Creating a Debt Reduction Plan

When you’re worried about money and feel your options are limited, debt can feel like a pair of handcuffs. And if it feels like you can’t do what you want to do—which is to pay it all off and get yourself free—there’s the temptation to do nothing. But there are some things that can be helpful when crafting a debt reduction plan that will work for your situation.

Prioritizing Expenses

Before you start prioritizing expenses, it’s important to have a clear understanding of what income is available and how much is being spent. This can be done with pen and paper, or by leveraging an all-in-one app, such as SoFi Relay.

Keeping a roof over their head is a number one priority for most people. Mortgage lenders are not very patient when it comes to getting their money, and failing to make a house payment can leave a big black mark on a person’s credit record. For renters, paying the property owner on time each month may have a positive impact on their credit report.

Making sure a car loan and car insurance are current, especially if that’s the only way to get to work, might be next in order of importance. After that come big debts, such as student loans, but those may be eligible for student loan forgiveness depending on the type of loan and if the qualifications for forgiveness are met. Refinancing student loans into one manageable payment might be worth considering if that would save money with a lower interest rate or a shorter loan term. (For federal student loan borrowers, though, refinancing may not be the best option right now since the CARES Act has offered some relief through September 30, 2021.)

Making a plan to tackle credit card debt is also important. Each month, making the monthly minimum payment is important, otherwise, a person’s credit report can quickly reflect any lack of payment . And to manage the outstanding balances on those credit cards, it may be time to work out a new payment plan to get out from under credit card debt.

Once all that information is accounted for, moving forward with a personal debt reduction plan will make it easier to deal with all those long-term bills and relieve debt-related worry.

There are four popular approaches to knocking down debt. The debt avalanche method is probably best suited to those who are analytical, disciplined, and want to pay off their debt in the most efficient manner based solely on the math.

The debt snowball method takes human behavior into consideration and focuses on maintaining motivation as a person pays off their debt.

The debt fireball method is a hybrid approach that combines aspects of the snowball and avalanche methods.

And a personal loan may be an option for those who have a solid financial history or whose credit score has improved since they first signed up for their high-interest loans and credit cards.

Here’s how each strategy typically works.

Debt Avalanche

This method puts the focus on interest rates rather than the balance that’s owed on each bill.

1. The first step is collecting all debt statements (e.g., credit card, auto loan, student loan) and determining the interest rate being charged on each debt.
2. Making a list of all those bills is next, looking past the total amount owed on each debt. This method puts the debt with the highest interest rate in the spotlight, so that one will be at the top of the list, with the other debts listed in order of interest rate, second highest to lowest.
3. Some things to keep in mind might be any fees, prepayment penalties, or tax strategies that could make one debt more or less expensive than the others. When using a balance transfer credit card to save money on any particular debt, reprioritizing the list once the introductory rate runs out and a higher rate kicks in plays a part in how this method works.
4. Continuing to pay the minimum on each bill—on time, every month—is important. But paying extra (as much as possible) toward the bill at the top of the list will help that debt be paid off as quickly as possible.
5. When the first debt is paid off, moving on to the next debt on the list and starting to pay extra there will start the process over again. Money will be saved as each of those high-interest loans and credit cards are eliminated, which can allow all the bills to be paid off sooner.

Debt Snowball

This approach can be effective in getting a handle on debt by slowly reducing the number of bills there are to deal with each month.

1. This method also starts with collecting debt statements and making a list of those debts, but instead of listing them in order of interest rate, organizing them from the smallest debt to the largest (total amount owed, not monthly payment amount).
2. Continuing to pay the minimum—on time, every month—but paying as much extra as possible toward the smallest debt on the list is key to this method. (If possible, completely paying off the balance on that very first bill might provide some sweet momentum to get started.)
3. As with the debt avalanche method above, paying attention to fees, penalties, and tax strategies may determine which debt gets paid first.
4. Moving on to the next debt on the list, and so on, will keep this method in motion. Keeping track of paid-off debts with a visual tracker might help with motivation.
5. No longer using credit cards that have been paid off is a good way to stay out of debt for the long term. And having a goal to set up an emergency fund to cover unexpected expenses—a medical bill or car repair, for example—to stay on track is a good way to stay ahead of the game.

Debt Fireball

This strategy is a hybrid approach of the snowball and avalanche methods. It separates debt into two categories and can be helpful when blazing through costly “bad debt” quickly.

1. Categorizing all debt as either “good” or “bad.” “Good” debt is generally in the form of things that have potential to increase net worth, such as student loans, business loans, or mortgages, for example. “Bad” debt, on the other hand, is normally considered to be debt incurred for a depreciating asset, like car loans and credit card debt. As this list is being developed, identifying all debt with an interest rate of 7% or higher is likely the “bad” debt that may be beneficial to focus on first.
2. Listing bad debts from smallest to largest based on their outstanding balances will provide the working order.
3. Making the minimum monthly payment on all outstanding debts—on time, every month—then funneling any excess funds to the smallest of the bad debts is the focus of this method.
4. When that balance is paid in full, going on to the next smallest on the bad-debt list will keep the fireball momentum until all the bad debt is repaid.
5. When that’s done, paying off good debt on the normal schedule can be a smart way to invest in the future. Applying everything that was being paid toward the bad debt to a financial goal, such as saving for a house—or paying off a mortgage, starting a business, or saving for retirement, for example, is a good way to look forward to a financially secure future.

Personal Loan

Consolidating debts at a lower interest rate or with a shorter term offers another option to pay those debts off in less time than expected.

1. Gathering debt statements and totaling up the debts to be paid off is the first step.
2. To have an idea of interest rates that might be available (most lenders will offer a range), making sure the information on credit reports is accurate is the next important step. Any errors found on a credit report can be reported to the credit reporting agency.
3. Looking at a variety of lenders to find the best interest rates and terms available will help when setting a goal to find a manageable payment while paying off the debt load as quickly as possible.
4. Considering member benefits or other perks that lenders may offer, such as a hardship deferral or a discount on a future loan might make a difference when choosing a lender. Then, applying for the loan that best suits the borrower’s needs is the next step in the process.
5. Paying off old debts with the personal loan and staying current with the new loan payments will help keep things manageable. Sticking to a budget that prevents the same spending mistakes from being made again is important to keeping debt at bay.

Personal loans used for debt consolidation can help pull everything together for those who find it easier to keep up with just one monthly payment. A bonus is that because the interest rates for personal loans are typically lower than credit card interest rates, the amount paid on the total debt may be less than what would have been paid just by plugging away at those individual debts. For those who qualify for a rate that’s less than their credit card rates, a personal loan can make sense.

