.

The Mastermind Within is partnered with various financial institutions who specialize in debt consolidation. To see if debt consolidation would make sense for you, you can click here to get connected with these partners.

Get Out of Debt with These Credit Card Payoff Hacks

Credit card debt is a huge problem for millions of people.

Just like other forms of debt it drags down your financial progress and creates significant stress unless managed properly.

With the tips listed above, hopefully you can get out of debt and get on to living your dream life!

Have you tried any other strategies to destroy your credit card debt?  How well did they or didn’t they work?

Pay Off Credit Card Debt
Pay Off Credit Card Debt
Pay Off Credit Card Debt
Pay Off Credit Card Debt
mortgage and heloc arbitrage

Getting out of debt and paying off your mortgage are very worthy goals. Can you pay off your mortgage with a HELOC? Unfortunately, most HELOCs have interest rates which don’t make it optimal to pay off your mortgage.

Pay off Mortgage with HELOC

Making plans to pay off your mortgage is a fantastic way to improve cash flow and get out of debt. Becoming debt free would allow you many freedoms which are so rare in the world today.

While paying off debt is not rocket science, there are some debt payoff methods which can help speed up getting out of debt.

One debt payoff method homeowners think they can use to pay off their mortgage fast is by utilizing a HELOC (home equity line of credit).

If your HELOC rate is lower than your mortgage rate, it is possible to reduce your interest expense and perform interest rate arbitrage.

But, in general, does using a HELOC allow you to become mortgage free faster?

In this post, let’s explore using a HELOC to pay off debt fast, when using short term debt can help cancel long term debt, and how performing mortgage and HELOC arbitrage works.

mortgage and heloc arbitrage

What is a HELOC?

A HELOC (pronounced HE-lock) is a home equity line of credit. A HELOC is a loan, which using your home as collateral, and lets you borrow up to a certain amount, rather than a set dollar amount.

HELOCs are similar to credit cards. They have a credit limit, and you can borrow against it, pay all or part of the balance, and borrow again up to the credit limit.

The interest rate typically is variable and depends on the Prime rate.

How does a HELOC work?

HELOCs have terms which have many varieties and can be customized depending on your preferences.

Typically, the first 5 or 10 years of a HELOC will be established as the draw period. During the draw period, you may borrow from the HELOC and the minimum monthly payments are interest only.

After the draw period expires, the repayment period begins. Usually, the repayment period will be 20 years.

During the repayment period, you will be paying both principal and interest. After the 20 years, your entire HELOC will be repaid.

Also, similar to a mortgage, missing a payment could have a negative effect on your credit score or result in a foreclosure.

We’ve established what a HELOC is and how a HELOC works, let’s examine paying off your mortgage with a HELOC. First, let’s define arbitrage.

What is Arbitrage?

Before getting into the numbers, let’s talk about a money making theory. What is arbitrage? As defined by Investopedia,

Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price.

Arbitrage is performed when you can extract risk-free profit from a difference in the pricing of your investments.

One common example is when you borrow money at 3%, and invest the money at 4%. The difference between your borrowing cost and investment yield is 1% – you are banking 1% for free!

Many professional money managers look to make money risk-free with arbitrage. However, the average person can use arbitrage to their advantage as well!

If you can find these arbitrage situations, you should try to capitalize on them!

using heloc to pay down debtA Real Life HELOC Example

After applying for a HELOC, you will receive an offer. Depending on your lender, the credit line will be dependent on the current equity in your house.

When I went to apply for my HELOC, I received the following quote: a $21,000 credit line with a 7.6% variable interest rate. For my HELOC, there would be a 10 year draw period and 20 year amortization period.

This interest rate is not amazingly low, but could lead to some interest rate arbitrage.

One thing to note is HELOC interest is not tax deductible for all expenses. HELOC interest is tax deductible as long as it is used to make improvements to the home, but isn’t deductible if the money is spent on anything else.

An Example of Paying off Your Mortgage with HELOC Funds

When I got my HELOC, I wanted to look and see if I could strategically pay off my mortgage to better my situation financially.

Let’s examine an example where I would take HELOC funds and look to reduce my mortgage balance to get rid of private mortgage insurance.

My mortgage is a 5/1 ARM mortgage with a 2.625% interest rate. At this time, I’m not quite at 20% equity and still have private mortgage insurance. There are 3.75 years until my interest rate adjusts.

Over the next 10 months, I theoretically could pay an extra $25,290 and get rid of the $144 a month private mortgage insurance (PMI).

This would result in a 8.43% return on investment. This is a guaranteed 8.43% on my cash over 3.75 years since the debt will be paid off.

paying off private mortgage insurance

While this mortgage payoff scenario sounds great, what if I could arbitrage this return by using debt at 7.6% and keep my cash? Would using a HELOC to pay off my mortgage be worth it?

