Debt Guide

How to:
Slash your interest rates

Boost your credit score
Negotiate hard with your creditors
Become debt-free fast and forever
By Nick Clements, Co-Founder of MagnifyMoney.com

Debt Free Forever: Your Plan for Financial Freedom
Table of Contents
Introduction 3
Self-Assessment.. 5
Control Your Expenses 12
Transfer & Attack: Balance Transfer. 17
Transfer & Attack: Personal Loans. 25
Build, then Blitz.. 30
Time to Negotiate. 37
Bankruptcy and a New Beginning.. 42
Future-Proof Yourself. 45
2
Introduction
--------------------------------------------------------------------------------------------------------------------------------------
Debt can invade your life in many different ways. It can sneak up on you: the result of spending $20 more than you can afford every
day (which becomes more than $20,000 of debt in three years). It can appear all at once, after an emergency medical expense or a
job loss. And it can surprise you in a terribly painful way, when you learn about a family members hidden debt-fueled addiction.
Regardless of how you end up in debt, being in debt has a huge impact on your life, and that impact is not limited to your finances.
Studies have demonstrated that high levels of debt can cause stress, depression, high blood pressure, and deteriorating health in
general.
But debt does not have to be a life sentence. There are many options out there, ranging from balance transfers to bankruptcy. And
there is one common theme with all of these approaches: If you take action now, your situation will improve. In some ways, debt is
like any other disease: The longer you wait to deal with the problem, the worse it gets. But, unlike other diseases, it is never too late
to put together a plan and find a complete cure.
If you are reading this guide, you are looking for answers and have taken an excellent first step. We know that there is a lot of
information out there, and sometimes it can be horribly confusing. Even worse, we know that many people try to take advantage of
people in debt. For just a small fee, they promise miraculous overnight improvements in your credit score or amazing settlements
with creditors. For most of these people, the only guarantee they can make is that you will pay them a fee. Unfortunately, if it
sounds too good to be true, it probably is.
We have put together a step-by-step guide in simple English. In addition to this guide, you can always reach out to us, and we can
help you build a personalized plan. Just send us an email at info@magnifymoney.com, and we can answer your questions by email,
or set up a 30-minute telephone consultation at no cost.
The sooner you start, the sooner you can be on the road to recovery. But, before we get started, I wanted to deal with the elephant
in the room. So many people who have debt feel incredible shame. They are embarrassed by their situation, and that
embarrassment holds them back. They are afraid to ask for help. They are afraid to negotiate hard with their creditors. And their
shame weighs on them, causing stress and health issues.
You have no reason to be ashamed. You are not alone: Over 40% of Americans have credit card debt that they cant pay in full this
month.
Life has been challenging for most middle-class Americans. Wages dont increase, but the cost of living certainly has. Health
insurance (if you have it) has become more expensive, and the deductibles and co-payments can still be a couple of months of your
earnings. And we all have temptations. Whether it is a pair of shoes, a dinner in a restaurant, or a flight to Florida we lose our self-
discipline and indulge. And then we wake up, full of guilt and shame.
3
Just remember: He, who is without sin among you, let him be the first to throw a stone. Nearly one in two people has debt to deal
with. Dont worry about the judgment of others. Instead, focus on your own future.
Life is too short to dwell on mistakes of the past. The goal of this guide is to help you put together a plan for the future. You can
build a plan this month. You can be on the right path in three months. And you can feel like a different person in two years. Our goal
is to help you get there.
Why can we help?
My name is Nick Clements, and I am the co-founder of MagnifyMoney and the author of this guide. Before MagnifyMoney, I spent
nearly 15 years in consumer banking. Most recently, I ran one of the worlds largest credit card companies. I have a unique, insiders
view of how the system works. And I have used that knowledge to put together this simple, step-by-step guide on how to get debt
free.
Banks are businesses like any other. Their goal is to make as much money as possible. They make the most money when you are in