The Takeaway

With an unsecured personal loan from SoFi, debts can be consolidated and paid off in a way that works for your income, budget, and timeline.

Whatever payoff method you choose, the point is to do something. Having a debt reduction plan in place is key to getting rid of those financial handcuffs and being able to look forward to a successful financial future. Planning ahead, saving for specific goals, and sticking with a budget will go a long way to minimizing dependence on credit cards or high-interest loans in the future.

Ready to tackle your debt head-on? A personal loan from SoFi can help you consolidate your debt into one easy-to-manage monthly payment.



SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Source: sofi.com

What is Debt Consolidation and How Does it Work?

If you’re repaying a variety of different debts to different lenders, keeping track of them and making payments on-time each month can be a hassle. It isn’t just tough to keep track of these various debts, it’s also difficult to know which debts to prioritize in order to fast track your debt repayment. After all, each of your cards or loans have different interest rates, minimum payments, payment due dates, and loan terms.

credit card debt.

It consolidates all of those existing loans into one loan, which means you go from having several monthly payments and various interest rates to just one. This is not the same as debt or credit relief, where a credit counselor helps you reduce interest rates or eliminate debt altogether. Credit relief programs can help you consolidate your debt, but they aren’t getting you a new loan—it’s only consolidation.

While you are able to consolidate many different types of loans, the process for consolidating student loans is different. Keep reading to understand how they are different.

Applying For a Debt Consolidation Loan

When choosing a debt consolidation loan, look for one that has an interest rate and terms that fit into your overall financial picture. The overall goal when consolidating debt is to save you money, either on interest in the long term, or on monthly payments in the short term (which may end up making it more costly over the life of the loan).

Once you apply and are approved for a debt consolidation loan, it may take anywhere from a few days to a week to get your money. Sometimes the lenders will pay your debts off directly, other times they will send you the loan money, and you’ll pay the debts off yourself.

The Benefits Of Debt Consolidation

The most significant benefit of consolidating debt is that it is possible to qualify for a more competitive interest rate, which could help save money over the life of the loan. Debt consolidation loans tend to come with lower interest rates than credit cards.

A debt consolidation loan may be an option to consider if your monthly payments are feeling way too high. When you take out a new loan, you can extend the term length to reduce how much you pay every month.

It’s important to note that the longer the term length of your loan, the more you’re likely to pay in interest over the life of your loan. Still, if you’re struggling with your monthly payments, it might be worth it to consolidate your debt and extend your repayment timeline. This way, you won’t be struggling to stay afloat every month, and you’re less likely to miss payments.

Alternately, you could shorten your term length if you’re trying to aggressively pay off your debt and get rid of it more quickly. This could help reduce the cost of interest over the life of the loan.

Consolidating could potentially help improve your credit score. That’s because if you carry debt on credit cards or lines of credit, your score might suffer if you’re using more than 20% to 30% of your available credit. By taking out a consolidation loan and depending on how much you qualify for, you could be creating more available credit, instead of racking up a credit card tab.

Finally, if some of your current debts are secured loans, debt consolidation might be worth considering because they are typically unsecured loans. With secured loans, you use an asset like a home or car to guarantee the loan. If something happens and you cannot repay the loan, then the bank can seize the asset that is acting as collateral. An unsecured debt consolidation loan can help you avoid putting other assets on the line.

Consolidating Credit Card Debt

Tired of dealing with mounting credit card debt? Consolidating credit card debt is the most obvious form of debt consolidation. This is because people can save a considerable amount by consolidating their high interest credit card debt with a new lower-interest loan.

The first step is generally applying for a credit card consolidation loan. There are many banks, credit unions, and online lenders who offer loans for consolidating debt. In some cases, the application process can be completed online.

Credit Card Interest Calculator.

For example, say a borrower has $10,000 on a credit card, paying 20% in interest, and the minimum payment is 4%. If they pay the minimum statement balance each month, it would take 171 months, or 14 years and three months, to pay it back. It would cost a total of $6,989.36 in interest.

But if you consolidate that debt with a new loan that has an 8% interest rate and a 10-year term, you will pay $4,559.31 in interest. Not only would you save money in interest by consolidating your credit card debt, but you could potentially improve your credit score by paying back your consolidated loan on time.

Who is Eligible for a Personal Loan for Debt Consolidation?

Borrowers who have one or more sources of debt where the interest rate is higher than 10%, it may be worth exploring a personal loan. While there’s no guarantee that you’ll find a lower interest rate, you can’t know unless you get quotes from a few lenders. (And these days, it’s a pretty painless process because lenders often offer quotes online. If it proves difficult, find yourself a different lender.)

Those with the best credit scores will typically qualify for the best rates on their new personal loans, but don’t let an average or even low score keep you from requesting quotes. This is especially true if you have more than $10,000 in credit card debt and those cards charge exorbitant interest rates.

Also know that credit score isn’t the only data point that’ll be considered in determining whether someone qualifies for a loan and at what rate. Potential lenders typically also consider employment history and salary, and other financial information they deem important in determining loan-worthiness.

A personal loan isn’t for everyone. If you’re doing it only for convenience and there isn’t a legitimate financial motive, it’s probably not worth it. Instead, focus that energy on paying back the money you owe as efficiently as possible.

While personal loans can be a great tool to reduce interest payments, it doesn’t reduce the actual debt you owe. If you’re looking to get out of debt so you can focus on other financial goals, but the interest rates on your debt are making it nearly impossible, a personal loan could be helpful.

When Consolidating Debt Makes Sense

Which types of debt make the most sense to consolidate? Any debt that has high interest rates or unappealing terms. If the loan term is longer than you want it to be, if the interest rate is variable and you’d prefer fixed, if your loan is secured and you’d rather it not be attached to collateral—these are all reasons that might merit debt consolidation.

There are many loans to consolidate debt, but some may have their drawbacks. Make sure you shop around when looking for consolidation lenders, and only choose a reputable lender that you know you can trust.

Some people considering a personal loan feel overwhelmed by having multiple debt payments every month. A personal loan could lighten this load for two reasons. For one, it may be possible to lower the interest paid on the debt, which means it’s potentially possible to save money in interest over time.

Secondly, it can also make it possible to opt for a shorter term, which could mean paying off credit card debt years ahead of schedule. If it’s possible to get lower interest than you have on your current debt, or a shorter term on your debt to pay it off faster, a personal loan could be worth looking into.

