I know that by taking such a hard and fast stance there will be people who disagree with such a statement but I’m prepared to defend myself. Let’s look at a few reasons why I believe good debt doesn’t exist for most of us. It’s an old fashioned financial street fight.

Your House

There’s this misconception that a home isn’t like a car or a TV. A home is an investment, say the pro debt people but 2008 to 2011 proves that no investment is a good investment if the money can’t be reinvested in to something else that makes money. Even if your home is worth more now than when your purchased it, unless you can get to that profit and reinvest it in to something that makes money, your home hasn’t appreciated at all. Could you sell your home for its appraised value and how would it be on the market? Unfortunately, all of us who have never missed a mortgage payment are competing with the large number of beautiful foreclosed homes listed at bargain basement prices. (Luckily, that trend is starting to subside)

The only way we could call your home a good debt is if you didn’t live in it and you were renting it at a profit or showing positive gains by buying properties cheaply, fixing them up, and selling for a profit. If you’re living in your home, it’s an expense and for most people the expenses of their home are higher than the appreciation of its value.

Are you rich?

Some investing professionals who have a high net worth borrow money at a low interest rate and invest it at a higher rate. An example of this may be an investor who borrows money at 4% and invests it at a rate of 6%. A consumer may take out a home equity loan to make repairs to their home instead of tapping their fixed income investment accounts because their investments are making more money than the interest rate on the home equity loan.

This could be considered good debt but for the average nonprofessional investing, consumer strategies like this are best left to the pros and unless you are of high net worth, the spread between what you’re making and what you’re paying isn’t enough to warrant the trouble. In this example, 2% profit would be lost when a financial advisor is compensated for setting it up and maintaining the investment. Of course, some consumers could do this on their own.

You’re Not Stable as You Think

Go to a mall or walk down the street of your city or town and ask nine random people what they do for a living. Statistically speaking, at least one of those will tell you that they’re unemployed and actively looking for a job. They will most likely tell you that they didn’t see this coming and they can’t believe the turn that their life has taken. They may be highly educated and were living a comfortable middle class lifestyle prior to being laid off. Now, they can’t meet their debt obligations.

No debt is good debt because you never know what life will throw at you tomorrow. Your life could drastically change but your obligation to pay back your loans will not. Take some time to add up your debt obligations and ask yourself what kind of life you would be living if you didn’t have so much of your money going to debt? Sure, you need a place for your family to live so a mortgage may be a necessity but how much faster could you pay off your home if you didn’t have so many other debt obligations? The average United States consumer debt is currently more than $43,000 per person which means that each American has a debt load of 122% of their income. (Read more here)

The most dangerous aspect of debt is that it has become a lifestyle so engrained in our society that we forget that wealth is built by getting paid more but also being smart about our spending and buying what we can afford.

Does Good Debt Really Exist? from personal finance blog Bargaineering.com.

If you are finding it difficult to put together a debt pay down plan on your own, it might be in your best interest to look for a debt counselor. A debt counselor (also called a credit counselor) will look at your current financial situation, take a look at your debts, and then help you come up with a plan to pay off your debt in a way that is manageable. You will have fees to pay, but for some, just having that outside help can be just the thing.

Not all debt and credit counselors are the same, though. You need to do your homework before agreeing to work with one.

Choosing a Debt Counselor

One of the problems with the credit counseling industry right now is that there are a number of high priced services, along with outright scams that promise fast credit repair. Before you sign anything, or start working with anyone, you want to make sure that you are working with a legitimate and approved credit counselor. The U.S. Department of Justice has a list of approved credit counseling agencies; this can be a good place to start. You can also look for accreditation by the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies. Check with the Better Business Bureau as well, looking for serious complaints.

You should also find out about fees for services up front. Debt counselors have to provide you with a fee schedule, and a description of what they can do for you. Some credit counselors will only help you come up with a plan for paying down your debt, and leave you to do it on your own. Others will actually help you consolidate your debt and make payments for you. Make sure you understand what is offered, and how it fits your needs before making a decision.

