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6 Mistakes to Avoid When Paying Off Debt

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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On the surface, getting debt-free sounds like a simple process. Make your minimum payments each month and get your balances to zero, then you’re across the finish line. But with interest rates steadily on the rise, this isn’t much of a strategy. It’s a surefire — and expensive — way to keep yourself chained to debt for much longer than you need to be.

The truth is that saving the most money and getting out from under debt as quickly as possible comes down to learning the basics.

Here’s a rundown of the top mistakes to avoid while on the road to debt-free living.

1. Continuing to accumulate new debt

Deciding to take charge of your debt once and for all is an empowering move, especially when you start seeing those balances go down. But accelerating your payments on one account while continuing to rack up new debt is hardly a solution.

“You may feel better because you’re sending an extra $500 to your credit card every month to pay it down, but if you’re using a different credit card to buy groceries, you’re just cycling the debt around,” Michaela Harper, director of community education at the Credit Advisors Foundation, told MagnifyMoney.

This all-too-common scenario underscores how important it is to have an effective budget in place, which requires a firm grasp on your monthly income and expenses. If you’re spending more than you’re earning, you’ll never break the debt cycle.

Vid Ponnapalli, a New Jersey-based certified financial planner, recommends looking back and tracking your spending over the past six months. This should highlight any gaps between your spending and your income.

“If you’re bringing in $4,000 each month but spending an average of $4,500, you need to remedy that deficit,” he told MagnifyMoney. “This means either reducing your expenses or increasing your income.”

Crafting a solid budget is your best defense.

2. Focusing on the wrong debt

Not all debt is created equal. When you’re in over your head, Harper said to focus first on “people who can mess with you — [anyone who has] a judgment against you or has the ability to put liens on you.” Having your wages garnished or your car repossessed are never scenarios in which you want to find yourself.

From there, high-interest balances should be front and center because you’re paying the most to keep them around. This is precisely why it makes sense to roll these balances over to accounts that have lower interest rates. This process is called debt consolidation.

Let’s say your debt looks like this and you’re paying $150 a month on each account:

  • Credit card No. 1: $5,000 at 19% interest
  • Credit card No. 2: $2,000 at 14% interest
  • Credit card No. 3: $1,000 at 10% interest

Going that route will take you four years to pay everything off, and you’ll dole out $2,383 in interest alone (if you stick to $150 payments even after certain cards are paid off). But if you take all that debt and pay it off with a two-year debt consolidation loan at 8%, you’ll cut your interest payments by almost $1,700, lower your monthly payment by about $100 — and be debt-free in half the time.

Many debt consolidation loans come with an origination fee of up to 6%, but your savings could very well make up for it. To explore your loan options, consider using this debt consolidation loan tool from LendingTree, MagnifyMoney’s parent company. The tool could match you with up to five different lenders offering competitive loan options.

3. Tapping your 401(k) to pay off debt

Let’s talk 401(k) loans, which let you borrow from your future self and then gradually pay it back with interest, usually via automatic payroll deductions. You have five years to repay these loans, and the interest rate is generally the current prime rate plus 1%.

When face to face with a mountain of debt, it can be very tempting to use your retirement nest egg to wipe out your balances and start over, but think very carefully before doing so.

First, there can be significant tax implications. You’re putting pretax money into a 401(k). But when you’re paying back a 401(k) loan, you’re using after-tax dollars, Ponnapalli said. Then you have to pay taxes again when you withdraw the money during retirement.

What’s more, Ponnapalli said if you fail to make good on your loan terms, the loan is then considered a distribution. If you’re younger than 59 ½, you’ll also pay a 10% penalty.

“And if you leave your job for any reason, the balance will be due, in full, much sooner than originally planned,” he added. (Check your individual plan for details.)

By taking your money out of the market, you’re robbing yourself of future gains as well. Where retirement savings are concerned, your No. 1 weapon is time. The longer you’re invested, the more money you’ll have waiting for you come retirement.

4. Falling for a debt relief scam

When you’re overwhelmed by debt, navigating the situation on your own can feel impossible. Credit counseling is a legitimate option if you go with a reputable company that has your best interests at heart. American Consumer Credit Counseling and the National Foundation for Credit Counseling have strong reputations.

Through these groups, you can connect with professionals who’ll review your financial situation, educate you on personal finance basics and — hopefully — empower you to get back on the right track. Credit counselors also help clients create a plan of attack for addressing their outstanding debt.

But consumers are wise to beware of shady debt relief organizations. For-profit credit counseling groups are generally a red flag, as are companies that make too-good-to-be-true promises or guarantees about debt relief.

