Smart Debt Consolidation Plan for Anyone Under 50
Please note: The following transcript is from a Copper State Credit Union live virtual event and has been modified for readability.
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I'm excited to introduce our speaker Christina Kredit. Christina is Copper State Credit Union’s Financial Wellness Program Manager. She's been with the Credit Union for four years and loves her current position. Christina has lived in the valley for nine years since moving from Pittsburgh, Pennsylvania. She loves listening to audio books and enjoys camping with friends and family, as well as working in her garden. Financial fun fact about Christina, she uses the cash envelope system for managing her family's budget. Christina, I'll turn it over to you.
Thank you Alex! Hello and Welcome! Thanks so much for joining me here tonight. I'm coming to you from Copper State Credit Union’s member financial education center.
Who We Are – Copper State CU
For those of you who are new, I want to introduce you to Copper State CU. We are a local Arizona credit union, created and built from the merger of two equally sized and equally thriving credit unions, Deer Valley Credit Union and Canyon State Credit Union. That happened back in 2019. In 2020, Southwest Healthcare Credit Union joined us and we created our new name and brand, Copper State Credit Union.
Our membership has a ton of benefits and it's open to most Arizona residents if you live, work or worship in any of those counties. We have seven branch locations as well as a branch at GCU, the college campus in the Lope shop. And right now we serve over 40,000 members, over 40,000 people trust us to do their banking.
I really like to start off all of these webinars and presentations with our core values, because without going over this, it's hard to understand why I'm here tonight and why I enjoy talking to you all so much about your finances. And it's because of our core values as a credit union, believing in financial strength, through financial empowerment, leading to financial prosperity, and those four core values you see up on the screen, those are what we really believe in.
We have a focus on family. We want to empower you, we believe that finances and getting empowered to take control of your finances is an exciting thing. And it's something that you will enjoy discovering in that journey as you go along.
Current Debt Situation in US
Currently in the US, we've got $14 trillion in household debt, up 19% from 2009 to 2019. That’s just consumer households like you and me, all of our debt added up to one big total. It feels overwhelming. It feels like you could never get out of it, but I want you to know that it's not hopeless. We are here to help, and today we are going to discuss the benefits of debt consolidation, if that ends up being the right plan for you. We will talk about what to do before consolidating debt, to make sure you check off a couple things off of your list. We will even talk about when it's not the best choice and go over some misconceptions about debt consolidation.
Before You Consolidate + A Debt Consolidation Story
It’s really important to start with what to do before you consolidate your debt. If you aren't willing to start here, you will end up in more trouble than you already were before. You may end up with more debt than you had before.
Meet Helena and George, they have a pretty tight income, so they don't have a ton of extra money after paying for their mortgage and for basic expenses. There are a few things that tend to drain the income a little faster. For example, they love going out to dinner and getting takeout. They spend a ton of money on their rose bushes in their yard. And also they order stuff on Amazon all the time to send to their niece and nephew. So these are the things that kind of drain Helena and George's budget. And to begin with, there wasn't a ton of wiggle room. So here's what happened. They end up in debt because they didn't track their spending. So they would just kind of, oh, this is so cute. I have to send it to Henry or, oh, the roses is dying, it needs this different plant food. And so they would just spend and spend. I’m sure we can all empathize with that – spending money on things you love is part of enjoying life!
But they weren’t saving anything and each month they ended up spending more money than they had. So eventually over the course of a little while, this ended up in about $10,000 of credit card debt. Helena and George met with someone who recommended debt consolidation. “You're paying way too much in interest - you should consolidate your debt into a lower interest loan.” So this sounds great to them. They are told they should do a mortgage refinance. Doing a refinance costs about $3,500, but it does reduce the rate that they're paying on that debt on the credit card down to 4% instead of the 18% that they were paying. But five years down the road here's what happens, because they did not stop and think about creating a spending plan or creating a budget.
They extended their mortgage term to lower the payment and give them a little more wiggle room in their budget. And what happened was they built that debt back up. So after five more years, there was almost another $10,000 in debt. They're in the same position they were before, but now it's even a little bit worse because they've already consolidated once.
Don't let their story become yours! We have several free resources to help.
1. Create a Spending Plan
Here are some helpful tips for starting out with a budget, if that’s where you are today:
• Set aside a couple hours to work on it
• Be realistic. Saying you’ll never spend money on anything fun will just lead to failure!
• Try to save up a cushion of funds in your checking account (a buffer amount of whatever you can manage) This helps for overlapping due dates when you haven’t been paid yet.
• Find a way to stop creating new debt. If you continue to create new debt, it won’t matter whether you consolidate or not, your situation won’t improve.
• Don’t neglect your savings! Getting in the habit of saving money will enable to you to not go further into debt when unexpected things come up.
2. Consider A Do-It-Yourself Debt Payoff Solution
Methods we discuss include the “Fixed Payment Method” where you make the same dollar amount payment each month instead of the changing minimum payment. We also highlight an option called the “Payment Roll-Up Method” where you focus on one debt at a time. Check out these resources for more detail:
Misconceptions About Debt Consolidation
Here are some terms to know:
APR or annual percentage rate - the amount of money that you pay to the lender or to the credit company, calculated as a percentage of what’s borrowed, over the course of the year. A higher APR means you pay more in interest and it takes longer to pay off. The APR that you qualify for on any given loan is going to be determined by your relationship with the institution, your credit score, and some other factors.
