Credit Card Debt Is Making a Comeback

Credit card debt took a nosedive in the early days of the pandemic in 2020 as consumers stayed home, lost work and received cash infusions from the government.

Two years later, it’s back.

Credit card debt increased 15% year over year — the largest one-year increase in more than two decades, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit released today. Its total of $930 billion is near pre-pandemic levels.

The report found one group of consumers has surpassed its debt average since December 2019, before the pandemic: those in the lowest income areas. Meanwhile, consumers who live in high-income areas have average balances that are $300 lower than in December 2019.

Credit card debt has been rising all year, according to the New York Fed, and its researchers chalk up the increases to a few possibilities:

  • Consumers are no longer putting off “services” purchases like vacations and travel.
  • Higher prices of goods and services because of inflation.
  • People aren’t slowing consumption of goods and services despite inflation.

New York Fed researchers say they expect to see credit card debt increase as it usually does heading into the holidays.

Debt is up, but delinquencies are down

Debt is higher than pre-pandemic levels, according to the New York Fed’s report. It increased by $351 billion, or 2.2%, in the third quarter of 2022 and now sits $2.36 trillion higher than at the end of 2019.

That’s good news for lenders and less of a celebration for consumers. What consumers can rally around is a lack of a significant uptick in delinquencies, which remain below historical trends, the report found. Researchers at the New York Fed largely chalk that up to excess savings still bolstering some borrowers. The percentage of consumers with debt in collections still remains lower than pre-pandemic levels.

Here’s what’s happening with other types of debt, according to the New York Fed’s findings:

  • Mortgages make up 71% of all outstanding household debt balances compared with 69% in 2019. New York Fed researchers say the refinancing boom in housing is over because of increasing interest rates, and what is left are purchases. New mortgage originations have slowed to pre-pandemic levels. Total mortgage debt is $11.67 trillion.
  • Student loans — the majority of which are federal loans that have been paused since March 2020 — saw slight balance declines likely due to discharges through existing loan forgiveness programs such as Public Service Loan Forgiveness. The pause is expected to lift next year. Total student debt stands at $1.57 trillion.
  • Auto loan balances continued to increase in the third quarter on a consistent 11-year upward trend, but the number of originations (i.e., cars being bought) has decreased since the previous quarter. New York Fed researchers say those who may be struggling likely bought a car recently, and the price would have been inflated compared with that of past years. Younger borrowers, ages 18 to 29, are struggling most with auto loan payments. Total auto loan debt is $1.52 trillion.
  • Home equity line of credit, or HELOC, balances increased for the second consecutive quarter after years of decline. Total HELOC debt is $322 billion.

Anna Helhoski writes for NerdWallet.

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4 Items for Your Midyear Money Checklist

A lot can happen in six months. That’s why, as we close out the first half of the year, it makes sense to check in on your financial life.

“With inflation, I think people this year are more heavily impacted than they probably have been in many years leading up to this point,” says Jason Dall’Acqua, a certified financial planner and founder of Crest Wealth Advisors in Annapolis, Maryland. “So it’s a good time to see how things have been going … as well as plan for what lies ahead in the remainder of the year.”

So where should you start? Add these four items to your midyear money checklist.

1. Review your income, expenses and goals

You don’t have to tally up every penny you’ve made and spent over the last six months. But taking a few minutes to check a bank or budget app can help you better understand your finances and course-correct if necessary.

“Right now with inflation, even if you had a budget back in January, it probably is not the same as it is today. There are some things that are going to need to be changed. So it’s just really resetting and figuring out where you stand today versus where you thought you were going to stand today,” says Kayla Welte, a CFP with District Capital Management who lives in Denver.

Look for opportunities to scale back if you’ve spent more than anticipated. For example, you can dine out less or cancel subscription services you rarely use. “Any excess spending that you’ve been doing, you may have to cut down to account for this higher cost of things that you absolutely have to buy,” Welte says.

If you set money resolutions or other financial goals earlier this year, check on those too. Have you saved as much toward retirement or an emergency fund as you planned? Are you on track to pay off debt?

2. Deal with debt

Debt is becoming more expensive to carry due to rising interest rates. Pay down debts sooner, particularly those with variable interest rates, to save money. These debts might include credit cards, personal loans or adjustable-rate mortgages.

Concentrate on reducing your highest-rate debt first, then move on to the next highest. Dall’Acqua also suggests switching from variable-rate to fixed-rate options by refinancing, if possible. “If you can lock in the fixed rate now, you’re likely to be saving yourself significantly in interest costs over time,” he says.

Be aware of end dates for loans in forbearance. For instance, federal student loan payments will resume on Sept. 1, barring another extension.

“At this point they have been on pause for nearly two years,” Dall’Acqua says. “So if that money has gotten lost within [people’s] overall spending, it’s going to be a big shock when they then have to resume paying.”

Setting aside money now in a separate savings fund can help soften the blow.

3. Plan holiday shopping

Inflation could make holiday gifts a little pricier this year. Create a shopping list and think about how much you can afford to spend. “Figure out what that would require for you to start saving on a weekly or monthly basis and start putting that money aside right now,” Dall’Acqua says.