Harper said initial counseling sessions should be free and have no strings attached. He recommended going with one of the nationally recognized groups. “You’ll have assurance that you’re dealing with a reputable organization and staff that knows what they’re doing,” Harper said.

5. Neglecting your other financial goals

There’s nothing wrong with being laser-focused on paying down debt as long as it doesn’t impact your ability to move the needle on your other financial goals. Whether it’s saving for retirement or building up your emergency fund, you don’t have to ignore your other goals in the name of debt repayment.

Speaking of emergency funds, Ponnapalli recommends building yours up to at least three months’ worth of expenses, but this can be a tall order for those at war with debt. An alternative strategy is to gradually fund a mini-savings account of $1,000 until you’re debt-free. This should be enough to cover most pop-up expenses. After that, you can top off your emergency fund to that three-month mark, then start saving more aggressively for other financial goals.

No matter what, kicking into a 401(k) that offers an employer match should always be a top priority, even while you’re paying off debt. (It’s free money, after all.) As for the big things, Harper suggests breaking down these goals into bite-sized pieces. If you want to save $5,000 to put a down payment on a house in three years, how much do you need to save every month to get there? Is it possible to do this while still making progress on your debt payments? It doesn’t have to be an all-or-nothing situation.

6. Putting all your eggs in the bankruptcy basket

It isn’t all that surprising that money is America’s leading cause of stress, according to a 2018 Northwestern Mutual study. When you’re buried under tremendous debt, bankruptcy can feel like a gift that wipes the slate clean. In the face of financial catastrophe, it might make sense, but it’s a last-resort option.

Any reputable counselor will guide you toward bankruptcy if it is your best path forward, but Harper warns that it isn’t without consequences. While many of your debts might be forgiven, you could lose other assets, such as your home or car, in the process. Your credit score will take a hit as well. Chapter 7 bankruptcy stays on your credit report for 10 years, while it’s seven years for Chapter 13. The silver lining is that, according to a study put out by LendingTree, roughly 75% of those with a bankruptcy on their record end up restoring their credit after five years.

“I’m a big believer that if it’s the right thing to do for your family in order to move forward, and it’s truly an insurmountable situation or amount of debt, then by all means grab it with both hands, do it and focus on rebuilding behaviors,” Harper said.

For folks who are overwhelmed by debt, Harper said credit counseling is often the best medicine for understanding what you’re up against and making a plan to get out of it.

The most important things to remember

The road to getting debt-free isn’t always straight and narrow — sometimes life gets in the way — but knowing the basics can make course-correcting a whole lot easier. Pushing pause on accumulating new debt is crucial. From there, put out the biggest fire first. Tapping your 401(k) to pay off debt or ignoring your other financial goals, while tempting, could also come back to bite you.

It’s about prioritizing debt repayment without putting your future self at risk.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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College Students and Recent Grads, Pay Down My Debt

Sample Goodwill Letter to Remove a Late Student Loan Payment from Your Credit Report

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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If you’ve pulled your credit report recently and discovered that there’s been a late payment reported on your student loans, you might be wondering what you can do to recover. Late payments can damage your credit, especially if you stop paying your loans for an extended period of time.

We’ve already gone over the repercussions of delinquency and default, but now let’s take a look at another method of repairing your credit report — sending a goodwill letter to your creditor.

What is a goodwill letter?

A “goodwill letter” is a simple way to repair your credit report, and it can be used for both federal and private loans. The purpose of a goodwill letter is to restore your credit to good standing by having a lender or servicer erase a lateness on your credit report.

Typically, those who have experienced financial hardship due to unexpected circumstances have the most success with goodwill letters. They allow you to ask if your student loan servicer can empathize with the situation that caused the lateness and erase it from your report.

It can also be used when you think the late payment is an error — for example, if you were in deferment or forbearance during the time of the late payment and weren’t required to make any payments, or if you know you’ve never been late on a payment before.

What makes a convincing goodwill letter?

If you’ve been looking for a goodwill letter that will work well, we have some tips on what you should include in your letter:

1. An appreciative tone

It’s important that the entire tone of your letter comes off as thankful and conscientious. If you were actually late on your payments due to extenuating circumstances, taking an angry tone probably won’t help your case.

2. Take responsibility

You want to be convincing and honest. Take responsibility for the late payment, and explain why it happened. They need to sympathize with you. Saying you just forgot isn’t going to win you any points.

3. A good recent payment history

Besides sympathy, you want to gain their trust that you will continue to make payments. If your lender sees payments being made on time before and after the period of financial hardship, it might be more willing to give you a break. When you have a pattern of late payments, on the other hand, it’s more difficult to convince them that you’re taking this seriously.

