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4 Biggest Debt Temptations and How to Avoid Them

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By Kali Hawlk, CommonSenseMillennial.com

Trendy outfits. Stylish furniture. Fancy vacations. Latest and greatest tech tools and gadgets. New cars. Bigger homes. This list of things people want and can’t get enough of could go on and on — because the temptation to spend money we don’t have is everywhere in our consumer-driven society.

We’re tempted to buy ourselves a little happiness with a new shirt, a fun piece of decor for our living space, or a snazzy smartphone case (that we somehow see as better than the other three we own but don’t use).

We treat ourselves with expensive coffee drinks, over-complicated cocktails, and meals that someone else prepared. We work hard, so we deserve it.

We want to keep up with the Joneses, or at least our peers. We don’t like feeling left out and owning less can often feel like amounting to less.

The temptation to spend isn’t difficult to explain, but that doesn’t mean it’s justified or no big deal. Here’s the problem: spending temptations, when left unchecked, lead straight to debt temptations.

When a Little Extra Spending Turns into a Whole Lot of Debt

Will a $4 latte that you buy on occasion after a rough day at work put you in the poorhouse? Unlikely. The problem occurs when you consistently make the mistake of spending just a little too much money — a little too much more than you actually have in your checking account to cover. “A little extra spending” quickly evolves into a financial mess when you charge purchases to your credit card and don’t pay that balance off in full.

“Not paying attention to where your money is going is what leads people into debt,” explains Sam Farrington, founder of SoundMind Financial Planning and member of XY Planning Network. Failing to track your spending or keep a budget leaves you more susceptible to overspending and living above your means.

As the old adage goes, you can’t manage what you don’t measure. Measure your money so you know you’re living in your means and not spending more money than you actually have.

The Number One Debt Temptation

You’d think that saying “don’t spend more money that you have” would be one of the most intuitive personal finance fundamentals out there. But many people find this exceedingly difficult, thanks to the top debt temptation: credit.

Lines of credit — usually associated with credit cards when we talk about debt — enable you to literally spend more money that you have access to via cash (in something like a checking or savings account). “The reality is that the credit card temptation will become your biggest financial snare down the road once the balance becomes unmanageable,” says R. Joseph Ritter, Jr. CFP® of Zacchaeus Financial Counseling, Inc.

It’s incredibly easy to open a credit card account, charge a purchase on the card, and forget about it until about four months later when your balance is steadily accruing interest. And just like that, you’re in debt.

Debt Temptation Intensifies When Credit Card Companies Sweeten the Deal

Credit cards may serve as an even bigger temptation when they’re rewards credit cards. Users may feel like they’re getting an amazing deal by opening up credit cards to get discounts, free items, statement credits, and points for fun and exciting experiences like travel.

According to Dennis M. Breier, president at Fairwater Wealth Management, “one of the biggest debt temptations, especially for young professionals, is putting vacations or large purchases on credit cards in order to get the points.”

While things like travel hacking — which involves taking advantage of credit card signup bonuses to earn massive amounts of reward points to score free airfare and hotel stays — can be beneficial, the temptation to go beyond your normal, everyday spending chasing after those points can be too much for some.

That’s where savvy consumerism abruptly ends and financial trouble begins. It’s tempting to open — and use — more credit cards than you need. It’s justified because you got a free airline ticket, right? Not when you had to spend $3,000 you didn’t have to score a flight that retailed for $300.

“Many young people will book a trip or buy something expensive with their card to get rewards points because it sounds smart. However, they won’t immediately pay this debt back,” says Breier. The temptation to use the card to feel “rewarded” is strong, and it can quickly leave you with a mass of credit card debt if you don’t have a plan to manage and pay your balances in full and on time each month.

Debt Temptations Go Beyond Plastic

Credit cards aren’t the only kind debt temptation out there — although they may be the easiest to give in to. Other types of credit, like auto loans, lure many into financial situations they can’t afford to get out of.

“Two of the biggest temptations include relying on credit cards and buying a car,” says Ritter. “Although the monthly payment makes a new car seem affordable and the new car smell is tempting, in the long run you will spend a lot less money on cars by buying a car that is several years old.”

Mark and Lauren Greutman, money management experts at MarkandLauraG.com, agree and also suggest buying used. “New cars depreciate by 20 percent right after driving off the lot,” they explain. “If you want a new looking car, I suggest buying a two year old car that was previously leased. You will get that new car feeling, but without that hefty depreciation.”

