How to Avoid the Balance Transfer Trap

Balance transfer cards can be a useful tool for reducing your interest rate and helping you pay off your debt faster. With the right balance transfer offer, more of your monthly payment can go to the principal, and you will pay less over time – in addition to getting out of debt quicker.

Unfortunately, as with so many financial tools, when used improperly a balance transfer card can actually cause more problems. In some cases, a balance transfer can result in a delay to paying off debt – and can even lead to an increase in debt.

Understand Balance Transfer Terms

Before you sign up for a balance transfer, make sure that you understand the terms involved. The terms of the balance transfer can have an impact on how effective it is when it comes to paying down your debt:

Introductory Period

First, look at the length of the introductory period. When that period ends, your interest rate might go higher. A six-month intro period may not give you a lot of time to make progress on your debt. You need to be aware of that, and do what you can during the 0% APR period. Your best results will come from a longer period. If you qualify, a period of 18 months can be very helpful indeed.

Balance Transfer Fee

Many balance transfer cards charge fees of between 3% and 5% of the balance transfered. If you have a large balance, and the fee is 4% or 5%, the fee will impact your interest savings – especially if you have a shorter six-month or nine-month intro period. Run the numbers to make sure that you really are coming out ahead.

May Not Get 0%

Sometimes, instead of receiving a 0% balance transfer rate, you might end up with 1.99%, 2.99%, or 3.99%. This can still be a good deal, though, if you have high interest debt. In some cases, you might be better off choosing a 3.99% lifetime balance transfer than going with a 0% transfer that takes effect for only six months. Carefully consider the options and the realities of your situation.

Understanding the terms of the balance transfer can help you make a more informed decision. However, you want to plan it so that you pay off as much as possible during the intro period so that when the interest rate heads higher, you aren’t stuck paying so much in interest that your debt repayment efforts slow to a crawl again.

The Real Issue: “Freeing” Up Room for More Spending

The largest trap associated with balance transfer, though, is the fact that once you move your balances to a new card, it can be tempting to view the “freed up” credit card as “available” money. You could actually end up in worse shape that you were in before.

If you get a new credit card with a 0% balance transfer offer, you might move your high interest balances over. Now that your old debt is on the new card, you have room on your old credit card. If you don’t cancel that card (canceling a card comes with its own credit score implications), you need to be careful about using it. Otherwise, you’ll start racking up the high interest debt again – before your old debt is retired.

Your best defense against this problem is to cancel the credit card. If you are reluctant to take that step, though, you should lock the card away. Put it on ice, or lock it in your fireproof safe. Put it out of the way so that you aren’t tempted to use it.

The reality is that a balance transfer will only really help if you are making true changes in your financial behavior. As long as your money habits remain the same, you will not be able to get out of debt – no matter how many balance transfers you use.

Have you ever transferred your balance to a new credit card? Leave a comment!

This article was originally published November 5, 2012.

Debt and Marriage: What You Should Know Before the Wedding

Debt can ruin a marriage, so how can you beat debt before your wedding day? Although you many not be able to eliminate debt before tying the knot, there are steps to prepare for debt in married life.

Dating and Debt

When you get married, your two families become one and so do your personal finances – the good and the bad. It’s important to find out what your spouse-to-be’s likes and dislikes are, and it’s just as important to find out about their personal finances.

Uncover this information while you’re dating and hammer out your plans for the future during your engagement. Waiting until you’re married to discover bad financial habits and low credit scores can add financial stress to your relationship.

How to Talk About Debt

Money is one of leading causes of divorce so talking about your finances should rank as a high priority. You don’t want your marriage to end before it begins, so make time to talk about finances with your significant other.

Share the debts and expenses you have and ask what debts and expenses they have. People are often embarrased by the debt they’ve accumulated so if you explain your financial situation first then they’ll probably feel more comfortable sharing.