Warning Signs of a Scam

You should be on the lookout for signs that your debt counselor is running a scam. The unscrupulous prey on the desperate and confused. Here’s how you can spot a potential credit repair or debt counseling scam:

• You are asked to send money via wire transfer, or send a contract and payment via private courier. Scammers like to avoid the Postal Service so that they can’t be tracked — or prosecuted for mail fraud.
• You are promised that you can repair your credit quickly, using “secret” techniques. The truth is that these companies can’t do something for you, legally, that you can’t do on your own for free.
• Representative is vague about services and fee schedules.
• Debt counselor doesn’t have a physical office that you can visit to meet with someone.

If you are unsure of where to start, a certified and accredited debt counselor can help. But you have to proceed with caution in order to avoid being scammed.

(Photo: Alan Cleaver)

Do You Need a Debt Counselor? from personal finance blog Bargaineering.com.

The same is true for repaying that debt. There are two schools of thought when it comes to repaying debt. You can take the mathematical approach and pay off your highest interest rate debt first, thus reducing your total interest payment. This is commonly referred to as a debt avalanche, a reference to the other, Dave Ramsey method called a debt snowball. A debt snowball is where you pay the smallest debt amount first, then roll that payment into the next smallest debt amount. Your payment grows and grows, your debts are knocked off as quickly as possible, and this provides a psychological boost to help you finish. It’s clearly not optimal, no one disputes that, but it works off psychology and it has worked for a lot of people.

Here’s the key question – how much does the debt snowball cost you over the traditional method? As much debt as we may have, chances are no one goes through the effort of calculating it. We simply pick the one we think is best, either math (avalanche) or psychology (snowball), and we run with it.

What if there was a tool that did this? I found unbury.me, written by Jordan Santell (@jsantell), a calculator that calculates all that for you. If you enter in your debts, your payments, and how much you have to pay each month – it spits out the difference you’ll pay in interest. No more guessing, this is concrete data.

I put in some dummy data just to see how it worked. Two loans:

• $300 to pay each month
• $5000 – 6% interest – $50 minimum payment
• $6000 – 8% interest – $75 minimum payment

With the avalanche, I’d be debt free by December 2014 having paid $1343.92 in interest. With the snowball, I’d be debt free by December 2014 having paid $1519.60 in interest. Going with the snowball, and it’s psychological boosts, would cost me $175.68. Is it worth it? Maybe, but at least now I can decide knowing it was going to cost me $175.68, rather than “more.”

And the calculator is really pretty.

Debt Avalanche vs. Debt Snowball Calculator from personal finance blog Bargaineering.com.

The U.S. Debt Ceiling

First of all, you need to understand about the U.S. debt ceiling. Article I, Section 8 of the Constitution gives Congress the authority and responsibility to pass laws governing new debt issued by the federal government. Earlier this century, Congress decided that rather than pass a law each time, they’d institute a debt ceiling to help streamline the process. Now, in order to borrow more, a law has to be passed to raise the debt ceiling, rather than on each new debt issuance. In theory, the debt ceiling is supposed to keep spending in check so that it doesn’t exceed revenues by too much, thus maintaining the balance of power. In practice, Congress has raised the debt ceiling as a matter of course for years — no matter which party is “in charge.”

This time, though, it’s different. Some are balking at the idea of enabling the government to borrow money. When the debt ceiling was reached a couple of months ago, some politicians began insisting that they wouldn’t automatically agree to another increase in the debt ceiling. Any law to raise the debt ceiling would have to come with changes to the way the government pays for things. The debate now is over which programs to cut, and by how much. With some noise in there about raising taxes on people and corporations making more than a certain amount of money in order to raise needed revenue.

Could the U.S. Begin Defaulting on Its Debt?

If the debt ceiling isn’t raised by Aug. 2 (earlier since the legislation has to be drafted, reviewed, passed, reconciled, and subsequently signed), according to Treasury Secretary Timothy Geithner, the U.S. begins defaulting on some of its obligations. There are Social Security checks that need to go out. Government employees need to be paid. We have other obligations, such as paying interest on Treasury bonds. While everything wouldn’t be defaulted on all at once, certain obligations would need to be met.

In an interview with CBS Moneywatch, Jay Powell, a visiting scholar at the Bipartisan Policy Center, estimated that the U.S. could default on 44% of its obligations in the month of August. He says that interest would be paid (most countries don’t just declare bankruptcy and walk away from their debts), and then priorities to keep certain programs, like Defense, going would be set. But there would likely be some disruption.