Starting on shopping early can also help you manage the cost without accruing debt. Many retailers host major sale events in the summer, so you’ll find discounts well before Black Friday. Amazon’s Prime Day is coming in July. So is the Nordstrom Anniversary Sale.

4. Examine your taxes and benefits

Welte recommends using an online tax calculator to check whether you’re withholding too much or too little. This can help you avoid getting hit with a big tax bill unexpectedly or missing out on extra cash you may need now.

“If you do the math and you’re going to get a $6,000 tax refund, it would be a great time to change your W-4s, get more money in your pocket now to pay for these excess costs that are coming up with inflation rather than waiting until next April to get that refund,” Welte says.

If you need to make adjustments, fill out a new Form W-4 (you can find this on the IRS website) and submit it to your employer.

While you’re at it, evaluate your employee benefit selections. These benefits can include health insurance, life insurance, health savings accounts and flexible spending accounts, plus perks like gym memberships.

Reviewing your choices in the summer can prevent you from becoming overwhelmed in October and November, when open enrollment begins for most companies, says Joe Bautista, a CFP in Lake Oswego, Oregon.

The goal is to ensure you’re choosing the most cost-effective options that suit your needs. For example, “a PPO has higher premiums but a lower cost if you tend to use health care, lower deductibles and copays typically. But if someone doesn’t use that health care, then they can be overspending,” Bautista says.

Don’t worry about getting everything perfect right now. As Bautista says, “financial planning is dynamic, it’s not static.” Check in on your money plans periodically and update as needed.

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How Debt-Related Stress Affects Body and Mind

Being in debt feels like you’re always a step behind. It doesn’t help that debt is spoken about as something that’s your fault — too much online shopping, or too many pricey pitchers of mimosas at brunch.

“In our culture, in our country, we have a lot of noise about debt,” says Lindsay Bryan-Podvin, an Ann Arbor, Michigan-based financial therapist and author of “The Financial Anxiety Solution.” “We make it mean a lot about who we are, our character, our willpower.”

In reality, debt isn’t always the result of things you can control. For example, 58% of debts in collections as of 2021 were medical debts, according to the Consumer Financial Protection Bureau.

Regardless of the reason you’re in debt, it hangs over everything, affecting how you feel physically and mentally, and how you interact with others. Here are stories of people who’ve tackled debt and managed the stress that comes with it.

‘I can’t sleep, thinking about it’

Debt-related stress can be the source of several physical concerns, like elevated heart rate and blood pressure, insomnia and digestive issues. Over time, it can worsen. “The research shows that long-term stress can lead to depression,” says Thomas Faupl, a licensed marriage and family therapist in San Francisco.

Claudia McMullin’s business, Hugo Coffee Roasters, suffered financially as a result of the pandemic. “COVID hit and I lost all my businesses overnight,” she says, referring to her coffee shop and roasting company, both based in Park City, Utah. “I did not have a cushion to survive. I had to immediately raise funds as fast as possible.”

McMullin got some help from Small Business Administration loans, like the Paycheck Protection Program, that became available at the onset of the pandemic. In a moment of desperation, she applied for a loan from a financial technology company. The company offered loans that were easy to qualify for, but it charged a high interest rate. McMullin estimates she owes around $18,000 a month on her debts.

“I’ll get in the car and go to the office, and my stomach will clench,” she says. “I can’t sleep, thinking about it.”

McMullin is taking drastic action to pay down her debts as soon as possible. She decided to cash out her IRA, a move that can result in taxes and penalties. Still, her decision left her feeling liberated, so she’s at peace with any resulting financial consequences.

“I haven’t had as many stomach aches this week now that I’ve made that decision,” she says.

‘I knew that this is something I was going to fight for’

Junaid Ahmed and his wife experienced a roller coaster of emotions when they learned that not carefully reading their mail cost them thousands. Her student loan provider put her on an interest-only payment plan several years ago, which the couple didn’t initially notice when they reviewed loan statements.

“Admitting that I didn’t look at the mail isn’t something to be proud of, but a lot of people are in the same situation,” says Ahmed. While his wife felt embarrassed, he got mad. “I knew that this is something I was going to fight for,” he says.

Ahmed is running for Congress to represent his Chicago-area district. He advocates for canceling student debt.

‘We both were finally crumbling under the weight’

Debt can get in the way of maintaining relationships. For Kristin Stones, debt was a dark cloud that hung over her marriage from the outset. “My husband and I got engaged like five seconds after we started dating and neither of us had anything to our names,” says Stones, the founder of Cents + Purpose, described as “an online community dedicated to sharing practical personal finance content.”

They struggled to afford their bills, using credit cards to bridge the gap before paychecks came in. After having kids, they worked opposite shifts so one parent was always home. “We had a moment. Things were really, really bad. I think we both were finally crumbling under the weight,” she says. Her husband broached the subject of divorce. “That was the first time in 15 years that either of us had said that word.”

They enrolled in Financial Peace University, a course developed by personal finance personality Dave Ramsey, putting the enrollment cost on a credit card because they couldn’t afford it. Over time, they paid off all debts except for their mortgage.