debt, paying only the minimum due. But now you have a former insider, ready to share the tricks and tips needed to get you debt
free as quickly as possible.
Lets Get Started
This guide will help you build your debt-free plan. And here are the steps that you can follow:
1. How Bad Is It? In order to get started, we need to do a full assessment of your situation. That means we will:
a. Review your budget, and understand your cash flow and debt burden.
b. Review your total debt (by type), and review your total debt in relation to your income.
c. Understand your credit report and your credit score. If you have bad credit, we need to understand what is driving the bad
score.
2. Build the Plan. Based upon the diagnosis, we can help you put together the next steps. You will be put into one of the following
plans:
a. Transfer & Attack: Transfer your balance to a lower interest rate, and attack that debt.
b. Build, then Blitz: Build that credit score, tighten that budget and then transfer your balance to a lower interest rate.
c. Time to Negotiate: Given your debt and income, you probably will not be able to pay off your debt. Rather than paying just a
small amount (forever), it is time to negotiate a deal. And negotiate hard.
d. Bankruptcy and a New Beginning: Sometimes the best option is to consider filing bankruptcy. The decision should not be
taken lightly. But sometimes this is the best solution and will get you to a better solution in the quickest amount of time.
3. Future-Proof Yourself. You never want to end up in high-cost debt again. That means planning for the future. And we have a
checklist, which includes:
a. Emergency fund: how big should it be, and where should you keep it.
b. Emergency borrowing: sometimes big emergencies happen. And you want to have a credit line set up before those
emergencies happen.
c. Keeping your other financial costs low: how to keep your checking account free and your insurance costs low, and how to
make your everyday spending work for you.
d. Investments: how to make sure you are not overpaying for your future.
And now lets get started with the self-assessment.
4
Self-Assessment
--------------------------------------------------------------------------------------------------------------------------------------------------
In order to deal with a problem, you first have to understand how bad it is.
In this chapter, we will quickly determine how bad is it? Based upon your answers to some basic questions, we can then decide the
best plan of attack. You dont have to read the entire guide: Your answers will help us direct you to the appropriate chapter to build
your debt-free plan.
To figure out the right plan, you need to ask yourself a few questions:
1. What does my monthly budget look like? How much do I spend each month, compared to how much I earn?
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
2. How much debt do I have? And how does that debt compare to my income?
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
3. How is my credit score?
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
Why are these questions important?
If you are still spending more money than you earn every month, we need to deal with your budget and spending first. Any other
solution would be like a band-aid on a broken arm: until the spending gets under control, any other solution wont help.
If your debt is just way out of control relative to your income and assets, you will have to be honest with yourself. You may not
be able to pay off the debt, and you will have to explore some potentially more aggressive options.
Your credit score is primarily a measurement of your responsibility. Have you paid your bills on time? A good credit score unlocks
the door to low interest rate alternatives, which can help you get out of debt faster. But, if you dont have a good score, your
options will be more limited. There is good news: credit scores can be improved. (Not overnight, like many people asking for your
5
money will promise. But they can be improved over time, and we can help you. We have seen great stories in six months, and
amazing stories over 12 months).
OK, lets get started.
A lot of people do not know the answer to this question. There is a big difference between how much you spend each month, and
how much you pay in bills.
Let me give you a simple example. Imagine that last month you spent $1,000 on a credit card. This month you pay the bill, and you
only make the minimum due. So, you write a check for $25. In addition, you have spent another $1,000 on your life (groceries, gas,
restaurants, and some other things you dont remember). But you only feel $25 leave your pocket, when you make the payment. In