And, of course, there would be disruption in the financial markets with a U.S. debt default. Stock portfolios (your retirement account, perhaps) would sink as the market crashed. Reluctance to invest in Treasury bonds would result in higher yields to try and entice foreign investors. That, in turn, would mean higher mortgage rates, and higher loan rates for businesses. A credit market crunch would be likely, and that could hurt business cash flow, resulting in lay offs.

Will the U.S. Reform It’s Financial Practices?

One thing this crisis has done is to wake many up to the unsustainable financial practices that the U.S. has been following. How to get the country back on the right financial track is a matter of debate. Some think that the problems can be resolved with tax increases, or with spending cuts. Few politicians suggest that we will need both spending cuts and tax increases to get out of this problem. (I, personally, believe that program cuts and a tax hike will be necessary.)

The real question, of course, is whether the American people are willing to sacrifice to get out of this mess. And whether we have an political leaders with the courage to do something unpopular. What do you think? What should we, as a country, do about the debt ceiling, and about fixing our country’s financial woes?

(Photo: MyEyeSees)

Debt Ceiling, U.S. Default, and What’s Next from personal finance blog Bargaineering.com.

This other person, also in N. CA, with middle initial S., apparently is 3 months late on his credit cards from Macy’s, Capital One, and this one NCB Management (Google says this firm is a collections agency).

I’ve been getting repeated collections calls from these companies instead of this other guy. How did my name end up associated with this person? My best guess is a mysterious call I received on May 5th, from an unknown number, when a woman asked to verify my name and the up-to-dateness of my information. All that she asked was “Hi, am I speaking to Anthony Smith?” and “is this your current phone number?”…? Well of course it is, I answered. Then I tried to ask if she can tell me who she’s calling on behalf of, and she just said “sir, I am not allowed to reveal that information”…

But starting from the next day, I started getting collections calls, perhaps once a week. Every time I explain (with less patience each time) to the rep on the phone that I am the wrong person, and they apologize and promise to remove my number from their list. Except they don’t, I’ve gotten contacted on three occasions by Macy’s, twice by NCB, and three times by Capital One.

Fair warning to your readers – if they ever get one of these calls, make sure to be very specific on what they verify…

I did some research and some experts at Bankrate told me that there are potentially two scenarios:

1. His identity might have been stolen or his credit report was commingled with another person’s report. In this case, it’s best for Anthony to review all of his credit reports to make sure it wasn’t one of these two. Hopefully it isn’t because these can get messy to unwind.
2. It is a case of mistaken identity, the best option for him is to dispute the debt in writing and take advantage of the Fair Debt Collection Practices Act. If the collectors can’t prove it’s him, they have to stop contacting him or face stiff penalties. Unfortunately, he will probably have to do this no matter what the cause, since the debt isn’t his.

I’ve been fortunate never to have been mixed up in anything like this (thank you to all the other Jim Wangs out there!) but I can see this becoming a big pain. Does anyone out there have any additional advice for Anthony?

Mistaken or Stolen Identity in Debt Collector Mixup from personal finance blog Bargaineering.com.

If you want to improve your finances, and move along the path to financial freedom faster, it is best to pay down your credit card debt as quickly as possible. Creating a debt pay down plan can seem a daunting task, but it doesn’t have to be. You can put together a credit card debt reduction plan in 55 seconds or less:

1. List all of your credit card accounts: Make a list of your credit card accounts, jotting down your current balance, the minimum payment, and the interest rate. When I did this my list followed this format: BOA Visa – $2,500 – $75 – 9.99%. (16 seconds)
2. Figure out which order you want to pay them off in: Next, decide what order you want to pay your credit cards off in. Either order it by starting with the lowest balance, or by starting with the highest interest rate. Paying of the high interest card will save you money in the long run, but there is something to be said for the emotional boost that comes from starting with the lowest balance and paying something of quickly. (7 seconds)
3. Decide how much you can pay toward debt reduction each month: Review your monthly budget, including expenses. This can be done quite quickly if you have personal finance software, or use a web app. Figure out where you can cut back on waste. Experts estimate that most households waste 10% to 15% of their income each month. Look through yours, and decide how much wasted money you can reclaim and put toward debt reduction. (23 seconds)
4. Write your first debt reduction check: Take the amount you can spare from your budget and add it to the minimum payment of the first credit card you plan to tackle. So, if your minimum payment is $75, and you can spare $100 from your budget for debt reduction, your payment will be $175. (9 seconds)

Every month, make sure that extra amount is going toward the credit card account you are working on. You continue to pay the minimum on all of your other credit cards. When you pay off the first credit card on your list, you can take the entire amount an apply it to the next card on your list. So, if your next card has a minimum of $65, you would add the entire $175 you have been paying on the first credit card to the minimum for a new payment of $240. Dave Ramsey popularized this time-tested technique as the “debt snowball.”