Examining a Potential Mortgage and HELOC Arbitrage Opportunity

To get rid of PMI, I’m about $25,000 of principal away. Thinking about using my HELOC to finance this debt reduction, I would still need to put up some cash. However, If I used all of the $21,000 credit line to pay off my PMI, I would free up $144 of cash flow a month, and accelerate my mortgage amortization.

After this payment, I would have interest-only payments on the HELOC of 7.6% on $21,000 for $133.

Looking at this, I’d be saving $11 a month without doing anything, and I’d speed up my mortgage amortization (pay off my mortgage faster). If I kept paying the minimum on my mortgage (2.625%), it would take 29 more months to get rid of PMI.

Therefore, I calculated the rate of return at the 29 month mark to find the profit potential:

heloc pay off mortgage

 

Over 29 months, I’d make $1,651 on my $21,000. This equates to an annualized return of 3.25% created for free from this potential arbitrage opportunity.

The $1,651 return on investment from this HELOC debt payoff strategy could even be added as extra mortgage payments to help pay off my mortgage debt even faster.

At the same time, it can be pretty risky to use debt to pay off other debts.

Also, if I was just using the HELOC to pay off mortgage principal, I would lose over $2,500 over the 29 months due to the difference in interest rates. The example above only works since I’m still paying off private mortgage insurance.

Finally, the HELOC interest rate is variable with respect to Prime, and as a result could increase. If interest rates go up, what I’ve calculated above could certainly be unprofitable.

Everyone’s situation is different. For you, if you are thinking of paying off your mortgage with HELOC funds, it’s important to calculate your potential gains or losses ahead of any actions.

How Else Can You Use HELOC Funds?

While paying down your mortgage with a HELOC might seem like a good idea, there are potentially more optimal ways you could use your HELOC funds.

Other potential options for the HELOC funds could include:

  • funding a brokerage account
  • using your credit line as insurance in case of a major emergency
  • funding a down payment for a rental property
  • funding a retirement account (401k, 403b, 457 plan, Traditional or Roth IRA)

Putting your money to work in the stock or real estate market might make sense for you if interest rates are low.

With stock and real estate investments, there is no guarantee of profits. However, in the long run, the stock market return 7-10% a year on average, and real estate investments return 10-20% a year on average.

If you are not risk adverse and are looking to use arbitrage and leverage to your potential advantage, a HELOC can be a low cost way to finance your investments.

If you are risk adverse and hate debt, just having a HELOC in case of emergency could help you sleep peacefully at night. Also, with another line of credit open, you could increase your credit score.

There are so many options for using HELOC funds and ultimately, the decision is yours. Personal finance is personal!

Would Debt Consolidation Make Sense to Adjust Debt Payments?

While paying off your mortgage with a HELOC might not always make sense, debt consolidation is another way which you could reduce your monthly payments.

Debt consolidation works by a provider issuing a loan that covers the full balance of your various credit cards rather than you paying your cards individually.

Debt consolidation can be advantageous for a couple of reasons:

  • First, it simplifies the process of killing your debt by rolling all of your debts into a single payment.
  • Second, it can save you money because debt consolidation loans generally have much lower interest rates than credit card or high interest debt.

Mortgage rates typically are very low interest rates, so debt consolidation might not always make sense.

In addition, a problem with this strategy is it can significantly increase the amount of time it takes to completely pay off your debt.

While you’re saving on interest and typically paying less per month, the amount you owe is unchanged; smaller payments make a much smaller impact on your total balance.

I’d recommend this strategy only if you’re carrying a large number of different debts, have debts with extremely high interest rates, and/or can accept the extended repayment timeline.

The Mastermind Within is partnered with various financial institutions who specialize in debt consolidation. To see if debt consolidation would make sense for you, you can click here to get connected with these partners.

Paying Down Your Mortgage with a HELOC could be Smart or Dumb

Getting out of debt and becoming debt free is a goal which everyone should have. Becoming financially free from the bank will allow you to live the life you want and deserve.

Depending on your mortgage interest rate and your HELOC interest rate, using your HELOC funds to pay off your mortgage could be a good idea, or a bad idea.

Since HELOC interest is not fully tax deductible anymore, there is less incentive to use HELOC for arbitrage. It is still possible to find interest rate arbitrage opportunities, but just more difficult.

If your HELOC interest rate is lower than your mortgage rate, you can make money. If your HELOC interest rate is higher than your mortgage rate, then you will lose money.

For you, thinking critically about your personal finance situation will lead you to the right answer.

Can you pay off your mortgage faster with a HELOC?

Pay off Mortgage with HELOC