Millennials are Spending Half of their Paychecks to Pay Down Debt

Student loan debt has been the headline for years as young Americans have struggled to make ends meet. And while the burden of paying for college is undeniable, it’s not the primary reason over half (56%) of Millennials are living paycheck-to-paycheck – credit cards are.

More than four in ten (42%) of adults aged 22-33 say debt is their biggest financial concern – in fact, many characterize it as “overwhelming.”  But surprisingly, the oft-cited weight of student loans is the third most pressing debt they face. Gen-Y says their debt load averages 16% as credit card debt, 15% mortgage debt, 12% student loan debt, 9% auto debt and 5% medical debt. All in all, 47% of Millennials are spending half of their paychecks just to pay down these debts, according to a Harris Poll fielded on behalf of Wells Fargo.

Perhaps motivated to help others forego the hardships they’ve encountered, when asked what advice they would offer to someone just starting out, most Millennial respondents said, “Don’t spend more than you earn” (33%), followed by “Get educated about your personal finances” (17%), and “Start saving for retirement now” (16%).

And when it comes to seeking advice, most turn to “family” (57%) for trusted financial guidance, followed by “financial institutions” (54%) and “personal finance experts/personalities” (50%).

Having survived the Great Recession, most (80%) say it taught them to save “now” in order to weather future financial difficulties. About half of all Millennials say they are “satisfied” with their current savings rate, yet 45% are not saving for retirement.

“The silver lining of the recession that started over five years ago is that a majority of Millennials get that saving is a necessity and even equate it with ‘surviving’ tough times,” said Karen Wimbish, director of Retail Retirement at Wells Fargo.

Known for a sense of optimism, three-quarters of Gen-Y say they are confident they will be able to address any financial problems they may encounter in the next ten years. Nearly three quarters (72%) feel they will be able to save enough money to create the lifestyle they want in the future. Of those who have started saving, almost half (46%) are saving between 1-5% of their income for retirement; 31% are saving 6-10%; 18% are saving more than 10%. Of the four in ten Millennials who are not yet setting aside funds for the future, 84% say they are not doing so because they “do not have enough money to save right now.”

Most Millennials (69%) say they feel better off financially than others of their generation. Plus, 68% expect their standard of living before retirement to be better than their parents.

How to Pay Off $30,000 in Student Loan Debt in Just 3 Years

If you are tired of having student loans hanging over your head, welcome to the crash course for debt elimination. Our syllabus is simple, the course objective has been plainly stated and grading will be based on a pass/fail basis. Let’s begin.

What’s the rush?

You may be wondering why we have defined such a short period of time to pay off a substantial debt.  After all, The Institute for College Access and Success says the average student loan balance was $29,400, based on the latest data available (for the Class of 2012). With a super-sized debt of that magnitude, you need a lot of time, right? Yes, but a lack of urgency can encourage complacency, and with time the debt grows even larger.

This may light a fire: Calculate the amount of interest you will be paying by only making minimum payments on your student loans. If you can’t put your hands on the statements for your loans, access the National Student Loan Data System (NSLDS) to retrieve your loan information.

It’s quite likely you’ll be surprised by the big number you discover. You might even find you’ll be paying as much interest on your loans as the original principal amount!

Putting a short fuse on the debt bomb will inspire a significant financial turnaround. Once you retire the student loans, imagine the boost to your cash flow. You’ll probably feel affluent for a change. With those monthly payments gone, you can focus on buying a home, saving for retirement, paying for a wedding and all of the other good things in life. No student loan debt means you can kiss Sallie Mae goodbye. You’ll feel like a different person, with less stress and real financial freedom.

Debt limits options

While the task may seem insurmountable, consider the Harvard alum who paid off $90,000 in grad school debt – in seven months. Joe Mihalic is a supply chain manager in Austin, Texas now but three years ago he was deep in debt and desperate to get out.

“I simply felt an overwhelming feeling of being trapped,” Mihalic says. “I felt that the debt was severely limiting my options and I realized I would never be truly free unless I became debt-free.”