Financial Behaviors

You can also learn a lot by watching spending habits and observing certain behaviors. If they always pay with a credit card rather than cash or a debit card, this may be a red flag of credit card debt. Inquire if they pay off the balance each month.

Of course he might put your mind at ease when he says he uses his credit card to earn points, but he pays off the balance in full. Or a red flag may pop up if she says she only makes the minimum payment each month.

A soon-to-be spouse that never seems to have money is another sign of a problem. It may be a sign of living beyond their means – spending more than they’re making. The way to get to the root of the problem is to ask the questions that give you the answers you need. Before you marry someone, you need to know everything about them including income, expenses and credit history.

Credit History and Debts

When you’re married, your credit history, credit scores and debts affect your ability to make major purchases. If your partner has a bad credit score and you’re buying a house, lenders may require a higher down payment or charge you a higher interest rate. It can even cause you to get denied for the mortgage.

In the current economy, credit scores and credit history play an even bigger role than ever before. It’s important that you enter into marriage with full knowledge of the debts and credit history that comes along with your spouse. It affects your ability to reach milestones in your relationship, such as buying a home and your day-to-day finances.

Avoid Wedding Debt

Definitely avoid starting your marriage in debt because you threw a wedding you couldn’t afford. You can have a wonderful wedding and still be conscious of the amount you’re spending.

Throwing a smaller more intimate affair is back in style. This helps couples to save money on everything from the venue space and the number of invitations to the food and beverages served at the reception.

Shopping for gently used wedding dresses at high-end consignment shops or borrowing gowns from friends and family members help brides to save thousands of dollars on buying a new gown. Remember you only wear it once.

Marriage and Debt

Finances are a leading cause of divorce because money problems can cause fighting and stress that trickle into the other areas of your marriage. If you go into your marriage with your eyes wide open, you can alleviate this problem in your marriage. Talk about your finances with your soon-to-be spouse before you get married. Don’t dwell on the past and hold it over their head. Instead make a plan for how you’ll handle your finances going forward together!

This post on debt and interest rates is part of a series on credit and debt in marriage.  You can also read about credit scores and interest rates, improving your credit score, and free credit reports.

How are you going to handle debt in your marriage? Leave a comment!

This article was originally published May 12, 2009.

How to Pay Down Holiday Debt as Quickly as Possible

Even with the best intentions, it’s too common: People rack up debt during the holidays. If you have some holiday debt, chances are that you want to get rid of that debt as soon as possible.

Here are some tips from Kevin Gallegos, the vice president of Phoenix operations for Freedom Financial Network:

1. Stop charging.

The first thing you need to do is stop using your credit card. “Don’t close any long-standing accounts with a positive payment history, as that can hurt your credit scores,” says Gallegos. But you do need to stop charging. He suggests the time-honored tradition of freezing the credit cards so you can’t make impulse purchases with them while you pay off your holiday debt.

2. Keep paying for your needs.

“Make sure to pay for necessities like food, clothing, and shelter,” says Gallegos. “However, keep in mind that things like fine dining and a new wardrobe are not necessities.” You don’t want to put other areas of your finances at risk, so keep paying on secured debt (car, home) and student loans.

3. Start with credit card debt.

Now that you have stopped charging and identified your true needs, it’s time to make a plan for paying off that holiday debt. Gallegos suggests starting with credit card debt. “Begin by figuring out a fixed monthly amount you can pay toward your debt until all debts have been paid off,” he says. “This amount should be more than the combined minimum payments on all of your cards.”

Then, choose a method of debt pay down. There’s the debt avalanche, which focuses on starting on the card with the highest interest rate so you pay off debt at a faster rate, or the debt snowball which has you start with the lowest balance. The snowball takes longer and costs more in interest, but it can be more motivating, since you start off with a quick victory.

