Playing Your Cards Right: Avoiding the debt zombie apocalypse

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Households with credit card debt are spending more than households without credit card debt in seven of the nine discretionary spending categories that our sister site, CreditCards.com recently asked about. This is a really big problem because the average credit card charges a record-high 17.86 percent. If you have credit card debt, you’re essentially spending 18 percent more for everything you buy.

I want to highlight that these are discretionary purchases – not housing and groceries. And they’re big line items, which is important because I’m not into the whole latte-shaming thing. If you’re in debt, it’s probably not because of small luxuries. A $425 monthly car payment is much more likely to be the culprit. That’s about $5,100 a year.

Or if it’s not the car payment, maybe it’s leisure travel or dining out. The average household with credit card debt that spends on leisure travel runs up an annual bill of $2,211, and dining/takeout is close behind ($2,186).

There’s also clothing/shoes/accessories ($1,892), cell phone services/upgrades ($1,629), out-of-home entertainment ($1,538), fitness ($1,385), subscription services ($1,198) and personal care/beauty ($1,146).

Remember, these expenditures are optional! Even the car payment. You might need a car to get to work and elsewhere, but you don’t need a brand-new car. The average new car costs $37,577, according to Kelley Blue Book. On average, $31,099 of that is financed, Experian reports, for 69 months. That’s almost six years of $500+ monthly payments and a big reason why so many households are in debt.

Buying a cheaper used car or holding onto your existing car a bit longer would save a ton of money. You could also opt for public transportation or ridesharing services such as Uber and Lyft. And note, these car payment figures I’m quoting are just for the loan. They don’t even include insurance, gas and maintenance, which would conservatively add a few thousand dollars to the annual total.

Lifestyle creep is to blame

A different CreditCards.com survey found that, among those with credit card debt, 56 percent have been in debt for at least a year and 37 percent have been in debt for at least two years. More than a third of credit card debtors blamed emergency expenses for landing them in debt, and 28 percent pointed to day-to-day costs. However, many people are blurring the line between necessary and discretionary.

In all nine categories, the CreditCards.com data found fewer than half of respondents would be willing to significantly trim their spending in order to save money. Yikes!

I don’t mean to sound like you can’t have any fun. I just think there are plenty of ways to have fun that don’t end up costing you an arm and a leg. The Federal Reserve says the average household with credit card debt owes $5,700. If you only make minimum payments at 17.86 percent, you’ll be in debt for 19 ½ years and you’ll end up paying $7,526 in interest. That’s a recipe for financial disaster. How can you save for retirement, college tuitions and other priorities if you’re living like that?

The median household credit card debt is $2,300. It could potentially be retired in one year if the family opted for a staycation rather than a big trip. Even cutting your annual dining out bill in half would make a huge dent. So, turn a restaurant visit into a special treat rather than a weekly (or in some cases, daily) habit. Pro tip: bring your lunch to work for one week and see how much money you save.

Other ways to get out of credit card debt

Besides raising your income (through a side hustle, perhaps) and cutting your expenses, take advantage of balance transfer credit cards. These allow you to move a high-rate credit card balance to a new card with a 0 percent interest rate for up to 21 months.

Refrain from making new purchases on this card. Divide how much you owe by the number of months in your no-interest promotion and stick to that monthly payment schedule. You’ll knock out the average $5,700 debt with 21 payments of $271 and change. Beware of transfer fees – that 21-month offer (the Citi Simplicity® Card) charges a 5 percent transfer fee. Most balance transfer cards charge a transfer fee ranging from 3 to 5 percent.

The longest 0 percent period without a transfer fee is 15 months (available on the Chase Slate, the BankAmericard® credit card and the Amex EveryDay® Credit Card from American Express). In all three instances, you need to transfer the balance within 60 days of opening the account to get the transfer fee waived.

I’m confident that everyone can get out of credit card debt – usually in no more than a year or two – if they sign up for a balance transfer card and make lifestyle modifications such as earning more or spending less.

More from Ted:

Ted Rossman is the industry analyst and columnist at Bankrate.com and CreditCards.com. He has been interviewed by hundreds of media outlets, including the Wall Street Journal, Forbes, NBC Nightly News, CBS News, CNBC and Fox Business. Ted also writes the “Wealth and Wants” column for CreditCards.com, which focuses on cash back cards. He previously spent seven years as a member of the award-winning communications department at CreditCards.com and its sister sites, The Points Guy and Bankrate.

Post-Fed rate cut: Here’s how credit cards are affected

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The Federal Reserve has announced its plan to cut rates, meaning cardholders across the country might experience slightly lower interest rates from their credit card issuers.

At the July 2019 Federal Open Market Committee (FOMC) meeting, the Fed voted to cut interest rates by 25 basis points — a relatively small decrease — with the intention of slightly boosting the economy in case of economic downturn.

Fed Chairman Jerome Powell has been hinting at a rate cut for the past few months. With risks to the economic outlook arising, the Fed hopes the cut will preemptively reinvigorate the economy.

The meeting in summary

“[The cut] is intended to ensure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric 2 percent objective,” Powell said at the July 31 meeting.