Ways to reduce debt-related stress

  • Find your people: Talk to friends and family, a nonprofit credit counselor, or even strangers on social media and online forums. Accountability partners can be a source of support. For Stones and her husband, enrolling in a financial course gave them the tools they needed to tackle debt. “Finding a community of other people helps to normalize and validate that you are not a bad person,” Bryan-Podvin says.
  • Know the numbers: Listing your debts and monthly bills can bring up a lot of bad feelings. But it can also help you spot opportunities, like expenses you can trim or debts you can negotiate (which is sometimes the case with medical debt). For Ahmed, it even spurred him to run for office.
  • Focus on self-care: An expensive yoga studio membership may not be in the cards, but there are free ways to indulge in self-care, like meeting a friend for a walk or trying meditation apps. If debt-related stress is making you physically ill, make time for your health.

This article was written by NerdWallet and was originally published by The Associated Press.

Sara Rathner writes for NerdWallet. Email: Twitter: @sarakrathner.

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The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Sometimes a grain of truth about a financial topic can morph into something that’s just plain misleading. One example is the 15/3 credit card payment trick — or hack — that you might have seen touted on the internet and social media as a secret tactic for improving bad or mediocre credit.

The 15/3 hack claims you can dramatically help your credit score by making half your credit card payment 15 days before your account statement due date and the other half-payment three days before.

Problem is, it doesn’t work.

“Every few years some nonsense like this gains some momentum, but there’s no truth to it,” John Ulzheimer, an Atlanta-based credit expert, said in an email. Ulzheimer has worked for FICO and credit bureau Equifax.

The number of payments you make in a credit card billing cycle — a month — does not help your number of on-time payments, a factor in widely used credit-scoring models. You’ll get credit for just one on-time payment during that month. And there’s nothing magical about 15 days and three days before your due date. In fact, it’s too late by then. At 15 days before your due date, your statement is already closed and your credit card company has likely already reported your information to the credit bureaus.

What is true about credit card payments and what can help? Making multiple payments in a month could help your credit scores temporarily by making it look like you’re using less credit, but not in the way the 15/3 hack describes.

What the 15/3 credit hack claims

Many YouTubers, blog posts and short videos on TikTok claim 15/3 is a secret sure-fire method for elevating credit scores.

We weren’t able to identify the originator of the 15/3 credit card payment method, but this is generally how it is retold in those spaces. Your credit scores will supposedly grow significantly if you:

  • Make half a payment 15 days before your credit card due date. If your payment is due on the 15th of the month, pay it on the 1st.
  • Pay the second half three days before the due date.

Some versions of the 15/3 rule swap in statement closing date for payment due date. The statement closing date comes about three weeks before the payment due date. Targeting the closing date could mean making three payments.

  • Make a payment 15 days before the statement closing date. (Not necessarily half because you don’t yet know what half is. You’re still using the card during the billing cycle.)
  • Make a payment three days before the statement closing date.
  • Pay off whatever is left after the statement closing date but before the due date so you don’t pay late fees or interest. This amount would be whatever you charged during the final three days of the billing cycle.

Why the 15/3 credit hack is wrong

The main problems with the 15/3 hack:

  • Wrong date peg. Typically, on or near your statement closing date — not the payment due date — your credit card company reports to the credit bureau or bureaus with such information as your balance and credit limit. It does this only once a month. Your due date comes about three weeks after that. So targeting the due date makes no sense. Making a payment 15 days and three days before the credit card due date, as the 15/3 hack suggests, is too late to influence credit reporting for that billing cycle.
  • Multi-payment myth. You don’t get extra credit, so to speak, for making two payments instead of one, or making a payment early. Your creditor only reports to the bureaus once a month.
  • 15/3 is random. If you use the 15/3 definition pegging payments to your closing date, that can help, for reasons we’ll discuss below. But 15 and 3 are irrelevant. You might as well make a single payment prior to the closing date. The creditor is just reporting what your balance is at the end of the billing cycle.

“There’s no relevance to when you make the payment or payments prior to the statement closing date,” Ulzheimer said. “You can make a payment every single day if you like. Fifteen and three days doesn’t do anything different than paying it off one or two days before the statement closing date.”

What’s the truth?

The grain of truth in the 15/3 hack is that credit utilization matters to credit scores.

Credit utilization is simply how much credit you’re using vs. how much credit you have. Scoring models award you a higher score if you have lots of available credit, but use very little of it.

Your credit score is a snapshot in time reflecting your creditworthiness. Purposefully lowering your utilization on a certain date is like applying lipstick before the photo is taken.

But your effort to pretty-up your utilization only lasts one month — until the next month when your creditors report your balances and limits again and you have a new utilization ratio. So unless you were going to apply for a loan or otherwise needed to show a handsome credit score on a specific date, your effort was wasted.

It’s like you put on a fine suit but sat home alone. Nobody saw it, or cared.

Credit utilization ratio details

For a single credit card, the relevant dollar figures are your last-reported balance compared with your last-reported credit limit. If you’re using $1,000 of a $2,000 credit limit on the card, you have a 50% credit utilization, which is considered somewhat high.