4. Negotiate.

Gallegos points out that you can negotiate with your creditors. “If you have experienced a temporary hardship, you might try calling creditors and asking for ‘temporary hardship status,'” he says. “Some creditors may work out payment plans.” This can be a way to get a little breathing room while you tackle your holiday debt.

Don’t forget that if you are a customer in good standing, you might also be able to negotiate your interest rate. If you can get a lower interest rate, you’ll be able to pay off your holiday debt quicker.

5. Get help if you need it.

Chances are that you can handle your holiday debt on your own. However, if you are overwhelmed and don’t know where to start, it can make sense to get a little help. “Individuals who have credit card debt of $10,000 or more, and are struggling to make required minimum payments, may find help,” says Gallegos.

Your holiday debt might have put you over the edge, acting as the last straw in your situation. If this is the case, you might need help. Make sure you work with a reputable credit counselor or debt company so that you don’t end up in worse trouble overall.

How are you planning on paying down your holiday debt? Leave a comment!

Could P2P Lending Help Your Finances?

One of the financial opportunities becoming increasingly popular in the United States is peer-to-peer (P2P) lending. P2P lending exists to help borrowers and lenders find each other. In many cases, P2P lending allows ordinary people access to financial opportunities that they might not normally have.

P2P lending involves lenders (often “regular folks”) offering funds in $25 increments. Borrowers try to raise money a little at a time from several lenders. This way, the borrower receives the money, and lenders can help out . . . without taking a huge risk. Unfortunately for Canadians like me, I found out P2P lending isn’t an available option yet. This is mainly due to having separate provincial securities regulators, instead of one federal regulator like the SEC.

The idea is that you can use services like LendingClub and Prosper to lend money to your peers, and receive a return that is competitive with returns you might see elsewhere. You can also borrow from your peers and get a loan that you might not otherwise qualify for. Whether you are a lender or a borrower, P2P lending might be able to help your finances.

Lending Money to Others: An Increasingly Popular Investment Strategy

If you are looking for better returns on your money, particularly in a low-rate environment like what we have now, P2P lending might be able to help.

You can see reasonable returns when you lend money to others. In many cases, it’s possible to see annualized returns of more than 5%. While 5% or 6% doesn’t seem like a big deal when you compare it to long-term stock market returns, it can still be a viable alternative to bonds. Besides, try finding those types of returns when you go to the local bank and open a savings account or even a CD.

Of course there are risks. You need to understand that you are lending money to someone else. You are hoping that they will repay the principal, as well as some interest. With P2P lending, you set yourself up to risk losing money if the borrower defaults on the loan. Be aware of that before you decide to invest using P2P lending.

With careful screening of borrowers, though, you can reduce your risk. P2P sites rate borrowers’ credit so you can see which are more likely to make on-time payments. Choose those with better credit ratings, and you can improve your chances of being paid. If you want better returns, though, you can invest in notes from borrowers with questionable credit. Take a chance on borrowers with D credit, and you could see much higher returns, as long as there isn’t a default.

One strategy is to take a dumbbell approach with P2P investing. On one side, invest half your portfolio in notes with the highest credit rating. On the other side, balance it out with D, E, and F borrowers. For some investors, this works well.

Borrowing Opportunities with P2P Lending

Maybe you aren’t in a position to lend money to others. Maybe you want a loan, but have been unable to get one from the bank. In those cases, P2P lending might be able to help. Many borrowers find that they can get a debt consolidation loan, business loan, or some other loan for a lower interest rate than what is offered by a bank or credit card.

However, you will need to convince lenders to fund your loan request. As with more traditional lending, your credit score matters. Even though your credit situation matters (and will influence your interest rate), with P2P lending your personal story often matters even more. You need to make a convincing case that you deserve the money and that you are serious about repaying the debt.

Realize that, in many cases, websites that facilitate P2P lending run it as an all-or-nothing funding operation. If you don’t raise what you say you need, you don’t receive any of the money. The would-be lenders who did offer you money will have their funds returned to them; they can invest in another borrower.