reality, you spent $1,000 last month. And, this month, you spent $1,000 plus the interest you paid on the credit card (about $15).
If you want to understand your budget, you have to separate cash flow and spending. For getting out of debt, spending matters.
Many of us get our salaries, and then we pay (either in full or partially) for what we did yesterday, last month, and last year. But just
getting through the month does not mean that we are spending less than we are earning. The situation either gets better or gets
worse every month, and that depends upon whether or not we are spending more than we are earning.
One way of seeing what you spend on a monthly basis is to import all of your transactions into an online budgeting tool, like
mint.com. You need to be computer-savvy and comfortable linking accounts from your bank and credit card relationships (which
means sharing your bank account information). If you do feel comfortable, you can go through, in detail, the last 30 days of your
spending and earning to see how much you actually spent. Just choose the Budgets section after you set up your account:
You will then be able to look at your income, and compare it to your expenses.
If you dont want to use Mint, I suggest taking the next 30 days to figure out exactly how much you spend. (You could try to re-
create the last month, by looking through bank statements, credit card statements, and your memory. That is actually a good
exercise and is worth doing. However, you most likely wont be able to remember everything, which is why the next 30 days really
count.) As humans, we always underestimate how much we spend, and we often dont pay attention to small amounts. For
example, if we spend $7 a day that we cant remember (newspapers, coffee, and other random expenses), that turns into $2,555 a
year.
To figure out how much you spend each month, lets begin with what you know.
6
Step 1 Income: Write down your income. How much do you make, after tax, each month? Include all of your sources.
Step 2 Fixed expenses: There are certain expenses that happen every month. Write down and add up:
Mortgage/rent
Auto payment
Insurance (all insurance that you have purchased, including car insurance, life insurance, etc.)
Utilities (electricity, water, cable TV, etc.)
Student loan payments
Tuition, child care, or any other fixed child-related expenses (like the nanny)
Any other fixed expense (gym membership, magazine subscriptions, etc.)
Any automatic investments or savings that you might have (like a retirement fund contribution, for example)
EXCLUDE CREDIT CARD DEBT OR COLLECTION ITEMS THAT YOU ARE NOT PAYING. We will deal with that debt separately.
Now, it is time to subtract. Take INCOME FIXED EXPENSES.
For example, if your salary (income) is $3,000 and your fixed expenses total $1,600, then $3,000 $1,600 = $1,400.
Warning: If this number is negative, you have to cut your fixed expenses. That means you need to find a cheaper home, cheaper car,
cheaper insurance, or all of the above. You will not fix your problems by cutting back on lattes: You have a problem with your core
budget. Your monthly income does not even cover your basic fixed expenses.
If the number is positive, you can continue to the next part of the exercise.
Step 3 Everything else: This is where it can sometimes get a little messy. Groceries, gas, eating out, and other random expenses
can quickly disappear. Most people cant remember every little thing that they spent money on, but it is the little things that get us.
Confession of a credit card insider: Credit cards are the perfect way to separate you from your money, especially on random, small
transactions that you cant remember. Test after test shows that even responsible people spend more money when they spend with
plastic. For some reason, when we dont have cash in our hand, we are willing to pay more and buy more. It is just so easy to swipe.
In order to understand how much you are actually spending (and where), I recommend a 30-day cash diet, with a spending journal.
You can pay all of your fixed expenses online (via bill pay, for example). But for everything else, try to pay with cash only. And keep
track of your spending every day in a diary. This will sound painful. And it is. But you are only doing this for 30 days, as you discover
where your money goes.
Once you know how much you spend on everything else, it is time to do some simple math (you only need to subtract!). Take
INCOME FIXED EXPENSES EVERYTHING ELSE (the number you got from Mint, or from your 30-day experiment) MINIMUM
PAYMENT ON ALL OF YOUR CREDIT CARDS.
7
Monthly Budget Form
Income (A) Monthly income after tax (include all sources) (A) $
Mortgage/rent $
Auto payment $
Insurance (all insurance that you have purchased,