By committing to a frugal lifestyle and squeezing every bit out of his annual salary, which was less than the balance on the loans, Joe accomplished his goal of rapid debt reduction.

“I didn’t start feeling weighed down by my debt until my self-esteem finally reached a level where I didn’t need to constantly spend money to feel good about myself,” he says. “At that point, the negative feelings associated with my debt were greater than the positive feelings associated with consumption. Only then did I seek out a life of frugality and living below my means.”

A cash budget is key

And consider Jackie Ritz, a Paleo diet aficionado who blogs as ThePaleoMama from North Carolina.  She and her husband paid off $50,000 worth of debt in ten months.

“We sat down one night and wrote down all of our debt, including our student loan debt, which was the most baggage,” she says. “My husband had carried his student loan debt the past 15 years and we wondered how long we were going to let that debt keep following along with us. So, in order to have financial freedom we knew we were going to have to be more aggressive in paying the student loans down and turn our minimum payments into the maximum amount we could manage in our budget.”

Jackie says sticking to a cash budget was the key.

“During this time, we made a budget for all our expenses and used the ‘envelope system’,” she says “You place the week’s worth of money in your envelopes and when the cash is out, it’s out! This was probably the hardest part of it all since we were so used to swiping our debit or credit card without even thinking about a budget.”

A prerequisite

There is a prerequisite to this course. It is Paying Off Your Credit Card Debt 101. As much as you would like to rid yourself of the burden of college debt once and for all, if you have substantial credit card balances, they must be attended to first. The interest rate you pay on credit card debt is likely to be twice as much – if not substantially more – than what you pay on student loans.

When you do tackle the student loans, pay off those with the highest interest rates first. That will save you money and allow each payment to reduce more principle. And prior to sending in a substantial payment to a lender, call first. Ensure the payment will be applied to the loan’s principal — not to interest.

Extreme debt reduction

In order to abolish $30,000 of student loans within three years, the payments will total $923.57, based on a 6.8% interest rate for 36 payments.  You can crunch the numbers for your own particular debt situation. The strategy will be a combination of increasing your monthly income while reducing your monthly expenses to come up with the extra cash.

The most common tactics used by extreme debt reducers include:

  • Reduce housing expenses by downsizing, moving back in with the parents or finding roommates. Housing is commonly the biggest monthly expense and the cutback that can provide the biggest boost to cash flow.
  • Create a strict budget, and stick to it. Cut out any unnecessary expenses and look for ways to save money anywhere you can. Quit the gym and work out at home, stop buying bottled water, eat out less, etc. 
  • Get a side job or two. Consider getting an off-the-books job for extra cash. Deliver pizzas, bartend, waitress, etc.
  • Milk the miles from your existing car instead of buying new. Two-car households can consider becoming one-car commuters.
  • Reduce recurring expenses. The Ritz’ cancelled their cell phone plans and signed up for prepaid phones, lowering their $160 cell phone payment down to $60 per month.
  • Sell stuff you don’t need for cash. Both Jackie Ritz and Joe Mihalic were big liquidators — selling cars, furniture, dishes, toys and more.

Debt reduction is more a matter of commitment than circumstance. The timeline you choose depends on the strength of your determination.

Crowd Sourcing Your Credit Card Debt

It’s a seller’s market in the online lending industry. If you are looking to refinance high interest credit card debt, take out a small business loan or seed a startup, peer-to-peer lenders are looking for you. Crowd sourced loans are in high demand and increasing competition is driving down interest rates. With a credit score of 640 or more, it’s money in the bank — no lobby required.

Online lenders such as Prosper Marketplace and Lending Club are flush with cash. Just today, Prosper has announced another $70 million in funding to fuel its growth and expansion.

“We have had an incredible year so far, and have grown monthly platform originations from $9 million in January 2013 to over $100 million in April,” said Aaron Vermut, CEO of Prosper Marketplace. “Last month Prosper crossed $1 billion in total loans originated on the platform, and Prosper plans to hit $2 billion in cumulative loans this year.”

The company has grown loan originations over 400% since last year – with a 30% gain just last month. At the end of April, Prosper claims a 35% share of the online peer-to-peer consumer lending market.

