How to Strategically Manage Your Debt

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1 Debt. Funny how four little letters can feel so dirty. Most of us have it in one shape or another, but none of us like to talk about it. Debt can get us into trouble, especially if it is unplanned and uncontrolled. And some of us can t help but feel out of control when it comes to our debt. Whether the debt is big or small, owing money can be uncomfortable and stressful, regardless of your financial status. What we often forget is that debt can also be a tool commonly used to get ahead, whether it is borrowing for education, for business or for a home that we assume will appreciate over time. Of course, debt can be extremely dangerous and detrimental to your financial success if you aren t careful and diligent about managing it. But if you are, debt doesn t have to be all bad; in fact, it can even help you reap some serious rewards. There are strategic ways to approach debt so that it works to your advantage, as long as you are disciplined enough to follow the rules. To help you control and leverage your debt -- and not the other way around -- we have highlighted the main categories of debt and some of the key dos and don ts of using it. Credit Card Debt According to the FINRA Investor Education Foundation, 60 percent of women carry a credit card balance. It is easy to let credit card debt get out of hand if we aren t mindful about it. But with some simple strategies, you can gain, rather than lose, from your credit card debt. Here s what you need to do: Shop around. Plenty of sites are trying to make money by referring you to creditors and keep you coming back with a variety of resources and information. They also help you narrow down choices based on a variety of criteria you can customize. Negotiate with creditors. Yes, it takes a time commitment and potential frustration dealing with multiple representatives, but the benefits (including better rewards, lower rates, waived fees and higher credit limits) can be worth it. Leverage the payment cycle. If you charge something the day before your statement closes, you get an interest-free period of 20 to 25 days to pay it off. But if you wait until the day after your statement closes, then you can get an extended interest-free period of up to 55 days. Take advantage of store card offers. Big retailers often offer big discounts on purchases if you open a credit account with them and continue to use their card in the future. This can mean serious savings, as long as you pay off the balance in full on time, every time. However, there are more flexible store cards offered by banks that can allow you to get discounts at a variety of retailers instead of just one. Use your cards regularly. Doing so and making payments on time, of course will boost your credit score and encourage your creditors to automatically increase your credit limit, helping even more. It will also help you rack up rewards faster. Reap your rewards. Too many people neglect to actually cash in on their available rewards (which can include travel discounts, cash back, concierge services and more). Check your card s website for details on their particular program and make sure you don t miss out.

2 Consider a balance transfer. If you are currently nearing the end of a promotional rate period and won t be able to pay off your total balance in time, or if you are already paying high interest on an existing balance, consider transferring it to another card in exchange for a lower rate. This can buy you extra time to pay off your balance and save you a lot in interest payments. Watch out for balance transfer fees, though, and do the math first. On the other hand, it is important that you never miss a credit card payment and try not to use up too much of your available credit. Missed payments are the biggest threat to your credit score, followed by a high credit-utilization ratio (under 30 percent is ideal). To help avoid potential trouble, use this tool to stay organized and create a clear debt payoff plan, if need be. Student Loan Debt. For example, if you take out a loan of R in your first year, the interest instalment will be approximately R175 a month at an interest rate of 10,50%, Student loan debt can seem overwhelming. However, with its relatively low interest rates and taxdeductible interest, student loan debt is generally considered to be a good debt. Here s what you need to know to manage it strategically: Map out career and income goals along with a loan repayment schedule early. Think of it like a business plan with a break-even projection and future profit estimates. This will help you budget accordingly and stay motivated to make that borrowed education pay off sooner than later. Pay private loans first and federal loans second, in order of interest rate (high to low). Understand your repayment options. You may be able to pay a lesser amount based on your current income or even have your debt forgiven in some cases. Explore your options. Teach or serve your community to save. If you are willing to be strategic about your career path, you could teach at either the local community college or at the university you currently study at and make money back to put towards your student loan. Take advantage of loan rewards programs. You can potentially pay off your debt faster just by making your regular purchases. If you re looking to simplify and potentially lower your payments, consider consolidating. Be careful, though. If you aren t going through the government s loan servicer, you will likely get stuck paying fees that cost you more in the long run. You also might lose certain benefits offered by your original lender. Just like with your credit card, missing a student loan payment can result in fees and penalties that make it harder for you to qualify for other loans, like a mortgage. And if you can afford it, don t defer your payments. It ll cost you more in accrued interest, and it ll take you longer to get out of debt. If you re having trouble making payments, call your lender and explain your situation. They are much more likely to help you if you are proactive and honest.