Generally, credit scores react best to utilization below 30%, and below 10% is ideal. With our example of a $2,000 credit limit, that means keeping your balance under $600 or $200, respectively. Of course, that’s not possible for everybody, especially not for those with relatively low credit limits. A $500 credit limit can get used up fast in a month.

Credit utilization accounts for nearly one-third of your credit score — 30% in the popular FICO score model. So lowering your utilization can, indeed, polish your scores. But with credit cards, your utilization bounces up and down during the month as you make charges and pay them off.

Overall, the 15/3 hack attempts to make your utilization look better, which is a fine goal and standard advice. It just misses the mark by offering the wrong time peg and irrelevant numbers of days before that time peg.

“This is neither novel nor some sort of a secret hack to the scoring system,” Ulzheimer said.

What really helps your credit score

Your credit score is affected by these factors, and generally in this order of importance, according to FICO:

  • Payment history.
  • Credit utilization.
  • Length of credit history.
  • Mix of credit types.
  • Recent applications for credit.

While the 15/3 hack won’t help your credit directly, it could indirectly if it keeps you disciplined to pay your credit card bill on time. Or, for example, maybe it helps you time your payments to coincide better with your paychecks.

But paying early according to the 15/3 rule generally has no merit.

“The truth is paying your bill before the due date will never, ever increase your scores by some drastic amount,” Ulzheimer said.

Gregory Karp writes for NerdWallet. Email: Twitter: @spendingsmart.

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How to Crush Your Holiday Debt

The holidays have left without a trace. Well, almost. Long after the decorations have come down, you still have debt hanging around.

Don’t let it put a damper on your year. Here’s what you can do to take control of your holiday debt.

Review what you owe

First, gather a few important details about your debt. Make a list of your accounts for each type of debt you have. Perhaps you spread holiday purchases across a couple of different credit cards and a “buy now, pay later” loan, for example.

For each debt, note how much you owe, the minimum payment amount, interest rate and payment due date. Staying organized can prevent bills from sneaking up on you.

Then, look closely at the receipts from your holiday purchases, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling. “Compare those with what’s listed on your credit card statement to make sure that you’re accurately being charged and there are no errors that could end up being costly,” McClary says.

Fit it into your budget

Figure out how much you can afford to pay toward debt each month. The 50/30/20 budget is one framework you can use to balance your debt with your income and other expenses. With this rule, 50% of your monthly income goes toward necessities, 30% goes toward wants and 20% goes toward savings and debt repayment.

You can also use budget apps like Mint and You Need a Budget to automatically track your spending by category, says Jeff McDermott, a certified financial planner in Saint Johns, Florida.

“That just gives somebody a baseline to get a sense of, ‘What do I normally spend? What sort of cash flow should I have to start paying down some of this debt? Are there things that I’m overspending on that I should be able to reduce a little bit to free up some cash to attack the debt?’” McDermott says.

Pick a payment strategy

Once you have a solid understanding of how much you owe and what your budget is, make a repayment plan. You’ll pay off your holiday debt sooner if you make more than the minimum monthly payments.

McClary suggests using online debt calculators or tools to estimate your debt-free date. “You can test out strategies of adding different amounts to the minimum payments to see how quickly it would pay off.”

If you’re unable to pay beyond the minimum on multiple debts right now, it’s OK to tackle it one at a time. There are two main methods for prioritizing repayment: debt snowball and debt avalanche.

With debt snowball, you pay extra on the debt with the smallest balance first, while making the minimum payments on others. Once you’ve erased that debt, roll the amount you were paying into paying off the next-smallest debt, and repeat. With debt avalanche, you focus on the account with the highest interest rate first.

“The avalanche, where you attack the highest-interest rate debt first, usually makes the most logical sense. It’s the best from a math standpoint,” McDermott says. “The one disadvantage to that: It can sometimes be hard to feel like you’re making progress if that particular card is really high.”

Which method is right for you? Pick the one that you’re going to feel more motivated to stay on track with, McDermott says.

Explore ways to ditch your holiday debt faster

Here’s what you can do to speed up the debt repayment process:

  • Consider consolidation. Debt consolidation combines multiple debts into one payment, typically through a personal loan or balance transfer card. This approach can make your debt easier to manage, and could reduce the overall interest rate you’re paying on it. Usually, you’ll need a good or excellent credit score. Before applying, McClary suggests obtaining a copy of your credit report and checking your credit scores to get an idea of whether you’ll qualify.
  • Negotiate with creditors. Picking up the phone can also pay off. “If you think the interest rate you’re being charged is not the best rate you could qualify for right now, have that conversation with your credit card company and see if there’s a lower rate that they can give you or better terms on the card,” McClary says.
  • Scrounge up extra money. An increase in income gives you the flexibility to pay down debt faster. You can earn money on the side (say through a dog-walking gig or cash-back app) or use a windfall, such as a tax refund.

This article was written by NerdWallet and was originally published by The Associated Press.

Lauren Schwahn writes for NerdWallet. Email: Twitter: @lauren_schwahn.

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Keep an Eye on Debt Using Creative Visual Aids

With an $82,000 pile of debt, buying a house seemed far in the distance for Ehren Sixon and his wife, Florida residents who embarked on a debt-free journey in 2016. They opted for the debt snowball method, a debt payoff strategy that encourages motivation by quickly attacking the smallest balances first.