Originally developed as a grassroots lending facility, peer-to-peer platforms allow potential borrowers to list their loan requests online, typically ranging between $2,000 to $35,000. As a borrower, you can get an instant quote in minutes with no impact to your credit score. Instead of paying 17% to a credit card company, you may pay 7% interest to an investor who funds your loan.

As an investor, you open an account, browse the hundreds of loans requested by pre-screened borrowers and can fund as little as $25 for the loans of your choice, building an income producing portfolio that issues monthly payments of principal and interest.

It’s a process that is working, big time. Over the past six years, more than $1 billion in personal loans have originated through the Prosper platform alone. Meanwhile, Lending Club claims to have facilitated more than $4 billion in loans during the past seven years, paying more than $300 million in interest to investors.

With rising demand on both sides of the equation threatening to rob banks of their greatest source of profitability, a funding war has begun. Financial institutions, smelling their own blood in the water, have begun to buy into the new paradigm. The New York Times recently reported that more than 80% of the loans issued in March were bought by banks, with more than a dozen investment funds being created simply to shop and acquire the peer-to-peer debt.

Because of the rush to gain loans, niche lenders are springing up, including crowd-sourced loans for students, consumers paying for medical expenses, small businesses seeking funding at rates they just can’t get from local lenders, as well as many other debt demands.

The democratization of debt has begun.

These Cities Have Residents with the Highest Credit Scores and the Lowest Debt

The average credit score in America is 665, using a rating methodology developed by the three major credit reporting companies. But in an analysis of the top 20 major U.S. metropolitan areas conducted by Experian, one city rises to the distinction of having the most credit-worthy residents of all, with an average score of 702: Minneapolis. Not far behind are Boston-proud residents with an average score of 694, followed by San Francisco (689), Seattle (679) and New York (678).

Atlanta residents have has the lowest average credit score of the cities considered, with a below-average score of 646. San Diego residents managed to increase their credit scores from 662 to 666 over the past four years – but also had the highest increase in average debt (+11%) from $23,797 to $26,423. Phoenix citizens had the highest boost to their average credit score of any city, with an increase of seven points compared to 2010, from 647 to 654.

Meanwhile, Detroit is on a debt diet, losing over 7% in amounts due; residents there have the lowest average debt ($23,604) of America’s top 20 cities. But folks living in Dallas have a Texas-sized average debt of $28,240 – that’s up over 7% during the same period.  Nationally, Experian reports average debt has increased by 5% since 2010.

“There is a lot more behind the numbers than meets the eye – 19 of the cities had increases in their debt amounts, which could actually be signaling a recovery pattern as credit lending is opening up and consumers are becoming more confident,” says Michele Raneri, Experian’s vice president of analytics. “Detroit, while being the only city to decrease its average debt, is also showing signs of recovery amid the unemployment and economic pressures the city is experiencing.”

Of the 20 cities analyzed, the metros with the lowest average debt, following Detroit, were Los Angeles, Calif.; Miami, Fla.; New York, N.Y.; and Boston, Mass. The cities with the highest amounts of debt, following Dallas, were Houston, Texas; Washington, D.C.; Seattle, Wash.; and Baltimore, Md.

Experian Credit Trend Analysis

Experian Credit Trend Analysis

Minneapolis bicycle, Photo credit: Dusty J via photopin cc

529 Plans: The Tax-Advantaged Savings Account that Can Curb College Debt

Americans are getting serious about saving for college. A record total of over $205 billion has been invested in 529 higher education savings plans as of June 2013, according to the non-profit College Savings Plan Network. These tax-advantaged investment accounts are offered in every state, but sometimes without the 529 moniker. They can be named “Smart Choice,” “Bright Start,” or “College Advantage.” Whatever they may be called, these state-established and maintained programs are an important tool for meeting the challenge of rising college tuition and expenses.