Avoiding Debt Temptation by Using Credit Cards the Right Way

Buying a used car instead of a brand new one is a simple and easy fix when it comes to avoiding debt temptation in our vehicles. Figuring out how to use and manage credit cards properly, however, is a bigger challenge for many.

Michelle Black, author and credit expert at HOPE4USA.com, believes that improper attitudes towards credit card usage serve as the biggest trigger to overwhelming debt. She suggests that, even though you may have a larger line of credit than you do cash balance in the bank, you need to think of your credit in the same way you would cash.

“Credit cards should be treated just like your bank account: if you don’t have the money to pay off the bill right that moment then you should not use your credit card to make the purchase,” explains Black. “Resolve to never revolve a credit card balance from month to month,” she advises consumers. “Your wallet and your credit scores will thank you.”

Black also wisely points out that just because credit cards can lead us into debt temptation, we shouldn’t label all credit cards as “bad.”

“The cash and carry crowd will lead you to believe that the only way to achieve true freedom from debt is to avoid credit cards all together,” she says. “However, that is not only bad advice it is also insulting. If you develop true financial discipline then it is no harder to avoid overspending on a credit card than it is to avoid overspending the funds in your bank account.”

This is where financial education and literacy become critical. Credit cards — and other financial products that allow us to borrow money for a period of time — can be useful tools when we understand how they work and how to use them to our advantage.

It’s important that we can identify our debt temptations. But it’s just as important to realize that we’re not fated to give in to them. With the right knowledge and information, we can make empowered financial decisions to avoid temptation while making the most of powerful financial tools available to us.

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.

Kali Hawlk
Kali Hawlk |

Kali Hawlk is a writer at MagnifyMoney. You can email Kali at [email protected]

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Introducing FICO 9: What This Means for You

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Yesterday, FICO announced that it will be releasing FICO Score 9.  If you have unpaid medical bills or other collection items, this change will impact you.

What is FICO?

FICO is the most widely used credit score in the country. 90 percent of all credit decisions (mortgages, cards, credit cards, personal loans and more) use the FICO score in some way.

So, when FICO makes a change to its score, we should listen. This score has a big impact, because lenders use it and others (like CreditKarma) are trying to approximate it.

What are they changing?

This change is huge for people with unpaid medical bills and other collection items.

Unpaid medical bills

According to Experian, 64.3 million Americans have a medical collection record on their bureau. In the current world, this can significantly harm their credit score.

If you have an unpaid medical bill, it can be reported to a credit bureau in two ways:

  • The medical service provider can report to the bureau, or
  • A third party debt collection agency that has purchased the debt, or has been contracted to collect the debt, can report it

99.4 percent of cases have been reported by collection agencies. So, if your doctor is calling you to pay – it probably hasn’t been reported to an agency. But, once a collection agency starts calling you, you probably have a negative item on your credit bureau.

The purpose of a credit score is to help lenders understand the likelihood of someone being responsible and paying back on time. There has been a widespread belief that people have been unfairly punished for medical bills. In fact, the CFPB has proven that people have been unfairly punished, in a May 2014 report.

With the new score, FICO is agreeing with the CFPB. Medical collections will now be differentiated from non-medical collections. And people will be “punished less” for medical collections. This makes sense, for three reasons:

  1. The medical system is complex, and many people have been hit with small medical collections that they didn’t even realize they owed. For example, with a small co-pay that ended up with a collection agency.
  2. Historically, many responsible people could not get insurance because they had a pre-existing condition. And, when medical disaster struck, they had no way to pay the medical bills. They tried to be responsible, but couldn’t.
  3. Even with insurance, multiple emergencies in a family can lead to large deductible payments. Doctors and hospitals can quickly turn over bills to collection agencies, resulting in a negative remark on the credit bureau. Even people who are just paying back their medical bills, responsibly, over time can be punished.

This is a big win for the CFPB. Hats off. A government agency has done the math for the industry, and the industry has agreed. This should result in better access to credit, and lower rates on existing credit – once (and if) the changes are accepted by the industry.

Paid Collection Accounts will now be bypassed

Beyond medical bills, many other types of debt can end up on your credit bureau. For example, failure to pay your utility bill, your phone bill, your overdraft or any other type of debt can result in your account being sold to a collection agency. And the agency will usually report the collection account on your bureau. Having these accounts can seriously harm your score.

But, the older the collection item, the less impact it has on your score. I have regularly met people who felt confused. They have recovered and now had money. Should they pay back that five-year-old collection item, or just let it age. They wanted to pay it back, but would receive advice from some people not to do so. Why? Because activity on a collection item could make it appear more recent.