The couple also tracked every milestone along the way with different visual aids as they paid off car loans, student loans and credit card debt.

“We wanted to be able to track our progress and keep us motivated,” says Sixon, a 32-year-old systems engineer and part-time YouTuber.

The internet is full of debt-tracking templates that can help you log milestones toward your debt-free goals. From coloring pages to spreadsheets, here’s how you can use visual aids to demolish debt.

Visual aids motivate

If you have a long journey ahead, a road map that logs your progress can offer support and encouragement.

“You get lots of little dopamine hits from checking off those smaller milestones or those smaller elements along the way, and that really keeps motivation going,” says Katharine Iesiev, owner of She Minds Money, a financial therapy service based in Massachusetts.

Iesiev favors creating something tangible that you can print out and view often at home.

Track your progress in several ways

The Sixons turned to the internet to research debt-tracking solutions. As you explore your options, consider what will be most motivating for you.


Sixon started with a spreadsheet to keep track of all lenders, balances and debts paid off. A spreadsheet can be as simple or elaborate as necessary. You can use it to log every payment to each lender or to update balances after making a payment. A key benefit is that it can keep debt and information organized. It also pairs well with other tracking systems.

Printables for everyday viewing

The Sixons also looked at templates online to facilitate checking off debt goals. They chose a thermometer for their fridge and later moved it to the front door as a daily reminder to stay true to their goal. At every monthly check-in, they would evaluate their progress and color in the thermometer upon paying off each 10% of their debt.

“With the spreadsheet, there were times when we just got so caught up in the outstanding balances instead of celebrating how much we’d paid off so far,” Sixon says. “I didn’t realize how fun and exciting coloring a portion of that debt thermometer was, but it made our debt-free journey more enjoyable.”

Also consider coloring pages that display images like a home to represent a mortgage or a car to represent a loan. You can fill in the increments as you make payments.

For a different creative approach, a progress map can offer an appealing and discrete artistic design with unlabeled increments that you color in a similar way. For the Sixons, their bold, red thermometer became a conversation starter and inspired some friends to pay down debt.

“They were thankful that they saw the way we put it up in our house and they were able to do the same,” he says.

Bullet journals

A bullet journal is less visible than a page you can print and display, but it could offer more frequent engagement with your finances. Keep it as simple or creative as needed. In 2018, Kaila Penner, co-owner of the blog Frugal Twins, drew an easy bar chart inside her bullet journal to track payments toward the last remaining $24,000 from a car loan and two student loans. She colored in each bar with pink, green or blue ink after meeting every $1,000 increment.

It’s possible to break down the increments further and designate different pages for different kinds of debt. So instead of a bar chart, you could opt for drawing graduation hats, dollar bills or anything else that you can color in to represent debts paid off.

Like Sixon, Penner also used a spreadsheet throughout her entire journey, but it wasn’t as motivating as the bullet journal. “Filling that in every month was much more satisfying for me,” the Iowa resident says.

She also added a thermometer on her refrigerator door for daily visibility. With all three trackers, she logged her progress to crush the debt.

Rely on visual aids long after debt

The Sixons paid off their debt sooner than projected in 2018 by budgeting cash in envelopes and cutting back in categories like dining out and streaming subscription services. They now use a thermometer to track savings instead. In anticipation of the arrival of their baby girl, the Sixons recently colored in a thermometer indicating their savings toward a family-friendly vehicle.

“To come out in 2021 and buy a car with no car loan — fully paid off — and have it ready for our child, I didn’t think we would be at this point in our financial journey,” Sixon says. “It’s incredible.”

They’re currently using multiple thermometers that remind them to focus on priorities like paying off their home and saving for renovations and travel.

This article was written by NerdWallet and was originally published by The Associated Press. 

Melissa Lambarena writes for NerdWallet. Email: Twitter: @LissaLambarena.

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5 Mistakes That Can Lead to a Bad Car Loan

5 Mistakes That Can Lead to a Bad Car Loan

As if we need more bad news about car buying, an analysis by Consumer Reports shows that many Americans are drastically overpaying for their car loans. And we can’t place all the blame on the pandemic or supply chain problems.

In one case, Consumer Reports found that a Maryland resident with “sterling credit” who bought a new 2018 Toyota Camry two years ago will end up paying $59,000 by the end of the loan. The reason: Their interest rate was bumped up to 19% when they actually qualified for a rate of 4.5%.

The Consumer Reports study, which looked at 858,000 car loans, concluded that bad car loans, the rising cost of cars and other factors have pushed the average monthly car payment to about $600 — an increase of almost 25% over the last 10 years.

With a little education and free online tools, such as a car payment calculator, you can set up a loan that works for your budget and avoid some common car loan pitfalls.

1. Extending the loan’s term

The term is how many months it takes to pay off the loan. The longer the term, the lower the monthly payments. However, the longer you take to pay off a loan, the more interest you will pay.

For example, if a person with a credit score of about 600 buys a $30,000 car and finances it for 60 months at the rate of 6.61%, they’ll pay $5,311 in interest. But if that loan is extended to 80 months, they’ll pay $7,175 in interest. That’s an extra $1,864 up in smoke.