On the other hand, you’ll also want to be careful about fees that might come with your new loan, separate from the interest rate you’ll pay. For example, some online lenders charge a fee just to take out a personal loan, and some don’t, so you’ll want to do your research.

Debt Consolidation for Student Loans

It’s possible to consolidate student loans like other forms of debt. Consolidating student loans with a private lender is often referred to as “refinancing.”

If you have only federal student loans, you can consolidate them with a Direct Consolidation Loan. This program allows borrowers to combine all their federal loan into a single, consolidated loan. The new interest rate is the weighted average of the existing loans, so it won’t result in a decreased interest rate. Direct Consolidation loans still qualify for many federal loan protections and programs.

Borrowers with both private and federal loans are able to roll them all into one refinanced loan with a private lender. Student loan refinancing could potentially allow you to qualify for a lower interest rate than the federal loan consolidation program.

The major drawback is that refinancing your federal loans with a private lender means you give up your federal student loan protections, including access to the income-driven repayment programs, deferment, and forbearance.

The Takeaway

Debt consolidation allows borrowers to combine a variety of debts, like credit cards, into a new loan. Ideally, this new loan has a lower interest rate or more preferable terms to help streamline the repayment process.

In the long term, debt consolidation could potentially help people spend less money over the life of the loan, if they are able to secure a lower interest rate on the consolidation loan.

One type of debt consolidation is student loan refinancing. This could help borrowers streamline their student loan repayment by consolidating debt into one loan. Depending on the terms and interest rates, borrowers could also spend less money in interest long-term.

Thinking about consolidating your debt or refinancing your student loans? SoFi loans can help you get there—and may save you money along the way.



SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
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Source: sofi.com

How Transferring a Balance Affects Your Credit Score

[DISCLOSURE: Cards from our partners are mentioned below.]

If you’re feeling weighed down by several credit card balances, credit card debt consolidation could provide some serious relief from your financial woes.

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Here’s how credit card consolidation works: You first decide if you want to take out a new loan, open a new credit card, or enroll in a debt management plan (more on that later). Whichever option you choose, you will use it to pay off your multiple balances.

Then you’ll only have one monthly payment: the loan, the credit card, or the debt management plan. Not only does that simplify your debt payments, but it can also help you save money by making you pay only one interest rate, rather than several.

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if you find an error, dispute it.

You can get your free annual credit report from each of the three major credit reporting agencies — TransUnion, Equifax, and Experian. And, Credit.com’s free credit report summary can help you understand what’s inside your credit report. It also provides you with a free credit score.

Once you know where your credit stands, you’ll have most of the information you’ll need to help you decide what credit card debt consolidation plan will work best for you.

2. Get to Know Your Options

There are several safe and smart ways to consolidate credit card debt, so you’ll want to research them before deciding what’s best for you. Some strategies will be more affordable than others, and your credit card consolidation choices may be limited by your credit standing.

Debt Consolidation Credit Cards

If you have good credit, look for a credit card with a low-interest rate. You can transfer high-interest rate credit card balances to a single card with a lower APR and save money on monthly finance charges as you pay down your debt.

For consumers with good credit, there are several credit card balance transfer, and low-interest rate credit card offers available. You may even qualify for a card with a 0% rate for 12 or 18 months.

Personal Debt Consolidation Loans

Personal loans charge simple interest (as opposed to credit cards, which often have variable rates and sometimes have different rates for a credit card balance transfer and purchases on the same card) and they typically have a loan repayment term of three to five years. By consolidating your credit card debt into a personal loan, you’ll have a definite plan for paying off your old card debt.

You may be able to consolidate your debt with a personal loan from your bank or credit union. But, before applying, be sure to ask about the lender’s credit requirements. Keep in mind that you’ll need excellent credit to qualify for the lowest interest rate on a personal loan.

Be sure to check out any potential online lenders with the Better Business Bureau before applying for a debt consolidation loan online. And you can verify if a lender is registered to do business in your state by contacting your state Attorney General’s office or your state’s Department of Banking or Financial Regulation.

Beware of any lender that promises to offer you a loan regardless of your credit. It’s also a good idea to stay clear of websites and lenders that charge you big upfront fees for a debt consolidation loan.

Debt Management

If you’re making little to no progress repaying or transferring balances or consider yourself to have a severe debt problem, then you may want to reach out to a reputable credit counseling agency or debt consolidation company. They can talk to you about a  debt management plan and other credit resources that may be available to you as a consumer to help pay off your debt.

With a debt management plan, you make one monthly payment to a credit counseling agency, and the agency pays each of your credit card lenders. A lender may lower the interest rate on your credit card balance when you participate in a debt management plan. Debt management plans typically last three to five years.

3. Do the Math

Credit card debt consolidation may save you money, but it’s often not free. Credit cards may have a balance transfer fee, so you’ll want to make sure that cost doesn’t outweigh the potential benefit of getting a lower interest rate on your debt.

Promotional interest rates expire — like 12 months of a 0% APR on a balance transfer card — so make sure you can repay your debt within that time frame. Otherwise you may not be saving any money at all.

The same goes for debt consolidation loans. Ask about any loan origination fees, and make sure the loan payment amount is something that easily fits into your budget. Failing to pay a personal loan as agreed will hurt your credit, so stay on top of your loan payments and work to build up a solid payment history.

No matter what credit card consolidation options you’re considering, be sure to ask about any fees you may have to pay and factor those numbers into your decision.

4. Don’t Forget About Your Credit Scores

Credit card consolidation can affect your credit in many ways, depending on which strategy you choose. For example, if you’re consolidating multiple balances onto one credit card, you’ll want to avoid maxing out that card’s credit limit because that will hurt your credit utilization rate (how much debt you’re carrying compared to your total credit limit).

You also may not want to close your old credit cards, as this can potentially ding your credit scores as well. By keeping your old credit cards open, you will not lower your credit utilization. Your credit utilization counts toward 30% of your credit score, and that’s why it’s important to keep that ratio low — under 30% and, optimally, less than 10% of your credit limits, overall and on individual cards.

Keep in mind a debt management plan may have a negative impact on your credit during the course of the program because your creditors will close or suspend your accounts while in the program, and this can affect your credit utilization.

Therefore, make sure you are ready to live credit card free for a while. (Not every creditor has to participate, so you may be able to keep a credit card out of the debt management plan if you need it to remain open for travel or business purposes, for example.)

Once you complete your plan, some of your creditors may re-establish your credit based on your new, debt-free status and the on-time payment history you established through the course of the debt management plan.