Tax favored status

“A 529 plan makes sense for any taxpayer who has funds that they want to dedicate to education costs at an accredited institution,” says James Twining, a fee-only financial advisor based in Bellingham, Wash. “The tax free nature of the earnings — and possible state tax deductions or credits — if used for education, are just too good to pass up.  The small costs levied by the various states are a minor drag on performance and are easily outweighed by the tax favored status.”

Investment choices

Richard Frazier, a financial planner in Wilmington, N.C., agrees — and adds that potential savers shouldn’t be intimidated by the investment choices.

“Investments inside 529 plans can vary,” Frasier says. “Most of them have what are called age-based investments. These investments automatically adjust themselves over time and get more and more conservative the closer the child gets to college. This is great for parents/owners of plans that are not investment savvy.”

Two versions of 529 plans

Twining notes that there are two different types of 529 plans for investors to consider: college savings plans and pre-paid tuition plans.

“College savings plans are invested and their value is based upon the performance of the investments,” he explains.  “Pre-paid tuition plans become worth whatever the educations costs are at the time they are incurred.”

While Twining generally favors the savings plan version, he says there is one exception where the pre-paid tuition plan could move to the head of the class.

“That exception would be for a student who is approaching college age, and will need the funds within a few years,” he says. “The education goal is now a short term goal, and like all short term goals, the appropriate investment stance is conservative. In this low interest rate environment,  it may well be advantageous to roll the college savings plan into a pre-paid tuition plan for those last few years before the expenses begin.  By doing this, the value of the plan is ‘locked in.’”

Consider a combination of solutions

Is a 529 plan the ultimate savings solution for higher education expenses? Michael Kothakota, an advisor in Raleigh, N.C., says he actually prefers a combination of investments.

“So, put some in a 529 plan, make use of a custodial account (UTMA/UGMA account) and then a Roth IRA,” Kothakota says. “If needed, money can be taken out of the Roth IRA to pay for school tax-free. In the event your child receives a scholarship or chooses a school that is not expensive, they now have a jump-start on retirement. The money in the custodial account can be used to fly home if they are out of state, purchase a vehicle, or even be used to purchase a home.”

What if college plans change?

But as every parent of a college-aged child knows, plans can change in an instant. So, what happens to the 529 plan if college becomes a “maybe in a couple years” thing?

“You can transfer the funds to a different family member and have them use the funds for a qualified education expense –including yourself,” says Kothakota.

“This is especially nice for a family who has multiple children but does not want to open 529 plans for all of them,” Richard Frazier adds.

Debt Takes a Holiday

personal finance

Americans are looking to celebrate a debt-free holiday, according to a new survey from the Certified Financial Planner Board of Standards. Only 1 in 5 of consumers surveyed said they will go into debt for yuletide purchases. And of those who say they are going to borrow a bit for holiday gifts, 69% expect to take on $500 or less in new debt, with the majority adding $200 or less.

“Each holiday season, financial planners feel some anxiety as our clients begin to splurge on gifts for friends and family,” says CFP consumer advocate Eleanor Blayney. “We can’t help but worry what this spending today will mean for their long-term financial goals, from saving to buy a new home or preparing for retirement. This survey suggests that Americans are aware of the importance of thinking about their holiday spending within the context of their overall financial life.”

Setting a budget seems to be assisting consumers in curbing their spending, as 83% of those surveyed say they know how much they plan to spend on holiday gifts this year. Women appear to be more budget-conscious than men this year, with half (50%) of women reporting they came in “on budget” with holiday spending, compared to 42% of men.

Two-thirds (68%) of consumers surveyed intend to keep their holiday expenditures the same or less than last year. Just 14% plan to spend more. Half of holiday shoppers have been saving for gifting expenses (52%); another 5% will use year-end bonuses. 

If this survey is any indication, the American consumer is growing more cautious. Of those who receive cash or gift cards this holiday season, an astonishing 65% said they will save the windfall — or use it to pay down debt. That thriftiness is most prevalent among the young, as 60% of respondents aged 18-24 plan to save cash gifts, while  only a few of those 25 to 64 plan on doing the same. 