And here’s another reason for not extending the loan: 80 months is almost seven years, and a seven-year-old car will likely need more repairs and maintenance. You’ll have to cover those expenses in addition to your car payments.

2. Not shopping for your loan

Before you shop for a car, you really should shop for a loan. I know that doesn’t sound like fun, but it saves you money and might even stop your car from being repossessed down the line.

Start by checking your credit and resolving any issues you discover. Then, apply for a preapproved car loan from a credit union or online lender. By doing this ahead of time, you can choose the down payment and loan term to fit your budget.

Getting preapproval also simplifies the negotiation process because it gets you focused on the out-the-door price. You can always take the dealer’s financing if the interest rate is lower. But your preapproved loan will serve as a bargaining chip to get its best rate.

3. Being ‘upside-down’ on a car loan

You’re upside-down on a car loan when you owe more than the car is worth. Why is this a problem? Well, if you experience an unexpected life change — a divorce, death or sickness in the family — and you have to sell the car, you’ll have to pay off the loan, plus the negative equity.

On the other hand, if you have equity in your car, you can use that as a down payment on your next car. Or just sell it, pay off the loan and pocket the difference.

4. Rolling negative equity into the new loan

If someone is upside-down on a car loan, but they just have to buy that new car, the dealer will be happy to roll the negative equity into the next loan. In that way, a person who is $10,000 upside-down on a car loan can buy a $30,000 car and wind up with a $40,000 loan.

There’s no good reason to roll negative equity into a new loan. Doing so can lead to a spiral of debt as you try to keep up with the payments. Instead, keep driving your current car and try to make extra payments until you’re right-side up.

5. Buying extras

Sometimes, that car you agreed to buy has dealer-installed options that aren’t listed on the sticker. Those might be mudguards, running boards, fancy wheels, door protectors or anti-theft devices. If that’s not enough, the finance manager might give you the hard sell on an extended warranty, a wheel and tire warranty or a prepaid maintenance plan.

All of these extras go into your balance on the sales contract and result in a much higher loan to pay off. The best strategy is to flush out those extras early in the negotiation process. I like to ask for an out-the-door price with a breakdown of all the costs and fees.

Car loan best practices

Here are several ways to keep control of your car loan:

  • Use a car loan payment calculator to estimate your monthly payment. Try using different terms and down payment amounts to see what works best for your budget.
  • Be realistic about what monthly payment you can afford, and shop for a loan that meets that criteria.
  • Getting preapproved for a car loan is perhaps the single best way to keep control of your car-buying transaction.
  • Carry as little debt as possible by saving for a down payment of at least 20% of the purchase price. This will keep you from being upside-down.
  • If you can’t afford to buy the new car you want, consider buying used, or look into leasing.

Philip Reed writes for NerdWallet. Email: Twitter: @AutoReed.

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5 Options for Your Money Before Student Loan Payments Resume

5 Options for Your Money Before Student Loan Payments Resume

This article provides information for educational purposes. NerdWallet does not offer advisory or brokerage services, nor does it recommend specific investments, including stocks, securities or cryptocurrencies.

The Biden administration has extended the federal student loan payment pause a final time, meaning borrowers won’t owe money or accrue interest until February 2022. While a new NerdWallet survey shows that over a third of federal student loan borrowers (35%) have continued making loan payments throughout the automatic forbearance, others have chosen or needed to put this money elsewhere.

With this final extension, federal borrowers whose essentials are covered have four to five more would-be payments that they might apply toward different goals. If you aren’t sure how to best use your remaining payment reprieve, here are five suggestions, plus next steps in case you aren’t ready to resume payments in February.

1. Save it in your emergency fund

Around 1 in 8 federal student loan borrowers (13%) say they put loan payment money into a savings account, according to the survey. The COVID-19 pandemic has been financially devastating for many, highlighting the importance of emergency savings. Ideally, you’d save three to six months’ worth of expenses, but even $500 or $1,000 stashed away can make a big difference in your peace of mind and ability to handle the unexpected.

2. Pay off high-interest debt

The survey found that some federal borrowers put would-be payment money toward paying off/down credit card debt (20%), private student loans (12%) or another type of debt (14%). If you’re comfortable with the amount you have saved for emergencies, focusing on high-interest debt can have a meaningful impact on your overall interest costs, especially with federal student loans at 0% interest for the next several months.

3. Avoid high-interest debt

Speaking of high-interest debt, a credit card balance of $1,000 with an interest rate of 16% would cost $160 in interest charges if carried for a year. If you don’t have any high-interest debt, but have upcoming purchases you’d otherwise let sit on your credit card — like a home improvement project or holiday expenses — you could use would-be federal loan payment money to pay for these purchases upfront. That way, you can avoid interest charges and the stress that may accompany a hefty credit card balance.

4. Put it aside to pay in one go

While payments aren’t due now, your main financial priority may be paying off your federal student loans. You can make monthly payments as normal or hang on to the payment money and make one large payment right before the pause ends. With this approach, you have cash on hand as a buffer in case something comes up. If nothing does, you can avoid the interest you’d otherwise accrue on the student loan principal.