You will also need to make your payments as agreed, or risk seeing a hit to your credit score.

Before you jump into P2P lending, carefully consider your options and your situation. I believe it can be a great way to get a nice return on your money but unfortunately I can’t participate in Canada yet. However, those of you in the U.S. can benefit from P2P lending – but you need to make sure it works for you, whether you decide to lend money to others, or whether you decide to borrow.

Have you tried P2P lending? Has it worked out for you? Leave a comment!

Tom Drake is a husband and father, as well as the writer behind the well-known Canadian Finance Blog. He covers budgeting and investing for a mostly Canadian audience, but the topics often apply universally.

How Debt Costs You More Than Money

When your debt seems manageable, it is easy to simply slowly chip away it while not concerning yourself about it. After all, if you can make your minimum payments, plus a little extra on occasion, what does it matter? As long as you can “afford” your debt, paying it off doesn’t need to be a priority.

Unfortunately, this attitude could be costing you quite a bit, especially in the long run. The longer you are in debt, the more it costs you. You are much better off if you pay off your debt as quickly as you can. Otherwise, you run the risk of big costs in terms of money, opportunity, and even emotional well-being.

Debt Costs You Money

Whenever you pay interest, you are putting money directly in someone else’s bank account. That interest you pay doesn’t provide you with a benefit in terms of items to purchase, or experiences to enjoy. It’s money you pay for the “privilege” of borrowing and carrying a balance. This is money that you could use, putting it to work for you, rather than lining someone else’s pockets.

The longer you are in debt, the more it will cost you. If you pay only the minimum payment on a credit card, it can, even if you never charge another thing on it, take as long as 10 years to pay off, and result in you paying three or four times more than you originally borrowed. That’s a lot of money that is, essentially, being poured right down the drain when, instead, it could be building your financial future.

Just the interest savings alone is a good reason to work a little harder to pay down your debt as fast as you can.

Debt Costs You Opportunities

When you are paying money in interest, you don’t have as many opportunities to make money. This is because your resources are going elsewhere. You can’t take advantage of the opportunity to make a good investment, or go on a trip, or do any number of other things because your resources are obligated to pay the debt that you owe.

If you have high enough debt, and all you do is make minimum payments, you will soon find that your credit score can be impacted. This means that, if you are approved for a car loan or a mortgage, you won’t have the opportunity to get the best interest rates. On top of that, your poor credit report, lowered by your high credit utilization, might mean that you don’t have the same job opportunities, or access to the same lower insurance premiums that others enjoy.

These opportunity costs can add up, resulting in a great deal of money and financial security compromised over time.

Debt Costs You Your Sanity

Sometimes, it’s not just money. Being in debt can take a toll on many people. Indeed, if you have high debt (and no plan to pay it down) it can impact your own emotional state. This can result in you feeling out of control and unable to direct your own life. You might lose your sanity, you could say!

And of course stress about your debt – and unhappiness about your situation – can affect your relationships. Many marriages experience increased problems due to household debt. Fights, disappointments, and even divorce can result from high debt. On top of that, your relationships with other family members, your children, and your friends can be affected by your emotional discomfort related to debt.

You can feel better – and have a sense of control – when you put together a plan to pay down your debt. Find out what your rights are regarding debt, and put together a plan to pay off your obligations as quickly as possible. Your mood will improve, you’ll save more money, and you will position yourself to take advantage of new opportunities.

Has debt had any of these affects on you? Leave a comment and let us know about it!

This article was originally published October 5, 2012.

How to Buy a House Without Making Gigantic Money Mistakes

Buying a house involves making lots of decisions, many of which are daunting because of the high cost of real estate. I spent 20 minutes on the phone with a friend of mine a while back talking through various options and considerations for selling his home and buying a house in our area. I could hear the stress and uncertainty in his voice and sympathized with how he felt.