Other ways credit card consolidation can hurt your credit include applying for a new line of credit which will result in a hard inquiry on your credit report, adding a new credit account that can lower the average age of your credit history, and getting a new personal loan. All of these things will show that you have a high level of outstanding debt (your scores should improve as your remaining balance shrinks from where it started).

There are credit score perks, too. Adding a personal loan to your credit history can improve your mix of accounts (it’s good to have a combination of installment and revolving credit, like credit cards).

And if you make your credit card or loan payments as agreed, you’ll establish a positive payment history, which affects your credit scores more than anything else. (Payment history accounts for 35% of traditional credit scoring models.)

5. Commit to the Plan

Transferring credit card balances, paying off credit cards with a personal loan, or enrolling in a debt management plan are only the beginning steps of credit card debt consolidation.

For it to truly help you get out of debt, you have to stick to the plan, whether that’s paying off your credit card balance within a 12-month promotional financing period or making sure you make payments as agreed for the entire five-year loan term.

Throughout the process, you can keep tabs on how your credit card consolidation plan is affecting your credit by reviewing your free annual credit reports and viewing your free credit score on Credit.com

Lucy Lazarony contributed to this article.

Source: credit.com

Save Money and Time With a Loan From LendingClub

When you need a loan, finding one — and getting approved — can bring as much anxiety as the thing you need the loan for. Whether it’s for debt consolidation, medical expenses or big home projects, waiting weeks just won’t cut it. On top of it all, big banks may charge you insane rates after making you jump through qualification hoops.

There’s another option, though. If you need to borrow up to $40,000, a website called Fiona can help you get a loan through a company called LendingClub. You can save an average of $1,000 on interest payments1, plus, you could get your money in only a few days — talk about relief!

Fiona will also show you additional offers from other lenders — because comparing your quotes can help you save even more money in the long run.

How to Borrow up to $40,000 and Pay Off Debt Faster

Getting started is simple. The application process only takes a few minutes, and you’ll see your loan offers immediately. Once you choose your loan, you could see your money in just a few days.

It costs nothing to apply, and it won’t affect your credit score, either. And by the way, your information is totally safe — the website uses higher encryption security than many banks.

Interest rates with LendingClub start at 8.05% — way better than the 20% or more your credit card is charging you — and many people may actually improve their credit scores when they take out a personal loan and make their payments on time each month. These lower rates can save you an average of $1,000 in interest payments and help you pay off your debt faster.

If you have a credit score above 600 and need a loan, let Fiona find your offers in only a couple of minutes. You can get approved and see your money in just a few days.

1 On average, personal loans from LendingClub Bank are projected to be offered at an APR of 15.99% (based on loan approval amounts in aggregate) with an origination fee of 5.30% and a principal amount of $13,411 for loans with term lengths of 36 months, based on current credit criteria and an analysis of historical borrower data between September 2020 and October 2020. For credit card purchases made in October 2020, the average APR was 20.23%, according to publicly available information published by TheBalance.com. If you pay off a credit card balance of $12,700 with an APR of 20.23% over 36 equal monthly payments, you will pay $4,345 in total finance charges. If you obtain a loan with a term of 36 months and an amount financed of $12,700 (principal amount of $13,411 with an origination fee of $711) at 15.99% APR, you will pay $3,372 in total finance charges over the term of the loan, a savings of $973 as compared to the average credit card.

Source: thepennyhoarder.com

Understanding How Student Loan Consolidation Works

Student loan consolidation works similarly to other types of debt consolidation. Borrowers can combine multiple student loans into one new loan with new terms and a new interest rate.

The amount you borrow for the new loan covers the principal balance on all of the student loans you consolidated. You’ll have just one bill to pay to one lender, as opposed to making multiple payments to different lenders each month.Two types of student loan consolidation include Direct Consolidation loans and student loan refinancing.

Federal student loans can be consolidated through the Direct Loan program. This allows borrowers to combine different federal loans into a single, consolidated, loan. The new interest rate is a weighted average of all your federal loan rates, rounded to the nearest eighth of a percent.

Student loan refinancing is an option available for private and federal loans. Refinancing also allows borrowers to streamline their repayment with a single lender and qualifying borrowers could secure a more competitive interest rate. However, federal loans are eliminated from federal benefits and protections when they are refinanced.

Read on for more information on student loan consolidation.

Why would you consolidate federal student loans?

Borrowers with federal student loans generally have the option to consolidate their federal loans through the Direct Consolidation Loan program. Typically, consolidating your student loans through this program gives you a single loan at a fixed interest rate that is guaranteed throughout the life of your loan.

If you have multiple federal student loans from different loan servicers, consolidation could simplify your student loan repayment plan. Borrowers are eligible to consolidate their federal student loans once they graduate or leave school, or if they are enrolled in school less than part-time.

Consolidation also allows borrowers to change the duration of their student loan. For example, you may start off with a 10-year payment plan, but when you consolidate you might choose to change the life of your loan. Consolidating isn’t the only way for federal student loan borrowers to change the repayment plans they are enrolled in. Borrowers with federal student loans are able to adjust the repayment terms on their loans, at any time without incurring a fee.

Private student loans are not eligible for consolidation through the Direct Consolidation Loan program, but private lenders do offer student loan refinancing. Refinancing can allow borrowers to consolidate their debt by combining all of their loans into a single loan.

How do you consolidate federal student loans?

Federal student loan borrowers interested in consolidating their federal loans into a Direct Consolidation loan can apply online or by mail, and there are no fees for applying.

There are a few cases where borrowers are ineligible, but for the most part, this option is available to those who are currently in the process of repaying their federal student loans.

When choosing to consolidate student loans with a Direct Consolidation Loan, borrowers may choose a new repayment plan that extends the life of the new loan up to 30 years.

Borrowers can typically select any of the federal repayment plans, which include a standard repayment plan with fixed monthly payments, a Graduated plan with graduated payments that increase over time, and income-driven repayment plans. Direct Consolidation Loans are still eligible for federal loan forgiveness programs such as Public Service Loan Forgiveness.

Possible Drawbacks of Student Loan Consolidation

While federal student loan consolidation can potentially give you a lower monthly payment, borrowers could end up paying more in interest over the life of the loan if they extend their repayment timeline. In some cases, lower monthly payments now can mean an extra year or two of repayment later.

If you want a lower monthly payment without making extra payments, refinancing your student loans with a private lender could be an option to consider.

While refinancing with a private lender means you lose all the benefits and protections offered for federal student loans, qualifying borrowers could secure a more competitive interest rate, thereby lowering how much interest owed over the life of the loan.

