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Debt reduction strategy: trading down the auto

Tuesday, March 3rd, 2009

Dumping the hot wheels for a sane ride can be part of a debt reduction strategy.

We’ve argued that housing debt should be treated as a cost, not an investment. Whether or not there’s debate regarding housing debt (mortgages), vehicles are crystal clear: they are depreciable assets and should be viewed as costs. As costs, they can be cut and/or eliminated as part of a debt reduction strategy.

Trade down your car to free up cash for debt elimination

The cost of delaying payments to reduce debt held at sky-high interest rates is enormous. Trading down a car to acquire some instant cash for debt elimination is one of the best excuses to throw in the towel on the luxury wheels.

Your vehicle is under threat of repossession: trouble with the auto loan lender

If you’re behind on payments for a car that you purchased, then before giving up the vehicle, contact your auto loan lender and try to renegotiate to new terms for reduced monthly payments. With weak demand for new and used cars right now, the auto loan lender may have a significant disincentives to take on additional stock, so they may be willing to talk. The worst case is to surrender a vehicle that you hold ownership over to an auto loan lender, since you lose the opportunity to recover some of its value through selling it. Cash recovered through an auto loan lender from a financed car can be used to buy a no-frills commuter car outright, or better yet, for payments towards debt elimination. Picking up copies of the public transit routes in your area can reveal some surprising options for getting to and from work, negating the need for an auto altogether. The one thing to avoid is spending any freed up cash on non-essentials.

Not behind on payments and still want to get rid of the car?

If you want to free up cash from a car and carry debt, make sure to evaluate all of your transportation options to get to and from work. Also, make sure to take into consideration the total cost of trading down the car. If you opt to replace the car with a more modest vehicle, make sure to understand not only the price of the replacement, but also the reliability, fuel economy, and choose one with a relatively low total cost of ownership for its remaining lifespan. Plan on keeping this car as long as is financially reasonable, i.e. until the cost of maintenance and ownership reaches a level that is too high to justify continued possession.

Trading down a car can be problematic.

While the upside to trading down from an expensive car to a modest one can seem obvious for a debt reduction strategy, make sure that it is the right move financially-speaking. For example, trading down to gain a couple of miles per gallon in fuel efficiency is rarely worth the total cost of switching vehicles unless you log huge miles. Also, to make the trade down financially sensible, the replacement vehicle has to be enough of a difference in price in order to justify the switching costs. Understand the difference between the current and new monthly cost of ownership, maintenance, and driving. If the difference in insignificant, or if it is minimal, continue with your current car and think about other ways to beef up your debt reduction strategy. In short, evaluate all of your options clearly, understand the new costs of ownership and maintenance beyond just the purchase price, and take seriously the possibility of getting to and from work on public transportation – at least on a temporary basis. The DebtGoal product offers a number of easy-to-use actions that allows one to quickly form and execute a debt reduction strategy.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Tags: auto debt elimination, auto debt strategy, auto trade down debt, car debt elimination, car debt strategy, car trade down debt, debt, debt elimination, Debt Management, debt plan, debt reduction
Posted in Debt Management, Paying Down Debt, Saving | View Comments

Can Credit Card Reward Plans Hinder Your Financial Picture?

Saturday, February 28th, 2009

Credit card reward plans need to be evaluated carefully to determine if they are a blessing or a curse for building solid financial health.

Credit Card reward plans can tempt one to choose the wrong credit card because they encourage spending.

But that doesn’t make reward credit cards wrong for everyone, especially someone who does not succumb to such temptation. The factors that should be considered when deciding on credit card reward plans include: the “real” cash back percentage, caps on earning points, points expiration, annual fees, and the complexity of point redemption. The best way to pay off a credit card involves a comprehensive strategy that addresses one’s temptations to spend, so carefully evaluate credit card reward plans, starting from the point that most likely they will not be a suitable tool to help improve one’s overall financial health, if not eliminate debt.

The “Real” Cash Back Percentage

While many card offers declare “5% cash back”, in reality those are oftentimes only for specific types of purchases, or even companies. Many of these reward credit cards, when used for a wide basket of goods and services, only average a cash back rate of 1%, which is a more typical percentage amongst all cash back credit cards.

Caps on Earning Points

Point caps can run anywhere from a couple of hundred dollars on the low end to several thousand on the high end. Even if you are both a big spender on credit and are highly responsible, caps greatly reduce the value of a credit card reward plan.

Points Expiration

Expiration periods for points are especially dangerous since they greatly entice one to spend more. Give the scale of points needed to redeem something of value, you feel induced to buy a lot on credit in order to be able to redeem the points fast enough before they disappear. Read the fine print on any credit card offer and do not hesitate to call the lender with questions before you sign up for the card.

Annual Fees

Annual fees can kill the value of point programs by charging you up front for access to credit card reward plans. If you’re looking for the best way to pay off a credit card as well as overall debt, don’t choose a card with an annual fee unless you have a clear and compelling reason to do so.

Complexity of Point Redemption

Redeeming points can be be as easy an receiving an automatic credit to your account, or as complicated as filling out forms, only to wait weeks while they are processed for a check send in the mail. Since simplicity is golden when getting successfully getting organized to reduce and eliminate debt, read and understand the terms of point redemption in the contract and have a sales representative for a particular credit card offer walk you through the redemption process.