The Fear of Mistakes

Remembering back to our experiences of buying a house I can recall that in the back of our mind the whole time we were worrying that we would make a gigantic mistake. If you only buy one or a few houses in your lifetime you don’t go through the process very often and a rookie mistake could end up costing you thousands of dollars.

It’s not just the potential cost of a mistake that sets you on edge, it’s also the fact that you’re making one of the biggest commitments of your life and making decisions that may live with you for the next 20 or 30 years – or even longer.

It was no surprise to me that when I asked readers a while back what kept them up at night one of the big things was finding a house they could like yet afford.

Finding Money to Buy a House

Unless you’ve saved up enough money to pay for your house with cash, you’ll have to borrow funds to buy a house. You’ll have to figure out how much you’re eligible to borrow and how much you’ll expect to pay based on your financial situation.

If you’ve struggled with finances in the past and have bad credit or a history of bankruptcy or foreclosure that makes it more difficult and we touch on that in one of the articles. Also remember that how much you’re able to borrow usually isn’t the same as how much you should borrow. You may be approved for a loan amount that’s actually higher than what you can afford. But we’ll get to that in the next section.

• How to Improve Your Credit and Buy a House
• 12 Steps to Improve Your Credit Score
• Mortage Pre-Approval When Buying a House
• Down Payments and Private Mortgage Insurance

Buying a House You Can Afford

As I mentioned earlier, buying a house is probably one of the biggest financial commitments you’ll ever make. You want to find something that meets your needs but also a home that won’t put you in the poor house for decades to come. So here’s a look at figuring out how much you can afford and some ways to help stretch your dollars to get more house for less.

• 3 Ways to Buy More House for Less Money
• How to Buy a House in an Expensive Market
• How Much House Can You Afford?

Financing Your Home

Decisions about financing your house can potentially save you or cost you tens of thousands of dollars over the life of a home loan. If that’s not enough to stress you out, picking the wrong type of loan could even mean the difference between being able to make your payments or facing foreclosure. Here’s a look at the implications of the different loan options and ways to keep your borrowing costs down.

• 30-Year Mortgage vs. 15-Year Mortgage
• FHA Loans vs Conventional Loans
• How to Use a Mortgage Calculator to Compare Home Loans
• 6 Key Factors for Home Mortgage Rates
• Finding the Best Mortgage Rates
• Home Loan Closing Costs

Paying for Your House

Once you finally find the right house and the right loan and get moved in your house payment is due every month for the length of your loan. If it turns out that bill is more than you can handle or is just higher than you’d like, here are a few things you can do to help ease the pain of a monthly mortgage.

• What to Do if You Can’t Pay Your Mortgage
• How to Sell Your House Without a Realtor
• 5 Ways to Pay Off Your House Early

I hope these articles help take some of the uncertainty and stress out of the process of buying a home.

Have you made any money mistakes when it comes to buying a house? What can you teach others? Leave a comment!

This article was originally published May 12, 2011.

How Does Debt Settlement Work?

“Do you owe thousands in credit card debt? We can help you reduce your debt so that you pay just pennies on the dollar!” Chances are that you have heard something similar on the radio (or seen an ad in print or online) with a similar promise. While it may seem too good to be true, many of these ads are actually advertising a legitimate service: debt settlement.

What is Debt Settlement?

Debt settlement is a process by which creditors accept an amount of money from you that is less than you owe. Rather than waiting for you to go through a payment plan where you pay off the entire debt (including interest and other accrued fees), the creditor agrees to let you pay less than you owe over time.

Your debt is considered done and over with when you settle your debt. It is possible to attempt to settle your debt on your own, but many people who go this route work with a debt settlement company that helps them.

Why Would the Creditor Accept Less Than You Owe?

Debt settlement works on the principle that the creditor is convinced that you won’t be paying the whole amount anyway, so some money is better than no money. Rather than risk being left with nothing because you just don’t pay, or even file for bankruptcy, the creditor (usually those who have made unsecured loans to you) agrees to settle with you for a lesser amount paid at once.