5. Contribute to an IRA

Around 1 in 6 federal student loan borrowers (16%) say they invested the money that would otherwise go toward their loans for retirement, according to the survey. If you’re comfortable with the amount you have in emergency savings and aren’t paying off high-interest debt, you may choose to put would-be payment money into an IRA.

An IRA is a tax-advantaged retirement account that a person with taxable income (or someone who has a spouse with taxable income) can contribute to. The current annual limit is $6,000, or $7,000 for those ages 50 and older. IRA contributions for 2021 can be made until your tax return filing deadline, so even the January loan payment money can help you increase your retirement savings and potentially reduce your taxable income.

If you can’t make payments, evaluate next steps

Around a third of federal student loan borrowers (34%) say they’re using loan payment money for necessities, like rent and food, which could indicate that these expenses might not be met otherwise. When asked when it’s financially feasible for them to start making loan payments again, 11% of federal loan borrowers say 2022 or beyond and 10% of borrowers say they don’t know when they’ll be able to do so, according to the survey.

If it’s not realistic for you to restart payments in February, you have options to avoid defaulting on your loans. For borrowers who can’t pay the full amount due, an income-driven repayment plan could be a good option. It caps your monthly payments at a certain percentage of your discretionary income and forgives the remaining balance after 20 or 25 years, depending on the specific payment plan you enter into.

If you meet eligibility requirements — for instance, if you’re unemployed, receiving welfare benefits or undergoing cancer treatment — student loan deferment will pause your payments completely and may even stop accruing interest (depending on the type of loans you have).

If you don’t qualify for deferment, student loan forbearance is also an option. You can put loans in forbearance for up to 12 months at a time, but you’ll accrue interest, regardless of your loan type. All of these alternatives to a standard repayment plan can cost more in interest and time over the life of a loan. But they can also provide some necessary breathing room if your budget simply won’t allow you to make student loan payments right now.

Erin El Issa writes for NerdWallet. Email:

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Beat Your Summer ‘Revenge Shopping’ Debt

The joy of shouting to your friends over the roar of a crowded bar, the giddiness of seeing the world rushing by below you from the seat of an airplane, the weirdly constricting sensation of wearing pants that aren’t elastic — the summer of 2021 brought back many experiences we had forgone during the past year and a half of the pandemic.

But this push to re-create a world that felt something like “normal” may have brought back another familiar feeling: the anxiety of racking up debt.

If your summer of “revenge” spending has come for a payback of its own in the form of lingering debt, make a plan for paying it off. Then, think about how to prevent yourself from getting into more debt as you navigate progress and setbacks on the path to normalcy.

Take stock of your debt — and find your payoff path

Whether you’re back to spending most of your time at home or killing time at an airport terminal before a flight, find time to sort out your debt and pick a payoff strategy.

First, understand exactly how much you owe and to whom. If you don’t know all the details, certified financial planner Pamela Rodriguez in Sacramento, California, suggests pulling your credit reports, which you can do for free.

“Pulling your credit report is probably the fastest way to know what you owe because there’s no hiding from your credit report,” Rodriguez says.

Using a spreadsheet, pencil and paper, or a debt payoff app, list your debts. Include the balance, interest rate and monthly minimum payment for each. Be sure to account for all forms of debt, like buy now, pay later loans.

Then, dig into your income and expenses to see how much money you can put toward debt and where you can cut spending. If you’re spending more on dining out than you were six months ago, for example, try cutting back on that to free up cash for debt payoff.

Next, pick a strategy for paying it off. Here are a few common tactics:

Debt snowball: With the debt snowball, you channel your debt payoff energy toward the smallest balance first while making minimum payments on the rest. Once the smallest debt is knocked out, roll the amount you were paying on it to the next smallest debt. As you wipe out more debts, the payment amount keeps growing like a snowball until you’re debt-free.

Debt avalanche: With this method, you pay off the debt with the highest interest rate first. Then, similar to the debt snowball method, once that is paid off, you cascade the payment onto your debt with the next highest interest rate.

Balance transfer credit card: If your credit score is high enough to qualify for one, a credit card with a 0% APR promotional period can help you pay off debt faster and cheaper than keeping it on the original credit card. Be sure to wipe out the balance before the 0% promotional period ends to avoid paying interest.

No matter which payoff path you choose, it’s important to decide on one and commit. Waffling between a few different options can cost you time and money as debts continue to accrue interest.

“People have decision overload when figuring out how to pay off their debt,” says Thomas Nitzsche, financial educator at the nonprofit credit counseling agency Money Management International. “Just come to terms with the fact that you’re going to have to do something and figure out a way to overcome that emotional barrier.”

If you don’t see a way to pay more than the minimums on your debts monthly, think about calling a nonprofit credit counseling agency for free budgeting and debt help.

Know your spending habits and triggers

If your summer debt was the result of revenge spending, dig into the triggers that led you to overspending so you can avoid sliding back into debt in the future.

For many, that may have been the opportunity to experience something that they were deprived of during the first year of the pandemic.

While travel and eating at restaurants may be safer for those who are vaccinated, these activities can wear down your budget. Rodriguez suggests finding more-affordable ways to enjoy activities you’re seeking.