4. Proof of any errors and relevant documents

If you’re writing about a mistake that occurred, still be friendly in tone, but back up the errors with documentation. You’ll need proof that what you’re saying is true. Unfortunately, errors are often made on credit reports, and it may have been a clerical error on behalf of your servicer. If you have any written correspondence with them, you’ll want to include it.

5. Simple and to the point

The last thing to keep in mind is to craft a short and simple letter. Get straight to the point while telling your story. The people reviewing your letter don’t want to read an essay, and the easier you make their lives, the better.

Sample goodwill letter No. 1

Below is a sample goodwill letter for student loans to give you an idea of how to structure your own:

To whom It may concern:

Thank you for taking the time out of your day to read this letter. I just pulled my credit report, and discovered that a late payment was reported on [date] for my account [loan account number].

During that time, my mother fell terminally ill, and I was the only one left to care for her. As such, I had to leave my job, and my savings went toward her health care expenses. I fell on very rough times after she passed away, and was unable to make my student loan payments.

I realize I made a mistake in falling behind, but up until that point, my payment history with you had been spotless. When I was able to gain employment once again, I quickly resumed paying my student loans, making them a priority.

I’m not proud of this black mark on my record, but it’s the only one I have, and I would be extremely grateful if you could honor this request to remove the lateness from my credit report. It would help me immensely in securing other lines of credit so that I can further improve my credit score.

If the lateness cannot be removed entirely, I would still be appreciative if you could make a goodwill adjustment.

Thank you.

Sample goodwill letter No. 2

If you’re writing a letter because the lateness on your credit report is inaccurate, then try something similar to this:

To whom it may concern:

Thank you for taking the time to read this letter. I recently pulled my credit report and found that [Loan servicer] reported a late payment regarding my account [loan account number].

I am requesting that this late payment be assessed for accuracy.

I believe this reporting is incorrect because [list the supporting facts you have]. I have included the documentation to prove that [I made payments during this time / that my loans were in forbearance/deferment and didn’t require any payments].

Please investigate this matter, and if it is found to be inaccurate, remove the lateness from my credit report.

Thank you.

Make sure you provide as many personal details as possible — without making the letter too long, of course. You should also include your name, address and phone number at the top of the letter in case your loan servicer needs to reach you immediately.

Where to send your goodwill letter

Now that your letter is written, it’s time to send it. This can be done either by fax or by mail. Most student loan servicers have their contact information on their website, but you can also look on your billing statements to see if they specify a different address.

Additionally, you can try calling the credit bureau where the lateness was reported to see if they can give you the contact information you need.

It’s important to mention that goodwill letters are not a means to immediate success. Unfortunately, it often takes several attempts to correspond with servicers and lenders to get them to acknowledge that they received a letter from you.

Your best bet is to get a personal contact at the company who has the power to erase the late payment from your credit report.

If all else fails, try as many different communication methods as possible. Phone, mail, fax, live chat (if your servicer offers it) and email them. Several people who have tried this report that it’s possible to wear your servicer down with a decent amount of requests.

Addresses and fax numbers to try

Here are some addresses and fax numbers for several of the larger servicers, as listed on their websites. Again, it may also be worth phoning your servicer to get the name of someone there that can help you. If you have federal student loans, you can also check this Federal Student Aid page for more contact information.

Nelnet

Documents related to deferment, forbearance, repayment plans or enrollment status changes:

Attn: Enrollment Processing

P.O. Box 82565

Lincoln, NE 68501-2565

Fax: 877-402-5816

Great Lakes

Great Lakes

P.O. Box 7860

Madison, WI 53707-7860

Fax: 800-375-5288

Sallie Mae

Sallie Mae

P.O. Box 3229

Wilmington DE 19804-0229

Fax: 855-756-0011

Navient

For anything other than federal loans, check here

Navient – U.S. Department of Education Loan Servicing

P.O. Box 9635

Wilkes-Barre, PA 18773-9635

Fax: 866-266-0178

Cornerstone

P.O. Box 145122

Salt Lake City, UT

84114-5122

Fax: 801-366-8400

FedLoan

For letters and correspondence

FedLoan Servicing

P.O. Box 69184

Harrisburg, PA 17106-9184

Fax: 717-720-1628

EdFinancial

For FFELP and private loans, check here

Edfinancial Services

P.O. Box 36008

Knoxville, TN 37930-6008

Fax: 800-887-6130

Documents to include with your goodwill letter

Don’t let your efforts go to waste by forgetting to send documentation with your letter. Here’s a quick checklist of what you should include:

  • The account number for your loan
  • Your name, address, phone number and email
  • Statements showing proof that you paid (if you’re disputing a late payment)
  • Documentation showing that you’ve paid on time at all other points aside from when you experienced financial hardship (if that’s the case)
  • Identifying documentation so your servicer knows you sent the request

Also note that if you’re mailing anything, you should send it by certified mail with a receipt requested. This way you’ll know whether your letter made it to the servicer.