$
including car insurance, life insurance, etc.)
Utilities (electricity, water, cable TV, etc.) $
Student loan payments $
Tuition, child care, or any other fixed child-related expenses (like the nanny) $
Fixed Expenses (B)

Any other fixed expense (gym membership, magazine subscriptions, etc.) $
Any automatic investments or savings that you might have

$
(like a retirement fund contribution, for example)
Others (Do not include CREDIT CARD DEBT OR

COLLECTION ITEMS THAT YOU ARE NOT PAYING. We will deal with that debt $
separately.)
TOTAL (B) $
INCOME FIXED EXPENSES (A) (B) $
Gas $
Groceries $
Other Expenses (C) Eating out $
Others $
TOTAL (C) $
Credit Card Expense

Minimum payment on all of your credit cards (D) $
(D)
DISPOSABLE INCOME (A) (B) (C) (D) $
So, you spend less than you make each month. Congratulations! We can now move on to #2.
8
In this section, we are going to look at two measures:

Debt burden: the % of your monthly salary that goes toward servicing your debt
Total debt as a % of your total income
With these two figures, we can understand your probability of being able to pay back the debt.
Debt Burden (otherwise known as debt-to-income, or DTI)
For this calculation, we need your gross monthly income and some of your monthly expenses.
The expenses should only be expenses that appear on your credit report: your mortgage, auto loans, the minimum monthly
payment on your credit card, etc. Do not include utilities or other recurring bills that do not appear on your credit report.
Simply take your total monthly expenses and divide them by your gross (pre-tax) monthly income.
For example, if your annual salary (before taxes) is $36,000, then you have a $3,000 monthly gross income.
If all of your credit reportable payments are $1,500, you then divide: $1,500 / $3,000 = 50%.
If your debt burden is ABOVE 50%, then you are in the danger zone.
If it is between 40% and 50%, you are at risk, but can get your situation under control.
If it is below 40%, you will have options to pay back your debt.
Total Debt
There are two types of debt: secured and unsecured.
Secured debt is when you borrow money to buy a real, tangible asset (like a house or a car). If you dont pay back that debt, the
bank can repossess that asset.
Unsecured debt does not have collateral. The most common forms of unsecured debt are student loans, credit card debt, medical
debt, and personal loan debt.
For this calculation, lets look at unsecured debt, excluding student loans. So that means we should just look at credit cards, personal
loans, medical debt, and any other unsecured debt that you might have.
9
Divide your total debt by your total annual gross income.
For example, if you have $20,000 of credit card debt and an annual income of $36,000, then you would divide: $20,000 / $36,000 =
56%.
If your total debt is more than 50% of your income, you are at risk. If your total debt is above 75% of your income, you are in the
danger zone.
Remember your percentages, as we move to the final section.
Calculate your debt and income ratios
Income (A) Gross monthly income (income before taxes) (A) $
Mortgage payment $
Auto loan payment $
Credit card minimum payment $
Other expenses that appear on credit report if any $

Debt Expenses (B) Student loan payments $
Note: Do not include expenses like utilities that do not appear on a credit report.
TOTAL (B) $
DEBT BURDEN % [(B) / (A)] * 100 %
Total personal loan $
Total credit card debt $
Total student loan debt $
Unsecured Debt (C) Total medical debt $
Other unsecured debt (if any) $
Note: Do not include a mortgage or auto loan as they are loans against assets.
TOTAL (C) $
DEBT TO INCOME [(C) / (A)] * 100 %
10
In order to see what options you have available, you should see your credit score. Ideally, you will see your official FICO score,
although other approximations are also possible. To get your score:
Check the statement of your credit card. More and more issuers are adding the FICO score to their statements, including
Barclaycard and Discover.
Obtain your credit score. If you want your official FICO, you will have to pay for it. You can order it at myfico.com.
You can get an approximation for free from a number of sites (and this is our recommendation). Sites include creditkarma.com
and quizzle.com.
Warning: These site give you a good indication of your credit score, but they are not your actual FICO score. In addition, beware
the product recommendations made by these sites. They are not recommendations they are just advertisements. Unlike
MagnifyMoney.com, Credit Karma and Quizzle only show the products where they receive commissions, and chances are that
you will only see the products that pay the highest commissions. As you can imagine, more expensive products can afford to pay
higher commissions.
Once you get your score, the range is much more important than the actual score. If:
Your score is above 650, you have options. If it is above 700, you have a ton of options (and well done!).
If your score is below 650, you will need to work on the score before you can reduce your interest rates.
If you dont have a score, you can build one. And it takes a lot less time than you think.
NOW WHAT DO I DO?
Before you start your debt-free journey, first ask yourself this question: Do I spend more than I earn each month?
If the answer is yes, the first step toward becoming debt free is to learn how to take control of your spending. You need
to face the underlying reasons you are in debt and learn how to build habits to avoid debt in the future. If you skip this
crucial step, you could wind up in debt all over again.
Before you research any other payoff strategies, start with this section: Control Your Expenses
11
Control Your Expenses
--------------------------------------------------------------------------------------------------------------------------------------------------
If you are in this section:

