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What Does The Research Say? – Forbes Advisor



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The best way to manage your credit cards is to pay off every charge you make in a given month. In other words, you should only use your credit card if you have the actual cash to afford the purchase.

You’ve probably heard this advice before. But if you’re currently carrying an outstanding balance on your credit cards, you are far from alone.

There’s no point in beating yourself up if your credit card balances have crept up higher than you intended. Everyone makes mistakes. But it is important to acknowledge that the debt is costing you money and come up with a plan to improve your situation.

The good news is that there are several approaches you can use to eliminate your credit card debt. Below is a look at several common credit card payoff strategies, along with some insightful research to help you choose the option that’s best for you.

A Quick Look at the Numbers

Revolving credit card debt from month to month is expensive and can hurt your credit score. Yet it’s a common financial mistake that many people make (or, at least, have made at some time in the past).

Before we dive into credit card payoff strategies, here’s a look at a few key statistics to help you see how your debt compares to others.

  • 75% of credit cardholders revolve a balance on their credit card accounts.
  • $5,315 is the amount the average American owes in credit card debt.
  • Americans pay only the minimum payment, or close to it, on 29% of credit card accounts.

Strategy #1: The Debt Snowball

How the Debt Snowball Method Works

The debt snowball is a credit card payoff strategy that requires you to list your outstanding credit card balances in a particular order. At the top of your list of debts you’ll want to insert the account with the lowest balance. Next, you’ll order the remaining accounts from lowest to highest, according to the balances you owe.

Here’s an example of what the debt snowball looks like on paper.

Once you set the payoff order of your accounts, you’ll continue making at least the minimum payment on every credit card other than the one in the first payoff slot. (Paying the minimum payment helps you avoid credit card delinquency.) But you pay as much as you can toward the account with the lowest balance in an effort to pay it off first. Finally, after you pay off the smallest-balance card, move to the next account on your list, rinse and repeat.

What the Research Says

A number of financial and credit experts believe that paying off the smallest debt first is the best way for consumers to pay down their credit card debt. Here’s a look at some research that backs up this theory.

  • A Boston School of Business study finds that the repayment strategy you choose can have an influence on how much money you apply toward debt elimination. Consumers in the study who paid off their accounts one by one paid down their debt 15% faster than those who made their debt payments in equal amounts. Conclusion: Small wins can keep you motivated.
  • Experian provides an example of how the debt snowball method can save you money on interest. In the scenario, a consumer who has nearly $19,000 in debt could use the debt snowball approach to pay $4,300 less in interest, even without making extra payments above the total amount due when he or she created the original debt payoff list. The secret is applying the extra money you free up when you pay off your first debt toward the next highest balance (and so on).
  • myFICO points out that the debt snowball method might also help you lower the credit utilization rates on your individual credit card accounts faster than the debt avalanche. Why is this point meaningful? Anytime you lower the balance-to-limit ratio on a credit card (even an account with a small balance), there’s a chance your credit score might improve. And a higher credit score may save you money in ways that aren’t always immediately apparent.

Strategy #2: The Debt Avalanche

How the Debt Avalanche Method Works

The debt avalanche is another credit card payoff strategy that requires you to list your credit card balances in a particular order. With this approach, however, you base your debt payoff sequence according to your interest rate—highest to lowest.

Here’s a hypothetical example of a debt avalanche plan.

As with the debt snowball, you make the minimum payment on all of your accounts except for the credit card in the first payoff slot. (That’s the card with the highest APR with the debt avalanche approach.) Then, you pay as much as you can each month until you wipe out the balance on the highest-APR card first.

Once you pay off your highest-APR account, roll over the money you were paying on that debt each month and apply it toward your card with the second highest APR. Repeat this process until all of your accounts have a zero balance.

What the Research Says

If you look at your debt from a pure mathematical standpoint, the debt avalanche seems to be the best approach. Many financial experts agree with this assumption. Afterall, attacking your highest interest rates first should save you more money in most situations.

  • A James Madison University study found that if someone has a goal of simply paying off their debt as quickly as possible, the debt avalanche is the ideal choice.
  • The National Bureau of Economic Research also released a study which found that in the case of interest rates of 17% and above, study participants would pay less by following the conventional debt elimination—aka the debt avalanche.

However, there is a “but” that comes up in debt research. If the person trying to eliminate debt struggles with bad financial habits or lacks motivation, the debt snowball may actually be the superior debt payoff strategy.

  • The National Bureau of Economic Research study above found that the psychological benefit of small victories with the debt snowball method might be powerful enough to trump slight variations in interest rates.
  • A Kellogg School of Management study found that consumers who owe large credit card balances are more likely to eliminate all of their debt when they use the snowball method due to its psychological benefits.

Strategy #3: Debt Consolidation

How Debt Consolidation Works

A third method you can use to pay down credit card debt is known as debt consolidation. Debt consolidation is the process of using a new loan or credit card to pay off the existing balances you owe. The goal with debt consolidation is to secure new financing with a lower interest rate so that you pay off your debt faster and save money.

The three primary types of debt consolidation are as follows:

With any type of debt consolidation, it’s important to make sure you stop overspending on your credit cards. If you pay off your cards with a new financing, but run up a balance on the original accounts again, you could set yourself up for severe financial and credit problems later.

Also, if you plan to apply for new financing, it’s best if your credit score is either good or excellent. It is possible to qualify for debt consolidation financing with bad credit, but you might not be eligible for an interest rate that makes the process worth your while.

What the Research Says

If you can avoid overspending, many financial experts acknowledge that debt consolidation could help you pay down your credit card debt faster. The research, on the other hand, is a bit of a mixed bag.

  • A University of Michigan study found that debt consolidation can focus a consumer’s attention on what matters most—reducing his or her total debt as quickly as possible.
  • The Boston School of Business study mentioned above, however, found that unless you can secure an interest rate that’s considerably lower, combining debts together can be disheartening and slow the debt elimination process because it takes away the motivation of small victories.

Which Credit Card Payoff Strategy Is Best for You?

Research aside, it’s important to note that every debt situation is different, and so is every debtor. You know yourself better than anyone else. So, you’re in the best position to decide which credit card payoff strategy is right for you.

If you’re having trouble deciding, here are a few questions you might want to ask yourself.

  1. What’s most important to you—saving the most money possible, or crossing individual debts off your list?
  2. Is your credit rating in decent shape, so that you’re likely to qualify for debt consolidation financing?
  3. Do you believe you could benefit mentally from eliminating little debts faster?
  4. Are you planning to apply for new financing in the near future? (If so, lowering your credit utilization ratio on multiple accounts might boost your credit score faster than the debt avalanche approach.)
  5. Do you feel you have the discipline to stay motivated if you focus on the account with the highest interest rate first, even if it will take longer to pay off due to a larger balance?

Most of all, keep in mind that there’s really no such thing as a bad debt elimination strategy. As long as you’re chipping away at your high-interest credit card balances and you avoid new debt, you’re taking a step toward a stronger financial future.

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Are Sallie Mae Student Loans Federal or Private?



When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances



Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit



Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.



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