Photo: DaPuglet via photopin cc

Retire Debt or Save to Retire: The Answer May Not Be as Simple as You Expect

Paying off debt, personal finance

The message has been hammered home time and time
again: save for retirement — you – must — save – for – retirement. Americans
are saying, “Message received.” And since the financial collapse, there has
been a major shift in priorities among the so-called “mass affluent.”
Retirement saving is now the top priority of 39% of Americans, followed by
paying down debt (26%), according to a Bank of America Merrill Edge report. This is a complete
reversal since the 2008 money meltdown.

Wait, what? We’re placing a priority on
saving for retirement over paying off debt? Won’t the financial experts say
we’ve got it all wrong? Aren’t we supposed to pay off the debt — and then start setting aside retirement savings?

come in here with a skull full of mush

“Depends on the debt,” says Shane Fischer, an
attorney in Winter Park, Fla. “If it’s a low interest rate debt that is tax
deductible, why not save for retirement first? You get the tax benefits of
retirement contributions with the tax write-off of the low interest on the
debt. And since you are limited to the amount of 401(k) or IRA contributions
you can make every year, why not maximize those contributions first?
Additionally, if your debt burden forces you into bankruptcy, your 401(k) contributions
are protected from creditors. So if you’re going to declare bankruptcy wouldn’t
you want to keep as much money as you can?”

Fischer is “thinking like a lawyer,” as John
Houseman portraying crotchety Professor Kingsfield so famously spewed in “The
Paper Chase.” But what do the financial advisors say?

James D. Osborne, president of Bason Asset
Management in Loveland, Colo. says the debt comes first.

“High-interest consumer debt — anything
carrying a higher rate than your mortgage payment — should be treated as an
emergency,” says Osborne. “This means credit cards, auto loans, personal loans
(like the one you borrowed for that European vacation), private student loans
and home equity loans. Once these loans are eliminated, it’s appropriate to
first build an emergency fund of 3-6 months of living expenses and only then
start saving for retirement. The only exception to this rule is that investors
should always contribute enough to earn their company match in a workplace

OK, got it. Pay the debt first. Unless you
get a 401(k) company match.

your investments in prison

But, not so fast, says Nancy D. Butler, an
advisor in Waterford, Conn.

“The fact that you have built up this debt
says that you have had difficulty managing your finances,” Butler says. “If you
apply the funds you have available to reduce the debt, what is to keep you from
building the debt back up again? And, you will still have no retirement

So save for retirement first?

“Although the debt typically has a cost
associated with it, sometimes you can come out ahead financially by applying
any money available above the required minimum debt payment, to save for
retirement,” says Butler.

She goes one step farther. And I have to
admit, I haven’t heard this as being a positive investment strategy before: tie
the retirement savings up with big withdrawal penalties.

“I often suggest applying the retirement
savings to an account that has a high surrender charge if you withdraw it too
soon,” Butler says. “Between the surrender charge, 10% penalty for withdrawing
before age 59½, and federal and state income taxes, a withdrawal could cost you
50% or more of every dollar you withdraw. This cost can be a deterrent and
therefore help to save the money [rather than] spending it and not having a
reasonable retirement.”

And so we all agree: save for retirement

your future self

Uh-oh. Rachel McDonough, a financial planner
in Bloomington, Minn. is urgently raising her hand to speak.

“I believe that debt is only truly safe
for those who don’t need it; those who could simply write a check and pay it
off anyways,” says McDonough. “If that’s not you, then your debt load puts
pressure on your future earnings and reduces your financial freedom. Plus,
stock, bond or mutual fund retirement investments have no guaranteed rate of
return. Sometimes they lose money. But paying off expensive debt guarantees you
a savings in the total amount of interest you’ll pay.”

Ell Kaplan, a “female finance CEO” agrees
with paying off high-interest debt, but low-interest bills like student loans
can be slowly satisfied with minimum payments.

“In investing, the most precious resource is
time,” Kaplan says. “By waiting until all of your loans are paid off, you will
have detracted extremely valuable time during which you could be contributing to
your retirement resources. Think of it as paying your future self, and make it
as non-negotiable as any other bill.”

definitive answer

One advisor has considered both sides of the
issue, created a definitive strategy – and then changed his mind.