Most importantly, if you work in a public service field, as a teacher or social worker, for instance, student loan refinancing will also cancel out some federal student loan repayment benefits you can get through the Public Service Loan Forgiveness (PSLF) program.

Can you consolidate all your student loans when you have private loans?

With federal student loan consolidation, you can only consolidate federal student loans. No private student loans can be consolidated into a Direct Consolidation Loan.

If you have private student loans, one way to consolidate those student loans is to refinance. Both federal and private student loans can be refinanced into one new loan.

Essentially, with refinancing, a private lender gives you a new loan (which is used to pay off your private and federal student loan balances), and then you just have to pay back that one loan.

Not only can this combine multiple student loans into one single loan, but also you may qualify for a lower interest rate depending on many personal financial factors, including your credit score. Refinancing at a lower interest rate may reduce the money you spend in interest over the life of your loan.

What is the difference between consolidating and refinancing student loans?

Programs like the federal Direct Consolidation Loan do exactly what they say: consolidate all of your federal student loans into one loan.

But you might not actually save on interest payments, because the new loan is a weighted average of your old interest rates, slightly rounded up. So your average interest rate will likely be slightly higher than what you paid before.

In contrast, refinancing student loans with a private lender could result in a lower interest rate for qualifying borrowers. And unlike the federal loan consolidation program, it is possible to refinance both federal and private student loans.

When you refinance with a private lender, you’ll lose the borrower-friendly benefits that federal student loans have, like income-driven repayment plans, or deferment, forbearance, and loan forgiveness programs. These borrower protections include the emergency relief measures enacted as a result of the COVID-19 pandemic. These protections, currently sent to expire at the end of September 2021 , have temporarily set interest rates on all federal loans at 0% and paused payments on federal loans.

Be sure you review any and all of the special features of your loans before committing to any changes.

The Takeaway

Student loan consolidation allows borrowers to combine their existing student loans into a new loan. For federal loans, this can be done through the Direct Consolidation loan program. Refinancing is a similar process, where a borrower pays off their existing student loans and borrows a new loan with a private lender. The interest rate on this new loan is determined by the lender based on factors like the borrower’s credit score and history.

Refinancing to a lower interest rate could help borrowers spend less money in interest over the life of their loan.

Considering refinancing your student loans? Learn more about student loan refinancing and see why it may be a smart option for you.



IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SLR17108

Source: sofi.com

10 common money myths debunked – Lexington Law

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Personal finance can be a complicated topic. People don’t often openly discuss personal finance, so it’s hard to know if you’re holding onto some incorrect money beliefs. And yet, understanding financial matters is crucial. Personal finance knowledge empowers you to better manage your finances and understand your options. It also helps ensure other people can’t take advantage of your lack of information. 

Luckily, if you don’t have a money expert in your life to discuss these matters with, you can find answers online. This is a great place to start. Keep reading to learn about these 10 common money myths. 

1. Credit cards are too risky to use

This first myth is heavily debated in the personal finance community. You’ll find many people standing behind the statement that credit cards are too risky to use. In fact, famous American radio host and finance advisor Dave Ramsey tells his viewers they should cut credit cards out of their lives. But while Ramsey has helped thousands of people get out of debt and does excellent work, we disagree with him on this point.

Let’s set the record straight: Credit cards can be a good thing as long you’re careful with them and understand the factors that impact your score. When used responsibly, a credit card can improve your score, which will open the door to many other opportunities. A great credit score means you can get better interest rates and be approved for auto loans, mortgages, personal loans and much more. 

Additionally, many credit cards offer benefits such as cash back, gift cards or travel points. If you use your credit card responsibly and never pay interest, these are free benefits you can take advantage of. 

Of course, you can only reap these benefits if you pay your credit card in full and on time. Racking up debt, missing payments or making late payments will all lower your credit score.

Those who are anti-credit cards fail to touch on what happens when you don’t have a credit card. Unfortunately, if you don’t have one, you may not have a very detailed credit history. And if you have a thin credit history, you’ll have trouble getting approved for items most people need, such as a rental lease, a mortgage or an auto loan. 

That’s why it’s recommended you get a credit card early on and start building your credit history. This will also help you establish responsible spending habits at an early age, which means as you get more credit later in life, you’ll know how to handle it without being tempted to spend beyond your means. 

If you’re not sure you can be responsible with your credit card, start with a low credit card limit or a secured credit card. This allows you to start small without risking significant debt. 

2. Bankruptcy wipes the slate clean

Bankruptcy may seem like a clean, fresh start, but in reality, it’s only one option. You should never have bankruptcy as your first solution. In fact, you should do everything in your power to avoid filing for bankruptcy. 

Bankruptcy has hugely negative consequences on your credit history and immediate financial opportunities. Depending on what type of bankruptcy you file (Chapter 7 versus Chapter 13), it can stay on your credit report for seven to 10 years. This will make acquiring any type of financial services (loans, credit cards, rental leases, etc.) extremely difficult. 

Additionally, you don’t actually get to escape all your debt. Many people assume bankruptcy will wipe all their debts away with one bankruptcy filing, but this isn’t the case. Bankruptcy is meant to help people in a dire financial situation come to terms with their debts.

The situation is evaluated on a case-by-case basis. Some people’s debt is restructured and they still need to continue with (reduced) payments. Some people will have their debts discharged, but certain debts can’t go away. 

The following debts typically can’t be discharged:

  • Child support and alimony
  • Some specific types of unpaid taxes, like tax liens (but if the delinquent taxes are several years old, they might qualify for discharge) 
  • Debts that caused malicious, willful injury to a person or a person’s property
  • Debts for personal injury or death caused by an individual operating a vehicle under the influence of drugs or alcohol
  • Debts that are not mentioned in the bankruptcy filing

And while student loans can be discharged in a bankruptcy filing, it’s quite challenging to do so and requires that the borrower files an “adversary proceeding.” 

Also, note that a bankruptcy filing usually results in the liquidation of your nonexempt assets, so you can lose your home, cars and other valuables, making starting over very challenging. 

Clearly, a bankruptcy filing isn’t a no-strings-attached new start. You may end up damaging your credit history for years to come, losing your assets and still having to pay many of your debts. 

Make sure you explore your options before turning to a bankruptcy filing. There are solutions out there, such as debt consolidation and debt counseling. Being in significant debt doesn’t mean you can’t get out of it—which we’ll elaborate on later in this article. 

3. Investing is only for the wealthy

There is a popular misconception that only the wealthy can invest. This simply isn’t true. Anyone can invest—there are many ways to invest and many options to suit all budgets. 

Most importantly, everyone should invest. It’s essential to start thinking about your retirement as soon as possible. Without adequate retirement savings, you could be forced to work late into your life.