While it will take you considerably more than 55 seconds to get rid of all of your credit card debt, it doesn’t mean you can’t get started in less than a minute. A few seconds is all you need to kick start your debt pay down plan.

(Photo: pumpkinjuice)

Finances in 55 Seconds: Create a Credit Card Debt Reduction Plan from personal finance blog Bargaineering.com.

I recently got entangled in a bit of an accounting snafu that quite frankly pretty much ruined my weekend. Here’s what happened:

On Saturday as I was heading out to the gym, I stopped by the mailbox to pick up my mail and found an envelope marked “Personal and Confidential.” In my experience, that’s usually a signal that the contents within are just some ad scheme–be it a credit card offer or time share scam or the dreaded “you’ve won a prize and must call xxx-xxx-xxxx immediately to claim it…” Upon opening the letter, however, I was confronted with a statement from a bill collector for an allegedly unpaid bill for a medical laboratory.

Yikes! Talk about a buzz kill…

Unfortunately, being that it was Saturday, there was no way to reach the billing department for the medical lab, my medical insurance company, the debt collector or anyone who could help me get the issue resolved. At first I was peeved because I thought the medical tests in question were from a February doctor’s visit and, although they’d been processed by my insurance company, the medical laboratory in question had never sent me an invoice for my portion of the bill. The nerve–sending me to collections for not paying a bill that had never been invoiced!

After doing some research, I couldn’t match up the so-called debt amount with any of the co-payment amounts listed by my health insurance for the most recent lab work. That’s when I started digging deeper into my old files and finally retrieved a bill from early 2008 that matched up with the amount on the collection letter. Well, that’s a relief–at least they weren’t sending me to collections over a debt that was a mere eight months old…

More digging turned up the credit card statement which proved I had PAID the invoice less than a month after it had been issued. Not only that, but given the notes I made on the statement, I had dealt with the billing department on the very same issue of the payment not getting posted and the debt remaining on my account years ago. Now, I’m steamed.

On Monday, I called the medical laboratory’s billing service. I explained that they sent me to a debt collection service for an invoice that I had paid TWO YEARS AGO. The person I spoke with requested I fax her proof of payment (in this case, my credit card statement) and said she’d take care of it. She later called to confirm that she had received the fax and that she was updating my account to reflect a zero balance and calling the debt collection service to notify them. She also said she’d send me a copy of my statement reflecting the zero balance–which I requested so the NEXT TIME they muck up my account, I have even more tangible proof of payment.

A week or so later the promised account statement had not arrived, but instead the invoice from services performed eight months ago. My first and only invoice for this particular lab work–marked “Final Notice” with a big orange sticker. Given that “Final Notice” is usually the step that precedes debt collection, I decided to check up on the “debt” that started this whole fiasco. I finally got a hold of the agent at the debt collection service and when he pulled up my account it still showed as “open.” I explained that I had paid the so-called debt two years ago and had a credit card statement as proof. He said no problem, just fax him the statement and he’d clear my account.

I then called the medical lab billing department to sound off about marking the first and only invoice sent to me as “Final Notice” as well as expressing my displeasure that they hadn’t cleared their mistake up with the debt collection service. I ended up talking with the same woman as before and she apologized for the “Final Notice” sticker, blaming it on the person who process the invoices. She insisted that she had called the debt collection agency, but would call again to make sure they expunged my record. I also paid off the most recent invoice while I had her on the phone and she called back five minutes later with a credit card confirmation number, an update on the collection agency (my record had not been cleared, but now was according to her and I would be receiving a letter from them to that effect) and a promise to send me a receipt for my most recent payment.

I still faxed the statement to the debt collection agent when I got to work. You can’t be too careful.