Of course, since the point is to convince your creditor that you won’t be able to make payments, you have to, in fact, stop making payments. Most creditors won’t consider settling until you are at least 90 days behind on your payments. When you do this on your own, you can set aside money in an account, allowing it to build up over time, while you stop making payments. When you settle debts with the help of a company, you actually make monthly payments to the service provider. The debt settlement company takes a fee off the top, and then puts your money in an account.

None of the money goes to your creditors. Instead, it grows until the creditor is ready to settle. Then, when the creditor is ready, the settlement company negotiates the amount you will pay, and uses the money from your account to pay the creditor.

Debt Settlement Will Destroy Your Credit Score

The first thing you have to understand about debt settlement is that it can harm your credit score. Obviously, since debt settlement doesn’t work unless you haven’t been making payments, your credit score will plummet because you are behind on your accounts. Next, you will receive a negative entry on your credit report regarding the settlement.

Normally, you want a loan account marked paid as agreed or paid in full. This indicates that you fulfilled the terms of the loan. If you go through debt settlement, your account will be marked as paid but it will be missing that crucial as agreed. In some cases, it might even be noted as settled. This lets future lenders know that you have settled your debts before – and that you might do so again. Some lenders are quite reluctant to let you borrow if they suspect you won’t repay the loan according to the original terms.

Bottom Line

If you are already struggling, and already behind on your debts, debt settlement might be an option. Make sure that you are working with a legitimate company with certified debt arbitrators, and that is accredited by The Association of Settlement Companies. Also, shop around for lower fees and look for a service guarantee. If you are current on your accounts, though, you should think twice before ruining your credit with a debt settlement.

Have you used a debt settlement company? How did it go? Leave your thoughts in the comments section!

This article was originally published October 3rd, 2012.

5 Signs You’re a Good Money Manager

It’s nice to know that you’re doing a good job. However, sometimes you are your severest critic. It can be hard to recognize when you are doing a good job, and when you are on the right track. This is especially true when you are trying to figure out how to manage your money.

You might not realize that you are actually a good money manager. If you have been down on yourself because you don’t feel that you are exactly where you wish you could be, take a step back. It could be that you’re on the right track, even if you aren’t quite there yet. Here are some signs that you’re a good money manager:

1. You have an excellent credit score.

While the credit score isn’t the be-all-end-all of financial management, it can still provide a solid indication of your money management skills. If you have excellent credit, it usually means that you pay your bills on time, and that you have a relatively low debt load.

If you don’t use credit, though, you’re not going to have a good score, and you don’t need to get worked up about it, since there are other (better) signs that you’re a good money manager.

2. You save money each month.

If you have enough money to save each month, then chances are that you’re doing something right. If you contribute to your rainy day fund and your retirement fund regularly, that’s a great sign that you are a good money manager. If you never seem to have “enough” to save, that is an indication that perhaps you aren’t managing your money very well.

3. The end of the month doesn’t stress you out.

If you are living paycheck to paycheck, stressing out as the end of the month comes, along with its scarcity, there is a good chance that you aren’t managing your money very well.

However, if you aren’t worried as the end of the month approaches, because you know that there is enough to carry you through until the next paycheck without any trouble, you’re probably doing something right. When you know that you have what you need without having to move money around frantically, you are probably a good money manager.

4. All of your bills are paid on time.

If you can pay all of your bills on time, you are probably a good money manager. If you don’t have to try to “float” your bill payments, or if you don’t put off paying your bills, that’s a solid indication that you are managing your money appropriately.

5. You have no debt (or you are actively paying it down).

Are you able to pay off your credit cards at the end of each month? If so, you are probably a good money manager. The fact that you are able to live within your means, avoiding debt, is a good sign.