This change removes all ambiguity. If you pay back your collection items, your score will benefit. This is the way it should be.

When will I see the impact

Unfortunately it will take a while. FICO sells its credit score to banks. Whenever a new score is introduced, a bank has to decide whether or not to upgrade. In order to make this decision, they need to do a lot of analysis.

First, they will perform a “retro” analysis. This means they will look at the past few years of their portfolio history, and they will estimate how the portfolio would have performed if the new score was used.

They will then need to build strategies, which includes the cutoff (above what score will they approve accounts), the pricing and the extra rules that they want to build. In my experience, this takes 12 to 18 months (there are so many committees that need to approve this!).

Banks are very eager to “swap in” new customers. So, if previously rejected customers can now be approved, banks will be keen to proceed.

They are less keen to charge people lower interest rates. So, the CFPB needs to watch the banks closely. If people are truly lower risk, they should pay lower prices. But, banks are not eager to reduce pricing.

In Conclusion 

We fully support the changes. Medical bills are being severely punished. And people should not be afraid to pay off collection accounts.

We are realistic: it will be a while before we feel the impact.

And we are rightly skeptical: banks will be happy to approve more people and give more credit. They will be less excited to reduce interest rates.

Got questions? Get in touch via TwitterFacebook, email [email protected] or let us know in the comment section below!

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.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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How to Win the Debt Repayment Game

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Debt: one of the most vulgar of four letter words. Okay, maybe your parents wouldn’t wash your mouth out with soap for uttering it, but here at MagnifyMoney it’s a word we hope is prefaced with “I used to have” or “I don’t have any.”

Except this isn’t the case for nearly half of Americans.

According to our recent survey, 42.4% of Americans carry credit card debt with the average amount being a startling $10,902. This equates to average payments of $408 per month towards credit card debt.

You’d think with those steep monthly payments, the debt would be paid off in about two years. Unfortunately, that isn’t how debt repayments work. Monthly payments end up being primarily put towards interest with just a tiny amount of the principle debt being chipped away. 75.7% of those surveyed were paying higher than 15% interest rates on their debt meaning it could take years to decades of making minimum payments for them to crawl out of the red.

Fortunately, there are ways to leverage your existing credit card debt to your advantage.

That’s right. You can use debt to make the banks fight over you. Just think about it as being on any reality TV show where contestants compete for love. Except you aren’t elbowing other indebted individuals in the face, the banks are brawling for you to give them a rose.

In financial terms, it’s called a balance transfer.

With a balance transfer, you move your debt from Bank A to get an offer from Bank B. Bank B might give you a 0% interest rate for 18 months, which means all your payments are paying down the principle debt you owe. This can not only take years off your repayment strategy, but save you hundreds to thousands of dollars.

Why does Bank B want your debt? Because they’re counting on you tripping up and falling into one of their traps, so you’ll end up paying interest. If you follow our rules and stay strategic, then you can beat them at their own game.

There is one caveat: you need excellent credit. If you have a credit score of 750 or above, then you can use our Balance Transfer tool to see which option is best fit for your debt. Remember: you can’t transfer debt from one card to another with the same financial institution. If your original debt is with Chase, then you’ll need to find another option for your balance transfer.

What if you don’t have excellent credit?

Balance transfers are often exclusively reserved for people with credit scores in the 700s. If you haven’t quite reached that level of financial health, you can still utilize a debt consolidation loan to borrow money or help refinance existing debt.

Debt consolidation loans also know as personal loans have far less traps and temptations than borrowing on a credit card. They also provide fixed interest rates, which means you don’t have to worry about your interest rate suddenly getting hiked up like you do with a credit card.

You can go through the process of seeing if a debt consolidation loan is the right fit for you without a hard inquiry on your credit score (hard inquiries make your score drop a few points).

Explore your debt consolidation loan options here.

Dealing with a credit score below 600?

You can try applying for a personal loan with One Main if your score is at least 550, but you should focus on taking steps for increasing your credit score.

Never fear, we’ve laid out six simple steps for building credit here.

What happens after debt repayment?

Once you fight your way into the black, it’s important that you assess the behaviors that put you in the red to begin with. Sometimes extenuating circumstances, such as medical emergencies, suddenly flip our lives upside down. Other times, an innate need to keep up with the Jonses can push us to live outside of our means. Identifying your road to debt and learning how to stay out of the red can be just as important as the process of paying it down.

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.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at [email protected]

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