What to expect after submitting your goodwill letter

Once you submit your goodwill letter, you should hear back from your creditor with a decision in a few weeks. If two to three weeks have passed without word, follow up via email or phone call.

As you know, there’s no guarantee that your goodwill letter will work. The decision to remove a negative mark from your credit report is entirely in the hands of your creditor.

If your creditor rejects your petition, you’ll have to accept the ding on your credit report and take other steps to boost your credit. But if they agree to repair your credit, you should see the delinquency removed from your report and your credit score increase as a result.

A higher credit score can make life a lot easier, whether you want to take out a loan, open a credit card or, in some cases, even rent an apartment. For student loan borrowers, a strong credit score also opens the door to student loan refinancing, a savvy strategy that lets you restructure your debt, possibly changing your monthly payment and potentially saving money on interest.

If your credit score rebounds and you want to take proactive steps to conquer your student debt, refinancing could be the answer you’ve been looking for, so long as you no longer need the protections that come with federal loans.

Either way, though, make sure to keep up with student loan payments so you don’t end up with a delinquent account dragging down your newly repaired credit score.

Resources

If you’re interested in exploring goodwill letters further — and the results that others have had — check out these websites:

  • Ed.gov: They cover disputes, what to do about them and how to go about rectifying them here.
  • ConsumerFinance.gov: If you have loans with a private lender, and your lender had reported you as late when you weren’t, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) to see if they can help you.
  • myFico Forums: The forums on myFico are populated with helpful individuals that might be able to give you contact information for certain servicers. There are some people reporting success with goodwill letters, and they may be willing to share their letters with others upon request.

It’s worth the time to write a goodwill letter

If you’ve discovered that a late payment has been reported on your credit, and it’s because you fell on hard times or is inaccurate, it’s worth trying to get it erased. These dings on your credit are there to stay for seven to 10 years. That’s a long time, especially if you’re young and hoping to buy a house or a car in the near future. It’s a battle worth fighting.

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Debt, Its Emotional Toll and How to Tackle It

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Debt can feel overwhelming, and studies are increasingly showing that it can lead to a decrease in happiness and life satisfaction, anxiety and even physical symptoms like headaches or loss of sleep.

A study of more than 1,000 student loan borrowers — conducted by Student Loan Hero, which, like MagnifyMoney, is owned by LendingTree — found that:

  • More than 61% of respondents admitted that they’re afraid that their student loan debt worries are spiraling out of their control.
  • More than 70% said they suffer from headaches because of their debt concerns.
  • Some 64.5% of respondents have lost sleep over their debt.
  • 67% reported physical symptoms of anxiety that stemmed from the stress of their student loans.

The study showed a direct correlation between having debt and detracting from happiness. In fact, results revealed that carrying student loan debt is nearly as significant as income when it comes down to predicting financial concern and evaluating life satisfaction.

What studies show about how debt affects your health

Indeed, money can buy happiness, but how much debt one has also weighs heavily into the equation, according to a study from Purdue University. An online college alumni sample of 2,781 individuals from the United States revealed that student debt could take a significant toll on one’s life satisfaction over the long term.

Another survey conducted by the Harris Poll on behalf of the American Institute of Certified Public Accountants (AICPA) showed that 56% of Americans with debt admitted that it negatively impacted their lives. Twenty-eight percent of the 1,004 American adults surveyed said their debt caused stress about their everyday financial decisions, and 21% said it caused tension with their partner.

It may be that such accomplishments as a promotion at work may be marred by knowing your debt is eating up your higher earnings. High debt may also be such a financial burden that borrowers are unable to save for retirement, for emergencies or even such pleasures as a vacation.

High-rate debt can be particularly difficult to carry. Seeing your monthly payments largely going toward fees can make you feel as though you’ll be trapped in debt forever. And if that debt isn’t allowing you to save money, your stress may only grow if you’re suddenly struck with a financial emergency that causes you to take on new debt.

6 tips to dealing with your debt

If you’re dealing with debt and it’s taking a toll on your health, what can you do?