Take advantage of compound interest and start investing in your 401(k) account as early as possible. If your employer offers contribution matching, make sure you max it out, as this is free money. 

The market is one of the best long-term ways to grow your money. Sure, the stock market has many ups and downs throughout the years. But if you’re investing over the course of years or even decades, the stock market is a great way to see consistent returns. The average stock market return for the last century has been almost 10 percent per year. 

If you start contributing $50 per month with an expected annual return of 10 percent, you’ll have around $114,000 in 30 years. And that number will only go up if you increase your contributions.

4. It’s impossible to get out of debt

If you have a significant amount of debt, it can feel like it’s impossible to make any progress. Getting out of debt is possible, though it will take time and effort. It won’t happen overnight, but with consistent hard work, you can see that debt disappear. 

People feel they can’t get out of debt because they don’t know where to start. You should explore your options online and find a debt relief solution that works for you. 

Some of the debt solutions available include:

  • Reaching out to your creditor for help: Your creditor may forgive a portion of your debt or offer you a new debt payment plan with a more manageable payment schedule or interest rate.
  • Debt consolidation: You could find a creditor to consolidate all your debts into one loan. This loan is usually at a lower interest rate than all your other debts, and payments are more manageable since you only make one payment per month. 
  • Credit card balance transfer: If you have credit card debt, you can consider transferring your balance to a new card. Companies often promote a balance transfer with a zero percent interest rate for a few months. You can use this zero percent interest period to make a real dent in your principal. 
  • Debt counseling: Visit a debt counselor who will walk you through all your options. They’ll evaluate your situation and present you with a clear plan for getting out of debt. 

5. Buying a house is always better than renting

It’s pretty common for people to have a goal to eventually buy a home. This is a great milestone to look forward to, but it’s essential to only take the jump into homeownership when you’re financially ready. 

Renting is often a better choice for people when they’re younger as it allows for more flexibility in life. When you rent, you have options such as:

  • Easily moving to another region or city when you need lower rent
  • Moving in with roommates when you need to lower your rent
  • Accepting jobs or opportunities in other cities without being tied down by a house or a mortgage

Some experts even argue that your money will perform better in the stock market than an investment in property (although this can vary greatly depending on your local housing market). 

Homeownership also comes with many additional costs that people often forget about. These include property taxes, utility bills, home repairs and home upkeep. Instead, it may be better to rent while you’re young and start saving for a significant down payment that will reduce your mortgage costs in the future. 

6. Paying in cash is best

Paying in cash can be good at times, but it also means you don’t have all the protections that come with using a credit card. When you pay with a credit card, you leave an electronic trail of the record. So, if you pay for something up front, a vendor can’t claim they didn’t receive the payment. You also often receive additional benefits such as extended warranties, additional travel insurance and more. 

Secondly, paying for everything in cash doesn’t help your credit score. Your credit score will increase as you continue to pay for things via credit and pay them off in full and on time. This consistent record of responsible money management will help you secure lower interest rates and approvals on other financial products in the future.

Lastly, paying for items in cash doesn’t make your money “work for you.” Whenever possible, you want to get more for your money. Paying by credit card often gets you cash back or points toward something you would have paid money for anyway. 

You should consider opting for cash payments if you’re irresponsible with credit cards or you receive a discount on the item or service for paying in cash. Otherwise, it might not be best.

7. Budgeting isn’t necessary if you watch your finances

Budgeting can help anyone at any income level. Even if you check your finances, you may just be checking for signs of fraud, but you’re not taking in the full picture of where your money is going. For example, reviewing your budget and seeing your $5 coffee purchase three times a week may look perfectly normal. However, a budget will start to highlight that you’re spending $780 on to-go coffee annually, which may encourage you to change this habit. 

Budgeting can also help you prepare for the future. You can use a budget to save up for future goals, such as a down payment or a car. Or, you can also use your budget to save up for an emergency fund. 

Luckily, there are plenty of tools available today that make budgeting a lot easier. Financial apps like YNAB (You Need a Budget) and Mint sync up to all your bank accounts and work as an automated budgeting tool. You can put in your spending and saving targets and the app will do all the work for you. It will alert you when you’re overspending, track your progress toward goals and even make recommendations for improvements. 

Budgeting doesn’t have to be hard. Once you set it up, a budget can help you gain control of your money and your financial situation. 

8. You should cancel credit cards you aren’t using

It’s understandable why so many people believe that if they aren’t using a credit card, they should cancel it. Technically, that logic makes sense as an additional credit card may seem like an unnecessary temptation to get into more debt or another opportunity to lose a card and risk identity theft. 

In reality, you should hold onto those credit cards. Closing credit cards usually decreases your credit score because it affects your credit utilization ratio and credit age. Both factors are significant contributors to your credit score. 

First, let’s discuss the impact on your credit utilization ratio. Let’s say you have three credit cards: two with a $3,000 limit and one with a $10,000 limit. Typically, you spend $3,000 a month on all your credit card expenses, and you pay it off in full. That means that out of the $16,000 credit available to you, you utilize $3,000, which is around 18 percent. 

Your credit utilization ratio should be under 30 percent to avoid a negative impact on your score, so your 18 percent is not causing any problems. Now, let’s say you choose to close that $10,000 card. Now, you’re spending $3,000 out of the $6,000 available to you in a month. You’ve increased your credit utilization from 18 percent to 50 percent, which is considered bad and will lower your credit score. 

Additionally, credit age is another thing to consider. If you can keep your first credit card open (even if you don’t use it), it lengthens your credit age. This positively impacts your credit score because lenders have access to more years of data on you. 

Ensure you consider both of these factors before deciding to close a credit card. 

9. You can wait to save for retirement

When you’re young, retirement can feel like it’s so far away. Many people therefore put off saving for retirement, not realizing the impact it will have on their future. 

As we’ve mentioned before, compounding interest is your friend. And, the earlier you start saving, the more of an impact compound interest can have.

Let’s look at someone who starts saving $50 a month at age 20 versus age 30. Assuming an annual 10 percent return from the stock market, the 20-year-old will have about $319,000 when they turn 60. In comparison, the 30-year old will have about $114,000 by the time they’re 60. Even though the 30-year-old only missed out on $6,000 worth of contributions over the 10-year gap, their earnings end up being more than $200,000 less than those of someone who started 10 years earlier. 

Even if you can only afford to put aside $10 or $20 a month, it’s crucial to start as early as possible. 