Going through all this drama has taught me a number of lessons which I will now share with you:

1. If you receive a letter saying you owe money, do your research–don’t just assume it’s a fact. The debt collector is required to send you written verification of the debt, such as a copy of the bill for the amount owed.
2. Keep good records. Now my record-keeping system isn’t the most organized, but I was able to find both the original invoice and the matching credit card statement which proved I had paid the so-called debt in a matter of fifteen minutes or so. This was a good thing because my credit card company wasn’t able to provide me with any back-up info more than two years after the fact.
3. Know your rights. The FTC has specific debt collection guidelines which outline your rights should you have an account sent to collections.
4. Dot your i’s and cross your t’s. It’s a hassle, it’s annoying, it’s a waste of your time–but follow up and make sure that everything is verified and/or corrected. I made the payment on time initially, and when I got invoiced a second time for the same outstanding amount, I called and verified that I had made the payment–and I still got sent to collections. You can be sure that I won’t rest with this situation until I receive that confirmation letter from the debt collection service saying my account has been cleared. And when I do, I will file it away for the future.  Just in case.

Stella Louise is the editor of the Savings.com personal finance blog. Blog & Save offers savvy consumers ideas and advice for living well on less.

Debt Collectors Don’t Check Debts, You Should from personal finance blog Bargaineering.com.

At first glance that may seem a little low, but remember that a lot of people don’t even have access to credit cards. If you only include families with credit card debt, that value goes up to over $7,000. Ultimately, any amount over $0 is too much because credit card companies charge interest rates in the double digits. High yield savings accounts pay out less than 2% these days, so a double digit interest rate on credit cards is far too much. It’s time to pay them down, here’s how.

Organize Your Debt

The first step in overcoming your debt is organizing it. Compile a list of all of your debts that includes current balances, interest rates, and pay off periods. By putting together this list, you have now taking something that might have seemed enormous, based on its total dollar amount, and turned it into something that discrete and manageable. $10,000 seems like a lot, and it is, but by taking it out of your head and putting it on paper, you are more likely to overcome it. If it’s broken up into several smaller debts, you’ve now gone an extra step and made each one a little more manageable than the $10,000 lot.

Debt Snowball vs. Interest First

At this point you have two options for your approach in which debts to pay off first. The Debt Snowball is an idea popularized by Dave Ramsey and relies on psychology, rather than math, to be effective. List your debts in ascending order based on balance, so the smallest debts are listed first. When you go to pay off your loans, pay extra to the lowest balance debt. When you pay off the smallest loan, take its minimum payment and add it to the payment on your next debt. This creates a snowball effect, as minimum payments from each retired loan are put towards larger loans, which can help you pay off debt faster and give you a morale boost with each retired loan.

An alternative is to list them based on the interest rate, paying down the highest debts first. By paying the high interest rate first, you are minimizing how much interest you are paying to the credit card or loan company. It’ll be much harder though as you won’t be building quick wins into your strategy, unless you’re lucky and the high interest debts are also your smallest balances.

Build a Zero-Based Budget

Now that you’ve established an approach to paying down the debt, the next step is to find the money. The best way is to create, update, and stick to a budget that accounts for every penny you earn and every penny you spend. You can use tools to help you budget or rely on pen and paper, the hard part is creating that budget and sticking to it. Are you familiar with the old adage “Pay yourself first?” It’s “Pay your debts first” now, so budget a dollar amount towards paying down your debts and stick with it. Account for every last penny.

Reduce Interest Rates

Once you’ve established a strategy and you’ve found a few extra dollars to put towards your debts, it’s time to reduce the interest rate of that debt so you can pay it off faster. There are a variety of strategies you can use but ultimately it comes down to finding cheaper alternative sources of debt.

If your debt is in the form of credit cards, consider turning to a 0% balance transfer. Many credit card issuers are offering a 12 or 18 month period of no interest credit card debt. You can use this time to catch up on payments, just be sure to check the post-promotional interest rate.

If you have other debts, consider a social lending network like Prosper or Lending Club as a way of lowering your interest rate. Through those services you can consolidate your debt at lower interest rates by tapping on a network of investors. The process can be a little draining but many people have used them to lower their interest rate and get out of debt.

Once you’ve consolidated your debt, setup a payment system and found money through budgeting, the key is sticking with your plan until your debt is fully retired. It’s not impossible and many people have done it and with this system in place, you’re well on your way to success!