“The first thing a person needs to do is take a close look at how they got into debt in the first place,” advised Carolyn McClanahan, M.D., CFP, who began her career as a physician and is now founder of a financial planning group called Life Planning Partners LLC, based in Jacksonville, Fla. “They should identify what triggered the situation or any bad habits that might have led to their debt, so that they don’t repeat those things going forward. Then, they need to make an actionable plan to figure out how to get out of debt.”

Consider these tips that could help you better handle your debt.

1. Thoroughly research your options

When tackling your debt, it pays off to research your options for dealing with debt. For example, federal student loans come with borrower protections that may help you if you’re struggling with money. You may be eligible for an income-driven repayment plan, which would adjust your monthly payments based on your income. You may also qualify for student loan forgiveness or have the opportunity to defer payments for a period of time.

If you have a mortgage, you could extend your repayment term without refinancing. This is known as mortgage recasting. By extending your repayment term, you could lower your monthly payments, freeing up cash to deal with debts that are a higher priority.

Credit card debt doesn’t have to be such a burden, either. If you lost your job, it may be beneficial to call up your credit card issuer. You may be able to get on a hardship program that reduces your payments for a time. Or, if you have decent credit, you may qualify for a balance transfer credit card with a promotional 0% APR. For a fee, you could move your credit card debt onto your new card to avoid interest charges for a period of time. Pay off that debt before the promotional period ends and you could save a lot of money on interest.

2. Don’t be afraid to negotiate

Many people fail to recognize that there are many instances where you can negotiate and in turn, lower your debt. Take medical bills, for example.

“It can really help to negotiate with the medical provider,” said McClanahan. “If you’re willing to pay them real money over time, you can end up paying pennies on the dollar of what you own,” she said. In addition to negotiating, McClanahan suggested asking hospitals or health centers whether they have any financial assistance programs that you might qualify for.

Furthermore, if you’re accepting a new job offer, don’t be afraid to negotiate a higher starting salary, which in turn could help you windle your way out of debt faster. Research the job market and consider making a compelling case as to why you deserve a higher salary.

3. Take it one debt at a time

If your debt is stretched across multiple credit cards or loans, you may be overwhelmed just by the thought of them. But if you can focus your attention on making extra payments on just one debt, it could help you see some quick wins.

“You ideally want to start by paying off the debt with the highest interest rates first,” McClanahan said. Repaying the debt with the highest rate helps you reduce how much interest you pay over time. Often, this means you’ll focus extra payments toward a credit card balance. Once that debt is paid off, you start making extra payments on your debt with the next-highest rate.

However, you may instead choose to pay off your debt with the lowest balance. This would result in a fast win that will motivate you to keep making extra payments on your debt.

4. Consider therapy

Seek the help of a psychologist or another mental health expert if your concerns about debt are negatively impacting your day-to-day life. A licensed health expert can help you confront your anxieties head on and offer strategies for dealing with them effectively. Also, reach out to your personal network and let those close to you know that you could use their support. It helps to know that you’re not in it alone.

Low-income individuals may want to seek the help of a sliding scale therapist, who will adjust their fees to make therapy more affordable. This can be found on mental health directories like GoodTherapy.org. There are also clinics that provide low-fee or free mental health services. To find a clinic near you, visit MentalHealth.gov.

5. Enlist the help of a credit counselor or financial planner

Sometimes, it helps to get an outside perspective on your debt, or at least talk to someone who can reveal your options. A credit counselor or financial planner can help you take steps toward getting your finances in order or develop a game plan for getting back on track, McClanahan said.

The National Foundation for Credit Counseling is a nonprofit financial counseling organization that provides a variety of free services, including counseling on credit and debt, bankruptcy and student loans. If you’re interested in hiring a financial planner, you could use the National Association of Personal Financial Advisors to find one.

Outside help could help you better weigh the pros and cons of your options and guide you as you work on your debt.

6. Focus on improving your credit score

Take steps to rebuild your credit and improve your credit score, which in turn, could give you access to more credit in the future. For starters, focus on implementing a plan for paying off debt, and work to keep your balances low on credit cards. Keep in mind that improving your credit score requires small, responsible actions over time, so be patient and set long-term objectives. For more tips on how to improve your FICO score, take a look here.

Indeed, accumulating debt can certainly take an emotional toll and negatively impact your overall life satisfaction. However, you can take simple steps to pay down debt and turn your financial situation around. No financial situation is permanent, and with some patience, persistence and implementing of best practices, you can find yourself back on the path to financial recovery. So take a deep breath, keep your emotions at bay and work on tackling your debt in a practical manner.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Renee Morad
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