“I too have read the “book” advice about
paying off debt before saving for retirement,” says Thom W. Newcomb, a
financial advisor in Pensacola, Fla. “However, about 5 years ago I abandoned
this philosophy and made a 180 degree turn and began advising clients to focus
on savings and less on paying off debt.”

Newcomb cites the following reasons:

  • In
    reality, there is a psychology to debt. Everyone has an “acceptable
    debt threshold” so paying off debt is a never ending battle. The moment it’s
    paid off, most consumers with no debt will soon take on new debt within their
    threshold. So focus on savings and simply keep debt under control.
  • Newcomb
    began asking clients a simple question, “Would you be comfortable if we didn’t
    pay off the debt but you had the money where you could pay off the
    debt at any point, if you wanted to do so?” Clients would almost always
    answer “yes”.
  • And
    generally, he says a client can make more than they pay with compound versus simple
    interest. Cash is King. Plus he takes into consideration the tax advantages of
    investments and interest payments, such as mortgage interest.

And Newcomb is dead set on his debt-last

Oh, wait. With two exceptions: clients with
high interest rate credit cards or loans, and people who are above their “acceptable
debt threshold.”


Quit the Commute and Retire Young

My morning commute is less than one minute, from the kitchen coffee maker to my upstairs home office.  In less indulgent times, I’ve suffered through one hour-plus commutes — one way. Those of you living in the most traffic-congested cities in America know the routine. Washington, D.C., Los Angeles, San Francisco-Oakland, New York-Newark and Boston are the worst, according to the Urban Mobility Report published by the Texas A&M Transportation Institute (TTI). Houston, Atlanta, Chicago, Philadelphia and Seattle are the runners-up.

Nearly one-third of New York City’s 4 million workers travel at least an hour to get to their jobs, according to the 2011 U.S. Census.

My two and half hour daily commute was on a 70 mile per hour Interstate. At least you feel like you’re getting somewhere. Most Americans slog through slow traffic, spending an extra $818 a year in wasted fuel and other costs of congestion, according to TTI. Not to mention the price we pay in lives lost and money spent on the wrecks caused by your putting-on-makeup, reading the sports section, and texting fellow commuters.

To really drive home the point, you can calculate the financial cost and emissions impact of your very own commute by using this calculator
developed by Stanford University. It even takes into consideration the cost of gas, parking and tolls you pay for that daily drive.

AAA estimates that when all the hidden costs of driving are taken into consideration — including routine maintenance and repair, insurance, licensing, registration, taxes, and depreciation — it costs an average of 59.6 cents per mile to operate your vehicle.

But, here’s the thing. You don’t have to do it. Pete Adeney lives in Longmont, Colorado and has done his own calculations on the cost of commuting. And all of that “ciphering” led to a drastic decision: He and his wife would move close enough to his job that he could bike to work. Yes, ride a bicycle to work. Every day.

“It is ridiculous to commute by car to work if you realize how expensive it is to drive, and if you value your time at anything close to what you get paid,” Adeney writes on his blog. “I did these calculations long before getting my first job, and because of them I have never been willing to live anywhere that required me to drive myself to work. It’s just too expensive, and there is always another option when choosing a job and
a house if you make it a priority.”

Adeney says young adults should forget financing a big fancy car, find a job that’s close to their home — in the town of their dreams — and then they may find something wonderful will happen to them, as it did to him.

“Making that easy choice is probably the biggest single boost that will get the average person from poverty to financial independence over a reasonable period of time,” Adeney writes. “I would say that biking more and driving less was the trigger in my own life that started a
chain reaction of savings and happy lifestyle changes that led my wife and I to retirement in our early 30s.”

So, if you haven’t ridden a bicycle since they had banana seats and hi-rise handlebars, you might want to saddle up and put on your skid lid. Life is waiting.

Photo: tedkerwin

How to Restore Your Credit Score

You’ve paid off your debt and bailed yourself out of financial prison. Now it’s time to restore your credit score: a financial
blemish that only time – and timely payments – can heal. For consumers attempting to build, or rebuild a credit history, secured credit cards can be a useful tool.