Minimum payment trap – the minimum payment is the lowest amount you're allowed to pay per month on money that you’ve borrowed. It's usually calculated at around 2% of the balance for credit cards. If that's all you pay, it will take significantly longer to pay off the debt.
Credit cards are now required to include a table on their statement that gives you the timetable for payoff if you make only the minimum payment. For example, if you make no additional charges and you pay the minimum payment on the balance - $5,000 - It will take you 23 years and you’ll pay $11,000 in interest. That’s without making any additional purchases! But if you bump up that amount and you pay more than the minimum, you can decrease the payoff time and interest paid significantly.
Benefits of Debt Consolidation
• One simple payment
• Save on interest
• Shorten payoff time
• Improve credit score
• Lower monthly payment amount
The last bullet point I have crossed out because a lot of people go into the debt consolidation world and say "I want to consolidate my debt" because they are looking for a lower payment amount. And I get it – this is an attractive option. But as a financial counselor, this isn’t a benefit to your financial life. I put it on here because a lot of people do think of it as a benefit!
Check out our Credit Card Payoff Calculator to run some numbers. Here’s a summary of one example: If there's a $10,000 debt and you're paying $200 a month, look at the difference in the APR. So 20% APR versus 8%, and that's what you pay annually, like over the course of a year in interest and the total interest paid for 20% APR is almost $12,000.
Look at the difference it makes when you go down to 8% - the length of the payoff is five years versus 12 years and the interest paid is $9,000 less.
Check out our webinar, Ask Our Experts: What's the Secret to a Good Credit Score?
Types of Debt Consolidation Loans
Below, we'll highlight the three loans that we think are the best fit for debt consolidation. For all of these, Copper State Credit Union does have options! Check out debt consolidation options on our website for more info.
1. Balance Transfer Credit Card
You would transfer your balance on whatever other loan you have over to a credit card designed for balance transfers if you can get qualified for a 0% promo period.
Love about it: 0% APR for promo period, especially with a low balance transfer fee (3% or less)
Think about it: Be sure you’re getting 0% APR for at least 12 months. 15 or 18 months is even better. And be sure you’re not using the card for additional purchases during this time. Watch out for cards with annual fees and cards that ‘defer’ interest. Don’t go with either of those!
To get it: Credit score should be 690+ to qualify for a card with a decent promo period. You’ll need to transfer to a different credit card company than you already have.
*Credit boosting tip – you can boost your score 30 or 40 points in as little as 6-12 months by making on-time payments and reducing balances!
2. Personal Loan
Love about it: You can find a fixed rate personal loan with a set term. The rate is not going to go up and down, and it could reduce your interest rate, if you have a really high interest loan currently. Plus, it puts it into one simple payment.
Think about it: Lower credit scores may not qualify, and if you do qualify, the rate may be pretty high. It also frees up credit elsewhere and can tempt you to run up the balance as you did before.
To get it: have a credit score of at least 620 and it helps if you already have a relationship with the financial institution (like a checking or savings account, direct deposit, etc.)
3. Home Equity Loan
Love about it: It’s going to have the lowest permanent rate vs. the other two options above because it’s the only one secured (by your home!) It’s a fixed amount you borrow and pay back over a set term, with a fixed rate. Another name for this loan is a 2nd mortgage.
Think about it: Your house is the collateral (or what you lose if you can’t pay) so be sure you have your budget in order before going down this road.
To get it: You need a house, some equity in it, and 620+ credit.
• From subprime lenders. These are people who will give a loan to someone with no credit or very poor credit, be careful because they are really, really hitting you with rates and fees to make up for that risk that they're taking. So I really would advise against going with a subprime lender.
• From “Debt Settlement” plans. They claim that they'll reduce your debt amount. They say, oh, we'll talk to your creditors and we'll get them to forgive your debt or whatever the case may be, but you will pay high fees again, and what's even worse, this will stay on your credit report as unpaid. So definitely don't want to go down the route of a debt settlement plan if you can help it.
• From lenders who charge a fee to consolidate your debt. This is a red flag!
Your Debt Consolidation Plan
No two people have the same financial situation. No two people are exactly the same in their needs and wants and goals.
This webinar was designed to present you with options. Plus, we have a free download item to help – “Should I Consolidate My Debt” Decision Flowchart. You’ll receive this after you take the survey.
The last thing I want to talk about today is a partner we have – GreenPath. They offer free resources, education, but also free debt counseling and credit counseling. This is not the same thing as the debt settlement plan that I talked about earlier, this is an initial financial assessment call which is totally free! Some folks need more, and if you move forward with a debt management plan for example, there are some costs associated with that. But the initial counseling is free and for people with serious debt concerns, having someone walk through it with you step-by-step is really helpful. So if you're feeling overwhelmed and this feels like, even with all the resources that we have, it still feels difficult to handle your debt on your own, give them a call.
I do appreciate you being with us tonight. It is always a pleasure to be talking financial wellness with our Copper State Credit Union members, so thank you so much for joining us and I will see you next time!
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This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.