However, the presence of debt doesn’t mean that you are a poor money manager. Certain types of debt, like affordable car loans, mortgages, and student loans, as long as it is manageable, is acceptable. On top of that, sometimes there are situations beyond your control that result in debt, such as job loss and medical problems.

Additionally, if you recognize your poor decisions from the past, and are actively implementing a debt repayment plan, you are probably a good money manager. If you are working on your debt effectively, you are probably doing just fine.

What do you think? What makes a good money manager? Are you a good money manager?

How Much House Can You Afford?

When you’re buying a home it seems there’s always a price difference between the property you want and how much house you can afford.

As we’ve looked at houses we’ve seen examples of people who took out a home loan they obviously couldn’t afford and are now struggling to pay the mortgage on the house. Some of those houses are now up for short sale or even in foreclosure.

Buying More Than You Can Afford

In some cases it was a first-time home buyer who wasn’t exactly sure how to buy a house that would fit into their budget long-term. A few years ago they could put no money down by taking out a second mortgage to cover the down payment and paying only the closing costs.

Known as an 80/20 loan, it allowed buyers to avoid private mortgage insurance and let them do 100% financing on a house. Even worse some people would go with adjustable rate mortgages (ARM) to make their payments lower so they could afford a more expensive house. Unfortunately we all saw what happened when the ARM rates adjusted and so many people were unable to make their house payments.

Bank Financing Rules

Banks are much tighter with lending these days so it’s harder to get approved for a home loan.  The system doesn’t make it as easy as it was to borrow more than you should but if you have a good credit score and low debt you can still get a loan for more than you can afford.

The loan officer who worked on our mortgage pre-approval told me on the phone she could approve us for $200,000 more than we were asking for based on our credit score and debt to income ratio. Even though we’ve been careful with our savings and credit over the last 10 years, it doesn’t make sense financially for our family to be borrowing around a half-million dollars for a house. Keep in mind that what the bank approves you doesn’t mean that you can afford it.

Mortgaging Your Future

Deciding how much house you can afford depends not just what the bank thinks of your finances but also what your plans are for the future. Simply because you can afford a house this year doesn’t mean that you’ll have enough money to make payments two years from now.

Say, for instance, you’re a two-income family but one parent wants to stay at home once you have kids. You might be able to afford the house you want now but what will happen a few years down the road when the kids show up?

As an example, there’s a house my wife would love to buy that meets all of our criteria but one, it’s just too expensive. We could afford it if my wife went back to work, but she wants to stay at home with the kids while they’re young. If we’d have bought a more expensive house 10 years ago, she wouldn’t have that option now.

There are many reasons why your income might change in the future so be sure to consider those when evaluating a house. If you take out a big mortgage it could limit your options later on.

Being House Poor

Borrowing more money than you should for a mortgage can affect your present, not just your future. The term “house poor” is used to describe a person or family who bought near the top of their price range and spends all their money paying the mortgage, interest, insurance, and taxes.

We were house poor when we bought our home 10 years ago and it was kind of stressful at times. We had a nice new house but no money to buy furniture for it. When our friends invited us out we had to decline since we had no money.

This can be tough not just from a comfort standard, never having any extra spending cash, but also if you hit hard times you don’t have a cushion. Fortunately for us we were at the start of our careers and our earning ability increased to match the monthly mortgage payment we owed.

Beware of Pressure to Buy

When you’re in the market for a house the pressure is always there to buy a bigger house. Multiple people benefit from you spending more money on a more expensive, nicer home:

• Real estate agent earns more commission
• Bank earns more interest
• Friends and family enjoy more ammenities (ie: neighborhood pool, community golf course)

It’s not just outside pressure, the demands can come from inside your family as well. Your spouse or kids might be lobbying you to buy a house that you know your family can’t afford. Or maybe you found a house that has features you’ve always wanted and you’re really tempted to go after it, even though it would stretch your budget. Just know that the pressure will be there and the smart thing to do is to ignore it.