How to Pay Off Debt from personal finance blog Bargaineering.com.

The reality is that bankruptcy is a business decision and should be seen as such. When people talk about Donald Trump going through bankruptcy, they don’t look at him as if he were a pariah. He’s a business man and bankruptcy is merely another tool in his toolkit. The Road Out of Debt, written by Joan Feeny and Theodore Connolly, is a book about getting out of debt with that perspective on bankruptcy. It’s not a book about bankruptcy, it’s a book about debt with a look at how not thinking about bankruptcy is a mistake.

Joan Feeney is a bankruptcy judge. Ted Connolly is a bankruptcy lawyer. That makes this particular two-some very experienced in the world of debt reduction and their expertise is valuable in simplifying bankruptcy, the bankruptcy process, and whether or not it, or alternatives, are right for someone struggling with debt. The book itself is broken up into four sections:

• Dealing with Debt: This first section focuses on the debt itself, potential solutions (including but not limited to bankruptcy), as well as pitfalls to avoid getting deeper into debt.
• Identifying Specific Debt: This second section segregates your various debts into categories and helps formulate strategies to help deal with those debts.
• Defining Bankruptcy Types: If bankruptcy is the right path, this third section explains the various types, the process, as well as all the paperwork and filings you’ll need to complete.
• Process and Outcomes in Hypothetical Bankruptcy Cases: If you go down the path of bankruptcy, this final section gives you a better understanding of what could happen through the process and how life can get a little more difficult afterwards.

If you’re struggling with debt and you feel as though you’re barely keeping up, I recommend taking a look at this book and dispelling some of the myths you have believe about bankruptcy. Just as we, as a society, have started coming to grips with abandoning underwater homes (loan-wise) and how there is no moral obligation, I think we will soon understand that bankruptcy isn’t the scarlet letter it’s often made out to be.

The Road Out of Debt Review from personal finance blog Bargaineering.com.

My look at the debt snowball was precipitated by an All Things Considered segment I heard on NPR. In it, Dan Ariely, behavioral economist, talks about a study in which he studied the loan payment techniques of over a thousand people. They gave each person five loans they had to pay off, a salary, and then had them start paying off the loans. The amount they received at the end of the study is proportion to how much you had in the study.

Snowballing Human Nature

From the transcript:

And the decision should be very simple. You pay off the loans with the highest interest rate. These are the loans that cost the most amount of money. What we actually found is that nobody, not a single person, has done that. And these include MBA students who took finance classes and undergrads and people who read Fortune magazine, lots and lots of people.

Now, what do people do? Instead, they try to get rid of loans. (emphasis mine)

In other words, the debt snowball is predictably irrational and it’s also human nature. We put more value on retiring loans than we do on making the right financial decision (paying off highest interest rate first).

Combating Human Nature

The best part of the discussion comes after this revelation that retiring loans is prized in the human mind – consolidate the loans and you’ll be both rational and mathematically optimal. Overcome this natural human desire to retire individual loans by taking it out of the equation. If you can’t, embrace the mathematically sub-optimal because paying off loans in the wrong order is better than not paying them at all.

It’s discoveries like these that always make me eager to read more in the area of behavioral economics.

(Photo: tjflex)

Debt Snowball Is Predictably Irrational from personal finance blog Bargaineering.com.

The basic premise is that you make minimum payments to all of your debts and put any extra debt repayment dollars towards your smallest debt. As you retire debts, you take those minimum payments and apply them to the next smallest debt. In this manner your small minimum payments “snowball” so that as you near the end, your payments are much larger than the remaining minimums.

Example Debt Snowball

Let’s say you have five loans:

• Student loan: $25,000 @ 6% APR
• Mortgage: $100,000 @ 5% APR
• Credit card A: $9,000 @ 19.99% APR
• Credit card B: $8,000 @ 19.99% APR
• Car loan: $5,000 @ 6% APR

First, you list all of your debts starting with the smallest balance to the largest:

• Car loan: $5,000 @ 6% APR
• Credit card B: $8,000 @ 19.99% APR
• Credit card A: $9,000 @ 19.99% APR
• Student loan: $25,000 @ 6% APR
• Mortgage: $100,000 @ 5% APR

First, you make minimum payments on every debt so you are current and suffer no penalties, fees, or other adverse effects. If you have an extra $100 each month left over for debt repayment, you put it towards the Car loan because it’s the smallest debt. Once you retire the car loan, take it’s minimum payment and put it towards Credit Card B. Once Credit Card B is retired, go after Credit Card A.