3 Mortgage Debt For those who can afford it, homeownership is still one of the best long-term investments, In South Africa- for every R100 left after tax, R12.50 goes to meeting interest payments on contractual borrowings Keep your housing expense ratio in check. As a general guideline, your monthly mortgage payment should not exceed 28 percent of your gross monthly income. To calculate your housing-expense ratio, multiply your annual salary by 0.28, then divide by 12 (months). Go with a 15-year fixed mortgage if possible. It will cost you more per month than a 30- year, interest-only or adjustable loan, but you will pay off the debt much sooner and save big money in the long run that you can invest toward other goals. Consider an Variable Mortgage Rates with a low initial interest rate and monthly payment if you are sure you will only be in your home for less than five years. You can save significant money that can (and should) go towards other goals. If there is a chance you might stay in your home longer, Variable Mortgage Rates can be too risky. Take advantage of tax deductions. Interest paid on mortgage debt on your primary or second home is tax deductible. Points are also deductible. Check with a tax expert for personalized guidance and to maximize your savings. Do the math to see if refinancing makes sense. You might be able to lower your interest rate and monthly payment, but it also means extending the length of your loan and paying thousands of Rands in closing costs in many cases. However, if you plan to stay in your home longer than it takes to break even on a refinance, it can be worth it. Remember that multiple types of credit inquiries can raise a red flag to lenders, so don t apply for other loans when you re home shopping. Once you find the home you love, put at least 20 percent down. Otherwise, you have to pay private mortgage insurance (PMI). If you can t afford to put down 20 percent, you can t afford that home and should steer clear of it.

4 Car Loan Debt If you re someone who is tempted to buy cars and wants to maximize your savings in the short term (and ideally invest the difference!), leasing a car is the way to go. But if you re committed to driving the same car for five or more years, buying may be for you. Here s what you need to know before taking out a car loan: Be armed when going to the dealer. Dealers are eager to make extra money by getting you into a loan through their own lenders and pushing a higher rate on you based on their determination of your credit score. Be wary of add-ons. Remember, dealers make the majority of their money by selling credit insurance, extended warranties and other extras that aren t really necessary. Pay more each month if possible. If you don t have other, higher-interest debt weighing you down and you have a comfortable emergency fund, you should set up automatic, bi-weekly loan payments. Specify that the extra money should be applied to your loan principal rather than future interest. Consider gap insurance. From the moment you drive a car off the lot, your car insurance is likely inadequate in the event you suffered a total loss from an accident or theft. If you paid cash for your car or have significant equity in it, you don t need gap insurance, but in many cases, it can be a smart investment for financial protection. Shop for quotes and get more info. Though it may be tempting, don t finance a new car, as depreciation is the greatest in the first few years of a car s life. And before you take out a car loan, make sure your total debt (from mortgage and credit cards, etc.) doesn t exceed 36 percent of your gross annual income. In most cases, refinancing a car loan isn t a smart bet. Excessive fees typically cancel out any short-term savings. The rare exception to this rule is if you happen to have the means to pay more per month in exchange for a shorter loan term, which can save you significant interest.

5 Investment Debt Just as banks can lend you money if you have equity in your home, your brokerage firm can lend you money against the value of certain stocks, bonds and mutual funds in your portfolio. This is known as a margin loan. Here s what you need to do before taking on investment debt: Understand the risks. Borrowing on margin is not for the amateur investor. Margin can result in losing more than your original investment. However, you could also boost your return significantly. Only consider margin if your marginable portfolio is diversified enough and large enough (relative to the level of margin debt) to help reduce risk. In this case, margin can be a convenient, flexible and low-cost borrowing tool to leverage your investments. Opt for margin over other debt if you can. Margin interest rates are typically lower than credit cards and unsecured personal loans, plus there s no set repayment schedule with a margin loan. Margin interest may be tax deductible if you use the margin to purchase taxable investments. Consult a tax professional about your individual situation. Don t borrow the max. Investors can generally borrow up to 50 percent of the purchase price of marginable investments, but pushing the limits can be extremely risky. A decline in the value of securities purchased on margin can require you to provide additional funds to the lending brokerage firm within a short time to avoid the forced sale of those securities or other securities in your account. And remember to double-check your firm s margin policies, as they can differ between firms.