The chairman also clarified his previous statements, confirming that the boost would not mean a series of further cuts.

“We’re thinking of it essentially as a mid-cycle adjustment to policy,” said Powell. “I’m contrasting it there with the beginning…of a lengthy cutting cycle. That’s not what we’re seeing now. That’s not our perspective now, or outlook.”

What this means for credit cards

The federal funds rate, determined by the Federal Reserve, typically affects the prime rate — or the interest rate banks charge customers with the highest credit ratings. This chain reaction, in turn, continues as the primate rate affects credit card interest rates.

As long as you’re paying your balance in full every month, you likely won’t see an impact from the increase or decrease of rates. But if you have credit card debt or are planning a large purchase in the coming weeks, the lowering of rates can make paying off debt a tad cheaper.

“While credit cards are affected directly by the prime rate, most consumers will feel a minimal impact with this cut,” says Mike Kinane, head of U.S. Bankcards at TD Bank. “We’ve had nine consecutive rate increases since 2008, so one .25 percent decrease won’t result in a dramatic change to a customer’s monthly credit card bill.”

Pay off debt now, not later

With the Fed rate cut, now is the time to pay off your credit card debt. Consider balance transfer card options that can help you consolidate and pay off your debt within an introductory zero percent APR window.

For example, the no annual fee Capital One® SavorOne℠ Cash Rewards Credit Card offers an introductory zero percent APR for 15 months on purchases and balance transfers (16.24% – 26.24% variable APR thereafter). You can transfer your debt to the SavorOne — for a 3 percent balance transfer fee — and pay it off over the course of 15 months while not owing anything in interest.

After your debt is paid off, you’ll still find value in the card’s unlimited 3 percent cash back on dining and entertainment, 2 percent at grocery stores and 1 percent on all other purchases.

The bottom line

The Fed’s rate cut may only marginally impact your cards’ interest rates, but it’s still a good idea to jumpstart your debt payoff as soon as possible.

Learn more about how to start budgeting, paying off your debts and choosing the right cards for your lifestyle here.

Weighing the costs: Should you transfer a car loan to credit card?

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It makes financial sense to seek the lowest interest rate possible when borrowing money, right? You might be tempted to transfer a car loan to a credit card if you get a zero percent introductory APR for a top rewards credit card.

If you qualify, you’ll get a lower interest rate, plus rewards you can redeem for a dream vacation, cash back, or even a statement credit.

But is transferring a car loan to a credit card a smart choice? The answer depends on several factors – starting with how you initiate the transfer.

How to transfer a car loan to a credit card

If you can transfer your car loan to a credit card and then pay in full, you’ll get the intro APR without any balance transfer fees.

But some loan issuers only permit payments via check, cash, ACH direct transfer or money order. In that case, you can use the balance transfer checks that came with your new credit card.

You can also do a balance transfer direct from your car loan company to your credit card issuer. You’ll need to provide your issuer with your loan account number, the address where you’d mail payments and the name of the loan company. If you’re used to making online payments, it’s a good idea to call your loan provider to confirm this information.

When you use a balance transfer check or initiate the transfer through your credit card issuer, you could pay balance transfer fees.

Before you make the transfer, get answers to these questions:

• Will the creditor that holds your car loan permit you to use a credit card to pay the loan balance?
• If you can’t use your credit card, can you use a balance transfer check to pay the balance?
• Are there any penalties for paying the car loan early?
• How much will you pay in balance transfer fees?
• How long does the intro APR last?

How to calculate the credit card interest rate

Before you decide to transfer your car loan to a credit card, calculate how much your new payments will be.

To calculate your monthly payments at zero percent interest, just divide the amount left on your loan with the terms of your intro APR offer. If you have to pay a balance transfer fee, add that to the loan amount.

If you owe $5,000 on your car, with a three percent balance transfer fee, add $150 to the $5,000. Then divide $5,150 by 18 months, for example, if those are the terms of your intro APR. You’d pay $287 per month, which is most likely lower than any car loan that doesn’t carry a zero percent APR.

If you intend to own your car for several years, extending your loan by nine months to free up working capital to pay down higher interest debt, put in a high interest savings account, or even pay for emergency expenses can be a wise choice.

The impact on your credit score

Your credit score could suffer if you exchange a secure installment loan for unsecured, revolving credit. If you don’t have other installment loans in your profile, you are reducing your credit diversity. And if putting the balance of your vehicle loan on your card brings you closer to your credit limit, you will also reduce your credit score due to high credit utilization.

These are significant factors that make up your credit score, so if you are looking to secure a mortgage or another car loan within the next year, transferring your car loan may not be a wise financial choice.

If you already have another installment loan in your credit profile and the balance transfer doesn’t approach 30 percent of the available credit on your card, the effect on your credit score will be minimal and you can move ahead with the transfer.

Otherwise, you may consider other options, such as refinancing your car loan.

Getting an auto loan vs. getting a credit card

If you have poor-to-average credit, it’s easier to get an auto loan than a credit card. Car dealers will often make deals with banks to extend credit to customers with credit scores of 640 and below. Even if you have declared bankruptcy, you can find a car loan – but the interest rates will be high.