Not Optimal, but Effective

Why is the debt snowball not the optimal solution? You pay the most in interest on the higher APR debts, the credit card balances. The “best” way, as defined by paying the least in interest, is to put extra money towards Credit Card A and Credit Card B, since they have 19.99% APR interest rates. Since you pay off the car loan first, according tot he debt snowball method, you are paying more in interest than you otherwise would have.

This afternoon, I’ll point out why this, less correct method, works better than the mathematically optimal one.

(Photo: shyald)

Dave Ramsey Debt Snowball Payoff Strategy from personal finance blog Bargaineering.com.

Shortly after meeting my husband, he tried to convince me that debt was a good thing. His student loans, after all, were not only funding his tuition but also many of our first dates. Using something called the “income smoothing theory,” he argued that it was better to borrow now, when we had little money, so we could live better than we otherwise would, and then pay it back later, when we (hopefully) had steady incomes. (Of course, to us at the time, living well meant being able to buy cheap Thai food and beer.)

While his theory falls apart if it’s taken to extremes, for the most part it makes sense. Debt can be a very good thing, as long as you use it wisely. Here are five ways you can use debt to improve your life.

Take out certain kinds of student loans.

Students loans are often referred to as “good” debt because they allow you to earn more money later. Plus, subsidies from the federal government often allow borrowers to lock in low interest rates. And it’s true, using student loans to get new skills that allow you to pursue the career you want can drastically improve your life. In fact, research from the College Board shows that a college degree plays a huge rule in how much money you can expect to earn: The median income for college grads over age 25 is $55,700; for those with high school diplomas, it’s $33,800.

Just don’t use the “good debt” argument to fool yourself into pursuing a degree in a field you don’t really enjoy, or one with less-than-promising job prospects. Many unemployed MBA-holders are probably wishing they weren’t carrying $200,000 of so-called “good” debt right now.

Invest in professional expenses.

Putting money into a new suit for your first day of work or a certification program that lets you get a promotion can also help you earn more money in the long run. If you recently graduated and have no cash to buy your new work wardrobe, or any other essentials to your new career, then it’s okay to charge them on a low-interest rate credit card. Just make sure a big chunk of your first paycheck is dedicated to paying down the debt so it goes away quickly.

Take advantage of auto loan subsidies.

Auto dealers often offer special subsidies on auto loans or other kinds of discounts when they’re trying to move certain models (especially older or less popular ones) off their lots. If you’re flexible on what you buy, consider shopping based on the subsidies available. It could mean the difference between a five percent interest rate and a seven percent one, and if you need the car for work or your family, that could be a good investment.

Manipulate credit cards to your advantage.

Credit cards often come with some perks hard to find elsewhere: Automatic ID theft protection. Travel insurance. Zero percent financing for limited periods. Rewards points, even when you pay off your bill each month. Many companies are now also offering free software that allows you to quickly analyze your spending from your online account. If you can pay off your balance each month, then you essentially get all those benefits for free (just make sure your card carries no annual fee).

Avoid the dark side.

Overspending on credit cards means fees, high interest rates, and lots of financial stress. The new credit card rules require card companies to feature more information on monthly statements, including how long it would take to pay off the debt if you make only minimum payments, or how much you have to pay to unload the debt in three years. Paying attention to those numbers – and to any changes to your card policy that arrives in the mail – can help you avoid falling into a debt trap.

For more details on Kimberly’s book, visit www.generationearn.com.

5 Smart Ways to Use Debt to Improve Your Life from personal finance blog Bargaineering.com.

I, and hopefully you, weren’t disappointed. I called him the real deal before he wrote a single post, that’s how confident I was, and after the series was complete, I think we can all agree.

Recently, Craig was in an article by Kimberly Thorpe for the Dallas Observer. In it, we get a better understanding of why Craig has so much insight (bad bets and a lot of research!) and how people like him are fighting back against the system.

As you read his story, there are two things I hope you to notice – he never plays the victim and he never blames anyone for his debt. He took some bets that turned out badly and now is simply playing the game by the rules, catching debt collectors with their pants down.