“If you can think of the one thing you were deprived of, find a smaller scale of that,” Rodriguez says. “So a smaller scale of travel would be going on a local adventure, and that is so much more manageable financially.”

The path forward in the pandemic seems likely to have a number of starts and stops, with accompanying opportunities to either spend or save money. Take advantage of moments where you can pull back your spending and direct more cash toward your debt. Having manageable debt — or no debt at all — equips you with more options whenever the world is ready to fully reopen.

This article was written by NerdWallet and was originally published by The Associated Press.

Sean Pyles writes for NerdWallet. Email: Twitter: @SeanPyles.

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With Student Loan Payments Set to Return, Here’s How to Get Help

For 42.9 million student loan borrowers, it’s been 18 months without a payment. That ends in October — ready or not.

The interest-free federal student loan payment pause, known as a forbearance, was extended three times after it initially went into effect in March 2020 as a way to help reduce the financial blow many borrowers experienced as a result of the pandemic.

But with payments set to resume in a few months, servicers — the companies that manage student loan payments — are already fielding thousands of calls a day from borrowers seeking student loan help, according to Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade organization for student loan servicers.

Time is running out for both servicers and loan borrowers to prepare for repayment.

While Education Secretary Miguel Cardona has indicated it’s not “out of the question” to extend the loan forbearance beyond Sept. 30, for now borrowers should be prepared for bills to come due sometime in October (they’re supposed to be notified at least 21 days prior to their exact billing date).

Talk with your servicer now

Servicers are expecting borrower demand for help to increase and may have trouble keeping up. The repayment system has never been turned off before, so no one is sure what restarting it simultaneously for 42.9 million people will look like.

“We don’t have any guidance from the department [of Education] about what a resumption strategy would look like,” says Buchanan. “We are in the time frame where those plans need to be communicated; it cannot wait.”

Richard Cordray, the newly appointed head of the Education Department’s federal student aid office, told The Washington Post for a story on June 11 that restarting payments was “a very complex situation” and said the office planned to provide more information to servicers soon. He also said the department planned to hold the servicers accountable by setting rigorous performance benchmarks.

Despite the uncertainty, if you’re worried about your ability to make payments, there’s no downside to contacting your servicer now to beat the rush, says Buchanan. Ask about your best options to manage payments, depending on your situation.

If you’re not sure who your servicer is, log in to your My Federal Student Aid account to find out. To ensure you don’t miss any notifications, check that your contact information is up to date on your loan servicer’s website and in your profile.

Know your repayment options

“Your options are not ‘pay or default,’” says Megan Coval, vice president of policy and federal relations at the National Association of Student Financial Aid Administrators. “There are options in between for lowering payments. Nobody, including the federal government, wants to see you go into default.”

Default happens after roughly nine months of late federal loan payments. It can result in a damaged credit score, wage garnishment, withheld tax refunds and other financial burdens.

  • If payments will be a hardship: Enrolling in an income-driven repayment plan sets payments at a portion of your income, which could be $0 if you’re out of work or underemployed. Or you could opt to pause payments (with interest collecting) using an unemployment deferment or forbearance.
  • If you were delinquent before the pause: Your loans will be reset into “good standing.” Making monthly payments on time will help you retain that status. But if you think you might miss a payment or you don’t think you can afford payments altogether, contact your servicer about enrolling in an income-driven plan.
  • If you were in default before the pause: Contact your loan holder or the education department’s default resolution group to find out how to enter into loan rehabilitation and get back into good standing.

Find a legit resource

Servicers may be your first point of contact, but they don’t have to be your last. You may have other needs your servicer isn’t providing, such as financial difficulty beyond your student loans or legal advice.

Cash-strapped borrowers can find legitimate student loan help for free with organizations such as The Institute of Student Loan Advisors. Other student loan help, such as a credit counselor or a lawyer, will charge fees. You can find reputable credit counselors through organizations such as the National Foundation for Credit Counseling.

Financial planners can also help, but it’s best to look for one with student loan expertise, such as a certified student loan professional.

You can find legal assistance, including advice on debt settlement and pursuing bankruptcy, with lawyers who specialize in student loans or with legal services in your state as listed by the National Consumer Law Center.

If your issue is with your servicer, contact the Federal Student Loan Ombudsman Group, which resolves federal student aid disputes. You can also file a complaint with the Federal Student Aid Feedback Center or the Consumer Financial Protection Bureau.

Avoid scammers

Legitimate student loan help organizations won’t seek you out with offers of debt resolution through unsolicited texts, emails or phone calls. Most importantly, you don’t have to pay anyone to apply to consolidate your debt, enter into an income-driven repayment plan or apply for Public Service Loan Forgiveness.

“The hard and fast rule is that applying for [consolidation and repayment] programs is free,” says Kyra Taylor, staff attorney focusing on student loans at the National Consumer Law Center. “I think when people realize what they can do for free, it makes it easier for them to spot scams.”

And don’t fall for any company that promises to forgive your student loans or wait for the government to do so — thus far, no executive action from President Joe Biden or legislation from Congress has come to pass.

Anna Helhoski writes for NerdWallet. Email: Twitter: @AnnaHelhoski.

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