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Tags: credit card annual fees, credit card point expiration, credit card point programs, credit card point redemption, credit card reward plans, Credit cards, debt
Posted in Credit Card, Lending Industy | View Comments

Late Credit Card Payments? Skipped Due Dates? What are your options?

Saturday, February 28th, 2009

The stress caused by late credit card payments can be unrelenting. But there are options to get back on track.

1. Take a deep breath.

Before you can start work on even getting organized to address the debt, take a moment to gather yourself and breathe, take quick power nap, meditate, or do anything else that clears your head for a moment of the problems of payments on a credit card. Getting back on track is possible with a straightforward game plan and an honest look at your financial picture.

2. Know your current status.

Facing your late credit card payments, or even skipped payments starts with understanding your debt status. Spend some initial time just pulling together all of your paperwork and details on each debt account that you have. Sounds confusing? It does not need to be, especially since the cost of inaction is steep. Grab a sheet of paper or open a spreadsheet, and start listing each account. Write down each of the following: the company that manages the account, their contact phone number, the total amount owed on the account, and its interest rate. Call the company if you don’t have any of that information on hand.

3. Set up a basic system.

Can you set up a basic system to pay off the debt? Dealing with skipped or even late credit card payments can be clear. If the total debt amount is small over multiple accounts, use the snowball method or debt stacking and monitor your progress each month until it is eliminated. From where are you going to get the money to make the debt elimination payments each month? Set up a quick, rough budget and cut out the discretionary expenses until the debt is eliminated. If this still seems difficult to do, start researching how to lower your interest rates on the debt.

4. Identify Zero Percent Balance Transfer Options

Yet another strategy for dealing with late credit card payments exists. Research options online with which you can have your current credit card balances transferred at zero percent interest. Choose balance transfer options in which the time period during which the zero percent is active is long, ideally one year or more. Keep in mind that this can only be a temporary solution: an opportunity for you to aggressively pay down debt before the zero percent period expires. Be careful since these balance transfer options can include high interest rates after the zero percent period ends, can have initial fees associated with them. In the meantime, to avoid creating any future problems with payments on a credit card, stop using the plastic and better yet, cut up any zero percent balance transfer card you receive.

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Tags: 0 APR, credit card debt, credit card management, credit card payments, credit card plan, Credit cards, credit organization, debt, debt elimination, Debt Management, debt organization, debt plan, debt reduction, late credit card payments, missed credit card payments, zero percent balance transfer options
Posted in Credit Card, Debt Stacking, Paying Down Debt, Uncategorized, snowball | View Comments

Top Five Ways to Spend a Furlough

Friday, February 27th, 2009

As pressure on private and public organizations to trim costs mount, managers are looking into ways to reduce expenses while preserving staff. One of the increasingly popular strategies is placing employees on a furlough – a temporary leave of absence, often unpaid. USAToday is asking readers to email in the various ways in which they are spending their time off from work due to a furlough. Here’s a list of the top five ways someone in debt can make productive use of their furlough.

1. Get organized. One of the biggest obstacles from a behavioral standpoint to reducing debt is being caught in an unorganized environment, where one might not know where paperwork is located, while suffocating in a cluttered home and/or workspace. Overcome this by dedicating the first slot of time during your furlough towards getting organized. Achieve this through “baby steps” – organizing general piles, then more specific ones, etc. Get a stack of cheap file folders and start filing documents in different categories.

2. Formulate a financial plan, and specifically a plan to reduce debt. In the process of organizing your “stuff” keep the financial and especially debt-related documents all in one handy place. Dedicate an hour or two to simply reviewing them to get a general understanding of your debt status, e.g. accounts, amounts, locations, and interest rates. Set some quick priorities. One of the best ways to priortize is paying off the debt amounts with the highest interest rates first. This approach can be combined with the snowball method.

3. Take the time to cut out unnecessary yet recurring monthly expenses. A major impediment to trimming your discretionary expenses in order to make room for debt reduction payments is simply the time and effort involved in contacting the subscription providers, gyms, and other service providers that charge you automatically on a recurring basis. Dedicate some time during your furlough to make these calls and cancel the services. Not only can those funds saved be put to more productive use, recurring automatic charges are one of biggest roadblocks to effectively reducing debt.

4. Spend time with family. Take the kids on a hike, play board games, and support them in their school activities. The essence is to spend time with family that does not cost funds out of your pocket (other than your time). In the current environment, spending time together as a family helps to reduce stress by getting everyone on the same page and reiterating support for one another.

5. Restrategize on your income and job. Take on contract work. Hunt online for temporary gigs that are flexible enough that you can finish work by the time your furlough ends. These projects will generate cash for you while you wait for the paychecks to start flowing again. Also, prepare yourself for job elimination. If you’re on a furlough, that may presage losing the position. Refresh and retool your resume, write sets of generic cover letters that can be quickly customized for different opportunities. Prepare a short job-hunting strategy, just in case. Work and debt are deeply interrelated since your ability to generate income impacts your debt reduction success and vice-versa.

Tags: debt, debt and family, debt and furloughs, debt and income, debt and kids, debt elimination, Debt Management, debt organization, debt plan, debt reduction, debt strategy
Posted in Debt Management, Spending, snowball, stress | View Comments