How Much Should You Spend on a House?

The last few years in the real estate market have shown us what can happen when people buy more house than they can afford.  As we’ve covered above, here are some key points to helping you avoid ending up with a mortgage that’s too big for you:

• Borrow what you can actually cover, not what the bank thinks you can afford.
• Know your life plans so you don’t mortgage your future.
• Leave a buffer so you’re not house poor.
• Avoid pressure and combat it with logic.

If you find a house you want to buy figure out your total costs; this means closing costs as well as the ongoing costs of principal and interest payments, taxes, insurance, and home maintenance. Run those costs against the checklist above to see if the amount you want to borrow makes sense today, tomorrow, and 10 years from now.

Are you in the market for a house? What are some guidelines you’re using to buy your next home?

This article was originally published on July 17th, 2010.

Good Debt vs. Bad Debt: What’s the Difference?

A few years ago, you could walk into any bank and get a loan or go to any car dealer and get a preferred rate. Then the stock market went limp, the real estate market burst and instead of standing in line for a brand name coffee, you were in line for unemployment benefits.

Good people have fallen on hard times in every neighborhood of every town around the country. Some had to tap retirement funds and live on credit cards just to keep their heads above water. Now that things are starting to turn around, if you haven’t done so already, it’s time to take stock of the damage done.

The debts have piled up and the bill statements can be overwhelming, but remember not all debt is bad. In fact, some debt can help you turn that credit score back around. So what is the difference between good debt and bad debt? Let’s take a look.

Good Debt

Any debt that can appreciate in value over time is considered a good debt. A home mortgage loan is a good example of this. Historically real estate values have risen over time. As an owner builds equity in a house with the combination of that boost and the mortgage payments, their credit grows as well. It is one of a number of reasons why so many people invest in real estate.

Student loans are also considered good debt. Generally the loans are held at low rates, which help the student be able to afford the payments. Also, the hope is that after getting whatever degree the student is pursuing, they will be able to earn a higher salary.

These debts are only good as long as the payments are made on time. Whatever you do, if the ship is sinking, the house payment is a life raft. Everything possible should be done to make that monthly payment.

Bad Debt

It shouldn’t come as a surprise to anybody that credit card debt is bad debt. Buying that new flat screen TV using that card with a high interest rate is like stepping into quicksand. It is great for the big game or the latest action flick, but when your financial life hits the proverbial fan, that TV and all the other items or the dinners out create a huge problem for many people all over the country. They are swimming debt, struggling to make even minimum payments and the finance charges are just piling up. For those that have already drowned, it has killed their credit.

Vacation “loans” are also a recipe for disaster. Gone are the days where people would save all year for their one week away from life. In this instant gratification world, people again go with plastic planning to spend a certain amount and then working it off after the fact. In most cases, the pre-vacation “budget” goes out the window the second the toes touch sand.

This is not to say that nobody should go on vacation or buy themselves the things they want. It’s just time to get back to basics with budgeting and saving to purchase the latest thing everybody else just had to have.

Debt Management

Every person is entitled to a free credit report once a year. Pull your credit and see what is on it. Find out just what the black marks are and make a plan to fix them. Make sure to hold on to that life raft (your mortgage) and then prioritize the bad debts in order of interest rate and balance. Focus on knocking those with the higher rates off as quickly as you can.

The only plastic one should use these days is their debit card. Buy what you can pay for and nothing more. Don’t even add good debt to the pile. If you are struggling with debt, and any more is just a bad idea. Seeing a debt counselor may be necessary for some people. If that is the case, do some due diligence and find a company that is a non-profit organization built to help you. The others are just there to make money off of you and it will end up a worse situation than you are already in.

Debt, whether it is good or bad, is still your responsibility to pay back. Be vigilant about paying your bills and the chunks you take out of the debt will get bigger and bigger as time goes by.

What are some other examples of good and bad debt? Leave a comment!

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