But at what cost? It may be higher than you expect.

Secured credit cards pose little risk to lenders. You make a security deposit to the card, from which purchasing power
is guaranteed. The credit card company already has your money, so you would expect to face minimum fees, right?

CardHub has taken a look at the offers and policies of 23 of the largest credit card issuers in the U.S., and found
that despite the low credit risk, secured credit cards can end up costing holders more than $100 every year. Even if you don’t carry a revolving balance, you’ll pay an average of $27 in fees each year. Secured card users who carry a
revolving balance of just $300 pay an average of $85 in fees and interest each year.

And that’s on top of the average $313 minimum deposit required to carry a secured credit card. The security deposits can actually range from a low of $200, to as much as $500.

“For consumers, secured cards are, in my opinion, the best gateway to credit access, offering the closest thing you can
get to guaranteed approval in the credit card space and promoting responsible spending and payment habits in a relatively low-risk environment,” says CardHub founder and CEO Odysseas Papadimitriou.

Unfortunately, many consumers make the mistake of applying for as many cards as possible, thinking that success lies in the law of large numbers. That strategy can negatively impact your credit score, defeating the purpose of rebuilding your credit.

And if you’re looking for a credit card to help repair your credit history, shop for a card with low fees and interest
rates, rather than rewards. With bruised credit, most bonus points and rewards programs will be of minimal value, at best.

“For issuers, secured offerings mitigate the inherent risks associated with extending credit to unproven consumers by virtue of the fact that required security deposits double as user credit lines, thereby preventing consumers from racking up balances they can’t afford to pay back” adds  Papadimitriou.
“That’s why it’s so disappointing to see certain issuers taking advantage of the fact that people with limited or damaged credit don’t engage in much price comparison in order to overcharge these at-risk demographics simply because
they can, as opposed to doing so for valid risk-management purposes.”To avoid getting caught in a debt trap again,
set up automatic monthly draft payments from a bank account for at least the minimum required payment. Then, as cash flow allows, you can add additional payments to reduce the outstanding balance.

401(k) Savers Go Deeper in Debt

401(k) personal finance

One step forward, two steps back. While
Americans are saving more for retirement, many are also going even deeper into
debt. The treadmill is starting to run in reverse. Over 60% of workers
participating in an employer sponsored retirement plan accumulated more debt
than they contributed to their retirement savings between 2010 and 2011,
according to research conducted by

The study looked at data from the Federal
Reserve and the U.S. Census Bureau and found that one in five participants in
401(k) retirement plans particularly added more credit card debt to their
family balance sheet than they contributed to retirement savings.

“Through retirement plans and social
security taxes, the average 401(k) participant now contributes over 11% of
their paycheck to retirement savings every month, yet the typical worker near
retirement has only about 2 years of replacement income saved,” says
HelloWallet founder and CEO Matt Fellowes. “The growth in household
debt is one big reason why retirement readiness is so stubbornly low.”

The research also revealed that monthly debt
payments for households nearing retirement increased by 69% between 1992 and
2010, and now totals $0.22 for every $1.00 earned by 401(k)
plan participants close to retiring.

Retirement plan participants who accumulate
debt faster than retirement savings, called “debt savers” in the study, have
50% less of their annual income saved for retirement compared to participants
who contribute more to their retirement funds than they accumulate
in debt.  That translates into two
years of replacement income saved, compared to four years for non-debt savers.

Participants who are mounting debt faster
than retirement savings are typically over 40 years old, college educated, earn
over $50,000, and don’t have adequate emergency savings. Nearly half (47%)
are in the highest income quartile. About 44% of “debt savers” earn more than

And the tendency to acquire more debt than
retirement savings does not seem to correlate with poor economic conditions,
according to the research.

“While there is no question about the
fundamental value and importance of the 401(k), our research finds that it is
just one piece of the puzzle,” said Fellowes. “Until we work on
improving all components of retirement readiness, it will be very hard for employers
to fundamentally move the needle.”  


Photo: _e.t via photopin cc