Similarly, you can get a secured credit card with a low credit score. But the best zero percent interest APR rewards credit card offers are typically extended to those with a credit score of 720 and above.

If your credit score was below 720 at the time you purchased your vehicle, but you’ve since qualified for a zero percent APR credit card, your payments will be less than your car loan for the duration of the zero percent offer. You’ll save on interest charges, too.

Pros and cons of transferring a high interest car loan to a low interest credit card

Pros

• You could save hundreds of dollars in interest over the life of the loan.

• You may reduce your monthly payments.

• You can earn credit card rewards with the new charge or balance transfer.

• The loan company will release the lien on your car and sign the title over to you.

Cons

• Your credit score may drop due to taking on more revolving debt and increasing your credit utilization ratio.

• If you miss a payment on the credit card, your APR could skyrocket.

• If you can’t pay off the balance transfer or new charge during the introductory period, your interest rate may be higher than it was on your vehicle loan.

Bottom line

If you do choose to transfer your car loan to a credit card with a low introductory interest rate, be sure to have a good understanding of your credit card company’s policy for doing so, as well as the requirements to get the introductory rate with no penalties.

Cosigning A Student Loan Can Be A Risky Move For Parents

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With the total amount of outstanding student loan debt surpassing $1.5 trillion, many borrowers are beginning to feel the consequences of their burdens — and that doesn’t just mean students.

When a student doesn’t receive enough financial aid to fund their educations, their families often turn to private loans to help cover the remaining costs. Parents are commonly asked to cosign on loans in order to get their child a better rate, or approved altogether. That willingness to help could be detrimental.

“Would you give a teenager who is irresponsible the keys to your financial future?” That’s how Mark Kantrowitz, student loan expert and vice president of research at Savingforcollege.com describes the risk in cosigning on a child’s student loans.

Reasons why parents probably shouldn’t cosign

Only private student loans can utilize a cosigner — Federal student loans do not allow the practice. With a cosigner, a student with low or no credit can be offered a better rate or increase the chances of seeing their loans approved. Helping a child qualify for a way to pay for their education may seem like a given for most parents, but it comes with immense risks.

Here are some important reasons why parents may want to think twice before cosigning on their children’s private student loans, according to Kantrowitz.

Cosigners are financially responsible if a student defaults on the loan

Cosigning on any type of loan means you are now on the hook for the balance, should the primary signer fail to make payment. And that doesn’t mean the student loans have to end up in default in order for the lender to come after a cosigner, either.

“Actually, as soon as the student borrower is late with a payment, the lender will seek repayment from the cosigner,” Kantrowitz says.

Around two-fifths of general loan cosigners end up repaying the debt, according to CreditCards.com, a Bankrate sister site. If you aren’t capable of repaying the student loan balance entirely on your own, this could cause serious financial distress.

The risk of damaged credit

Cosigning on a private student loan means the loan balance will show up on your credit report. Considering debt-to-income is a major factor in determining a credit score, the large balance can hurt your score.

Kantrowitz also notes that a delinquency won’t only hurt the student — it’ll hurt the cosigner, too.

“Delinquencies and defaults will show up on the credit history of both the student borrower and the cosigner, ruining the cosigner’s credit, not just the student’s,” according to Kantrowitz.

Once your credit is damaged, it will be harder to get approved for good rates on credit cards, auto loans or mortgages. The implications of poor credit stretch far beyond just a low number.

There are no financial benefits for the cosigner

While a parent may be helping a child invest in their future, they won’t receive any direct benefits from cosigning on the student loans.

“All of the benefits — qualifying for a loan, getting a lower interest rate — are received by the student, not the cosigner,” Kantrowitz says.

Seniors facing student loan debt put their retirements at risk

Should any of the private student loans end up in default, the affected cosigner could face an unstable financial future.

In total, Americans who are 60 years old and over owe $86 billion in student loan debt. That number has surged by 161 percent since 2010, as reported by the Wall Street Journal.

Should retirees be unable to repay loans in default, they face an alarming realization in that their retirement will be put at risk. More than 40,000 people aged 65 and older in 2015 faced garnished Social Security benefits because of defaulted student or parent loan debt, the Wall Street Journal reports.

Tips for parents who cosign on a child’s student loans

After considering all of the risks, some parents still might make the decision to cosign on a child’s student loans as every situation is different. While cosigning on any type of loan can have dire consequences, cosigners have rights, should the loans end up in default.

Seek a cosigner release

Under this agreement, the cosigner can be freed from financial responsibility after the primary borrower meets certain requirements. For example, a cosigner can be released from the financial responsibility of a loan after the primary borrower makes a certain number of consecutive payments that are all on time.

Those seeking a cosigner release should contact their lender for more information and to create a plan. The lender will likely ask for proof of your income and creditworthiness, in order to determine eligibility.

Consider refinancing

If you’re unable to be granted a cosigner release, refinancing the loans might be a good idea. In doing so, you will be able to have your name removed from the balance entirely.

(See today’s personal finance loan rates)

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