10. Credit repair services are a scam

If you have terrible credit, you might not know how to fix it. That’s why there are credit repair services available to help. Some people think credit repair services are a scam because they technically provide services you could do yourself, but this is far from the case. 

First, a credit repair service company has the experience and knowledge you don’t have. For example, submitting a claim to dispute something on your credit report can be tricky. You only have one opportunity to get the claim reviewed (unless new information surfaces), so you want to make sure you have the best chance of it being approved. A credit repair company knows what the credit reporting agencies look for when considering a dispute. 

Secondly, a credit repair company will take the time to scan and review all your credit reports for errors. You probably don’t have the time to do this thoroughly, so you turn to credit repair services that will go through this process for you. 

That’s not to say credit repair scams don’t exist, because they do. It’s essential to educate yourself on what these scams look like so you can avoid them. Additionally, credit repair companies are held to federal regulations, so if you are scammed, you can report the company. Though there are illegitimate companies, there are also many legitimate companies—you just need to know what to look for. Reach out to Lexington Law to learn more about legal credit repair practices.

The main takeaway from digging into all of these myths is that you should always do your research and not let financial misinformation rule your life. As you educate yourself, you are empowered to control your finances and your future. 


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

10 common money myths debunked

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Personal finance can be a complicated topic. People don’t often openly discuss personal finance, so it’s hard to know if you’re holding onto some incorrect money beliefs. And yet, understanding financial matters is crucial. Personal finance knowledge empowers you to better manage your finances and understand your options. It also helps ensure other people can’t take advantage of your lack of information. 

Luckily, if you don’t have a money expert in your life to discuss these matters with, you can find answers online. This is a great place to start. Keep reading to learn about these 10 common money myths. 

1. Credit cards are too risky to use

This first myth is heavily debated in the personal finance community. You’ll find many people standing behind the statement that credit cards are too risky to use. In fact, famous American radio host and finance advisor Dave Ramsey tells his viewers they should cut credit cards out of their lives. But while Ramsey has helped thousands of people get out of debt and does excellent work, we disagree with him on this point.

Let’s set the record straight: Credit cards can be a good thing as long you’re careful with them and understand the factors that impact your score. When used responsibly, a credit card can improve your score, which will open the door to many other opportunities. A great credit score means you can get better interest rates and be approved for auto loans, mortgages, personal loans and much more. 

Additionally, many credit cards offer benefits such as cash back, gift cards or travel points. If you use your credit card responsibly and never pay interest, these are free benefits you can take advantage of. 

Of course, you can only reap these benefits if you pay your credit card in full and on time. Racking up debt, missing payments or making late payments will all lower your credit score.

Those who are anti-credit cards fail to touch on what happens when you don’t have a credit card. Unfortunately, if you don’t have one, you may not have a very detailed credit history. And if you have a thin credit history, you’ll have trouble getting approved for items most people need, such as a rental lease, a mortgage or an auto loan. 

That’s why it’s recommended you get a credit card early on and start building your credit history. This will also help you establish responsible spending habits at an early age, which means as you get more credit later in life, you’ll know how to handle it without being tempted to spend beyond your means. 

If you’re not sure you can be responsible with your credit card, start with a low credit card limit or a secured credit card. This allows you to start small without risking significant debt. 

2. Bankruptcy wipes the slate clean

Bankruptcy may seem like a clean, fresh start, but in reality, it’s only one option. You should never have bankruptcy as your first solution. In fact, you should do everything in your power to avoid filing for bankruptcy. 

Bankruptcy has hugely negative consequences on your credit history and immediate financial opportunities. Depending on what type of bankruptcy you file (Chapter 7 versus Chapter 13), it can stay on your credit report for seven to 10 years. This will make acquiring any type of financial services (loans, credit cards, rental leases, etc.) extremely difficult. 

Additionally, you don’t actually get to escape all your debt. Many people assume bankruptcy will wipe all their debts away with one bankruptcy filing, but this isn’t the case. Bankruptcy is meant to help people in a dire financial situation come to terms with their debts.

The situation is evaluated on a case-by-case basis. Some people’s debt is restructured and they still need to continue with (reduced) payments. Some people will have their debts discharged, but certain debts can’t go away. 

The following debts typically can’t be discharged:

  • Child support and alimony
  • Some specific types of unpaid taxes, like tax liens (but if the delinquent taxes are several years old, they might qualify for discharge) 
  • Debts that caused malicious, willful injury to a person or a person’s property
  • Debts for personal injury or death caused by an individual operating a vehicle under the influence of drugs or alcohol
  • Debts that are not mentioned in the bankruptcy filing

And while student loans can be discharged in a bankruptcy filing, it’s quite challenging to do so and requires that the borrower files an “adversary proceeding.” 

Also, note that a bankruptcy filing usually results in the liquidation of your nonexempt assets, so you can lose your home, cars and other valuables, making starting over very challenging. 

Clearly, a bankruptcy filing isn’t a no-strings-attached new start. You may end up damaging your credit history for years to come, losing your assets and still having to pay many of your debts. 

Make sure you explore your options before turning to a bankruptcy filing. There are solutions out there, such as debt consolidation and debt counseling. Being in significant debt doesn’t mean you can’t get out of it—which we’ll elaborate on later in this article. 

3. Investing is only for the wealthy

There is a popular misconception that only the wealthy can invest. This simply isn’t true. Anyone can invest—there are many ways to invest and many options to suit all budgets. 

Most importantly, everyone should invest. It’s essential to start thinking about your retirement as soon as possible. Without adequate retirement savings, you could be forced to work late into your life.

Take advantage of compound interest and start investing in your 401(k) account as early as possible. If your employer offers contribution matching, make sure you max it out, as this is free money. 

The market is one of the best long-term ways to grow your money. Sure, the stock market has many ups and downs throughout the years. But if you’re investing over the course of years or even decades, the stock market is a great way to see consistent returns. The average stock market return for the last century has been almost 10 percent per year. 

If you start contributing $50 per month with an expected annual return of 10 percent, you’ll have around $114,000 in 30 years. And that number will only go up if you increase your contributions.

4. It’s impossible to get out of debt

If you have a significant amount of debt, it can feel like it’s impossible to make any progress. Getting out of debt is possible, though it will take time and effort. It won’t happen overnight, but with consistent hard work, you can see that debt disappear. 

People feel they can’t get out of debt because they don’t know where to start. You should explore your options online and find a debt relief solution that works for you. 