I, for one, am glad to see a “little” guy giving the big bad debt collectors a run for their money. Serves them and their predatory practices right.

Debt Collector Crusader Craig Cunningham in Dallas Observer from personal finance blog Bargaineering.com.

I’ve borrowed twice now from Prosper and I love it. The first loan was $7000 at 8.65% for three years and the most recent was $8000 at 9.65% for three years. I got the 2nd in response to the credit cards jacking up my interest rate and slashing my credit limit no reason. I was so angry about the credit card behaviors that I wanted to get my debts as far away from them as possible.

There is no hassle, I applied for the loan, watched people bid the initial interest rate down, and eventually got the cash. Once the loan was funded, they called me to verify who I was. You have to provide documentation that you are who you say. They direct deposit the money into the account you specify a day or so later.

Benefits

With lenders being very strict about who they offer loans to and credit cards slamming people with interest rate hikes and fees, borrowers are turning towards some atypical sources of funding to help pay down debt. Loans from peer to peer lending networks have some significant benefits:

• Fixed interest rate: Unlike credit cards, these loans have fixed interest rates that will not change. The rates can’t be lowered or increased simply because the lender “feels” like it or because some equation tells them you’re suddenly riskier.
• You can’t add to the debt: One of the difficulties with getting out of credit card debt is in the card itself. If you’re in debt, you can continue to pile on the expenses. That’s akin to digging your own grave when you think you’re filling in the hole!
• Loans are reported to credit bureaus: This is a huge benefit that helps you battle down debt and build up your credit at the same time. You aren’t penalized for going to a p2p loan.
• You’re done in 3 years: The loans are for a period of three years so you aren’t paying for a $10 pizza for the next ten years because of interest!
• You get the best possible interest rate: When you go to the bank or stick with a credit card, they dictate the interest rate you get. With these loan marketplaces, investors bid down the interest you’ll pay. You set an initial number, investors, based on your credit history and current debt, can bid the interest rate down.

Downsides

There are a few potential negatives about going to peer to peer networks for funding:

1. The process can take a long time. It’s not uncommon for the process to take a month, which is how long it took for the reader to finish the process and that may be too long depending on your needs. The reason why the process takes so long is because they work like auctions, with investors bidding on how much interest they’re willing to accept to loan you funds.
2. High credit requirements. Both networks require relatively high credit scores:
   • Lending Club is open to US residents with a FICO score of at least 660 and a debt-to-income ratio (excluding mortgage) below 25%. You need at least 3 years of credit history with no current delinquencies, recent bankruptcies, open tax liens, charge-offs, or non-medical collections account in the last 12 months. No more than 10 inquiries in the last 6 months, a revolving credit utilization of less than 100%, and more than 3 accounts on your report, of which at least two must currently be open.
   • Prosper is open to US residents with a FICO score of at least 640 and must be “approved by Prosper’s anti-fraud and identity verification systems.” It’s unclear how those systems operate.

I’ve never personally gone through the borrowing process but it seems painless enough. The prospect of having a credit card debt charging me double digit interest rates has always kept me out of that particular danger, but if I was in that situation, a single digit, fixed interest rate 3 year loan sounds mighty appealing.

Borrow Money With Prosper & Lending Club from personal finance blog Bargaineering.com.

A point that I never got to make, in part because it was a little off-topic, was that I never had consumer debt because I thought that debt limited your options. Making money is hard enough as it is, you don’t need to be giving up some of it to pay a credit card company for something you bought years ago. Scraping up enough for a down payment on your first home was and is still very difficult. I didn’t need the added pressure of consumer debt following me everywhere I went.

I felt that having the debt hang over me was worse than not buying something I couldn’t pay for that month.

Whenever you have debt, be it $5 you borrowed from your co-worker for lunch yesterday or $5,000 you owe a credit card company, your future is partially determined by someone else. Whether it’s a personal commitment, like $5 to a friend, or a written contractual commitment, as is the case with any sum to a credit card company, you lose control. You’ve acquiesced a small part of your freedom to someone else.

I think that “fear of the unknown” really kept me in line. I don’t know what I’ll be doing in five or ten years, I don’t know what my financial situation will look like, but I do know that having credit card debt will limit my options so I steered clear.

(Photo: alancleaver)

Debt Severely Limits Your Options from personal finance blog Bargaineering.com.