Some of the debt solutions available include:

  • Reaching out to your creditor for help: Your creditor may forgive a portion of your debt or offer you a new debt payment plan with a more manageable payment schedule or interest rate.
  • Debt consolidation: You could find a creditor to consolidate all your debts into one loan. This loan is usually at a lower interest rate than all your other debts, and payments are more manageable since you only make one payment per month. 
  • Credit card balance transfer: If you have credit card debt, you can consider transferring your balance to a new card. Companies often promote a balance transfer with a zero percent interest rate for a few months. You can use this zero percent interest period to make a real dent in your principal. 
  • Debt counseling: Visit a debt counselor who will walk you through all your options. They’ll evaluate your situation and present you with a clear plan for getting out of debt. 

5. Buying a house is always better than renting

It’s pretty common for people to have a goal to eventually buy a home. This is a great milestone to look forward to, but it’s essential to only take the jump into homeownership when you’re financially ready. 

Renting is often a better choice for people when they’re younger as it allows for more flexibility in life. When you rent, you have options such as:

  • Easily moving to another region or city when you need lower rent
  • Moving in with roommates when you need to lower your rent
  • Accepting jobs or opportunities in other cities without being tied down by a house or a mortgage

Some experts even argue that your money will perform better in the stock market than an investment in property (although this can vary greatly depending on your local housing market). 

Homeownership also comes with many additional costs that people often forget about. These include property taxes, utility bills, home repairs and home upkeep. Instead, it may be better to rent while you’re young and start saving for a significant down payment that will reduce your mortgage costs in the future. 

6. Paying in cash is best

Paying in cash can be good at times, but it also means you don’t have all the protections that come with using a credit card. When you pay with a credit card, you leave an electronic trail of the record. So, if you pay for something up front, a vendor can’t claim they didn’t receive the payment. You also often receive additional benefits such as extended warranties, additional travel insurance and more. 

Secondly, paying for everything in cash doesn’t help your credit score. Your credit score will increase as you continue to pay for things via credit and pay them off in full and on time. This consistent record of responsible money management will help you secure lower interest rates and approvals on other financial products in the future.

Lastly, paying for items in cash doesn’t make your money “work for you.” Whenever possible, you want to get more for your money. Paying by credit card often gets you cash back or points toward something you would have paid money for anyway. 

You should consider opting for cash payments if you’re irresponsible with credit cards or you receive a discount on the item or service for paying in cash. Otherwise, it might not be best.

7. Budgeting isn’t necessary if you watch your finances

Budgeting can help anyone at any income level. Even if you check your finances, you may just be checking for signs of fraud, but you’re not taking in the full picture of where your money is going. For example, reviewing your budget and seeing your $5 coffee purchase three times a week may look perfectly normal. However, a budget will start to highlight that you’re spending $780 on to-go coffee annually, which may encourage you to change this habit. 

Budgeting can also help you prepare for the future. You can use a budget to save up for future goals, such as a down payment or a car. Or, you can also use your budget to save up for an emergency fund. 

Luckily, there are plenty of tools available today that make budgeting a lot easier. Financial apps like YNAB (You Need a Budget) and Mint sync up to all your bank accounts and work as an automated budgeting tool. You can put in your spending and saving targets and the app will do all the work for you. It will alert you when you’re overspending, track your progress toward goals and even make recommendations for improvements. 

Budgeting doesn’t have to be hard. Once you set it up, a budget can help you gain control of your money and your financial situation. 

8. You should cancel credit cards you aren’t using

It’s understandable why so many people believe that if they aren’t using a credit card, they should cancel it. Technically, that logic makes sense as an additional credit card may seem like an unnecessary temptation to get into more debt or another opportunity to lose a card and risk identity theft. 

In reality, you should hold onto those credit cards. Closing credit cards usually decreases your credit score because it affects your credit utilization ratio and credit age. Both factors are significant contributors to your credit score. 

First, let’s discuss the impact on your credit utilization ratio. Let’s say you have three credit cards: two with a $3,000 limit and one with a $10,000 limit. Typically, you spend $3,000 a month on all your credit card expenses, and you pay it off in full. That means that out of the $16,000 credit available to you, you utilize $3,000, which is around 18 percent. 

Your credit utilization ratio should be under 30 percent to avoid a negative impact on your score, so your 18 percent is not causing any problems. Now, let’s say you choose to close that $10,000 card. Now, you’re spending $3,000 out of the $6,000 available to you in a month. You’ve increased your credit utilization from 18 percent to 50 percent, which is considered bad and will lower your credit score. 

Additionally, credit age is another thing to consider. If you can keep your first credit card open (even if you don’t use it), it lengthens your credit age. This positively impacts your credit score because lenders have access to more years of data on you. 

Ensure you consider both of these factors before deciding to close a credit card. 

9. You can wait to save for retirement

When you’re young, retirement can feel like it’s so far away. Many people therefore put off saving for retirement, not realizing the impact it will have on their future. 

As we’ve mentioned before, compounding interest is your friend. And, the earlier you start saving, the more of an impact compound interest can have.

Let’s look at someone who starts saving $50 a month at age 20 versus age 30. Assuming an annual 10 percent return from the stock market, the 20-year-old will have about $319,000 when they turn 60. In comparison, the 30-year old will have about $114,000 by the time they’re 60. Even though the 30-year-old only missed out on $6,000 worth of contributions over the 10-year gap, their earnings end up being more than $200,000 less than those of someone who started 10 years earlier. 

Even if you can only afford to put aside $10 or $20 a month, it’s crucial to start as early as possible. 

10. Credit repair services are a scam

If you have terrible credit, you might not know how to fix it. That’s why there are credit repair services available to help. Some people think credit repair services are a scam because they technically provide services you could do yourself, but this is far from the case. 

First, a credit repair service company has the experience and knowledge you don’t have. For example, submitting a claim to dispute something on your credit report can be tricky. You only have one opportunity to get the claim reviewed (unless new information surfaces), so you want to make sure you have the best chance of it being approved. A credit repair company knows what the credit reporting agencies look for when considering a dispute. 

Secondly, a credit repair company will take the time to scan and review all your credit reports for errors. You probably don’t have the time to do this thoroughly, so you turn to credit repair services that will go through this process for you. 

That’s not to say credit repair scams don’t exist, because they do. It’s essential to educate yourself on what these scams look like so you can avoid them. Additionally, credit repair companies are held to federal regulations, so if you are scammed, you can report the company. Though there are illegitimate companies, there are also many legitimate companies—you just need to know what to look for. Reach out to Lexington Law to learn more about legal credit repair practices.

The main takeaway from digging into all of these myths is that you should always do your research and not let financial misinformation rule your life. As you educate yourself, you are empowered to control your finances and your future. 


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com