Your monthly expenses are more than your income.
Hopefully, this exercise has demonstrated how small expenses can add up quickly over the month, and you will think differently
when you approach the checkout counter at the grocery store and get tempted by a few magazines and some candy.
If your expenses are more than your income, then you have an issue. Even if we find ways of getting your debt to cost less, you still
need to fix the underlying issue. If you continue to spend more each month than you earn, your debt will continue to grow. So, you
need to figure out how to:
Increase your recurring, regular monthly earnings, and / or
Decrease your monthly expenses.
Look through your list of everything else. Are there some obvious, painless things that you can cut? Fast forward to retirement. You
are now 65 years old, and you have to choose a place to live. There are two options. You can buy the nice home on the beach in
Florida, that is just seconds to the beach. Or, you can buy a studio apartment in a bad neighborhood with a view of the parking
garage. How you spend everything else will determine where you live when you retire. The more you save now, the more you have
later. So, you just need to decide. You may not be willing to give up that latte. Just know that by having that latte, you are giving up a
nicer place to live in retirement. Everything is a trade-off.
For some people, there just isnt enough money, period. When you look through your everything else bucket of expenses, there just
arent many expenses that you can cut. Otherwise, you dont eat or you dont travel to work. If that is the case, you have to find a
way to increase your earnings or cut your fixed expenses.
You should spend a decent amount of time looking to cut your fixed expenses. Just a few things to think about:
Can you refinance your mortgage? Take a look at PenFed (a fantastic credit union with very low interest rates) to see their
current interest rate. You can see the rate here: penfed.org/30-Year-Fixed-Mortgage. As of the publishing date, it is 3.726%. If
your interest rate is 4.726% or higher, it may be worth refinancing to help reduce your monthly payment. (In general, if your
interest rate is a full 1% higher, it may make sense to refinance. If it is 2% higher, it almost definitely makes sense to refinance.)
If you cannot afford your monthly mortgage payment, and you cannot increase your income, you may need to think about
selling your home and finding a cheaper place to live. No one likes to admit defeat, but the longer you stay in a place you
cant afford, the more likely defeat becomes. Take a real long, hard look at your home and its maintenance costs. There
should be no shame in moving to a cheaper location. Or, you can move to a place with a lower cost of living where you can
earn more. I have moved in order to make more money. Some people would rather stay put and cut their expenses. But you
have to make a choice.
If you signed up for a lease that is just too expensive, there is good news. You have more flexibility than a homeowner. Find
out what is required to break your lease, and start looking for something that you can afford. As a general rule, you should
never be spending more than 30% of your take-home pay on rent. Ideally, you can spend even less. I dont care what real estate
agents or banks say you can afford. They are not thinking about your best interests; instead, they are thinking about their best
12
interests. If your rent (or mortgage, for that matter) costs more than 30% of your net, take-home pay, you will likely find life
difficult.
It is very difficult to get out of an automobile you cant afford. Why? Because a car depreciates (usually by at least 30%)
the minute you leave the car lot. If you financed the entire car, you can end up getting stuck in a car loan, and refinancing
options are limited. If you are upside down on your car (owe more than the car is worth), the only way out is to come up with
the money to pay down the loan. Once your loan amount is just a bit below the possible sales price, you can sell and find a
cheaper option. But until then you can be stuck. That is a big warning: High-pressure sales on a car lot can be a tremendous
burden for years if you make the wrong decision. If you have good credit and your loan balance is less than you cars value, you
can look to refinance. Credit unions have great deals in this space. If you dont belong to a credit union, consider PenFed.org
one of our favorites. They are easy to deal with, and they have incredibly low interest rates and none of the junk fees.
Shop around and see if you can get cheaper car insurance. There are a lot of sites out there. We like The Zebra at
thezebra.com. It can help you compare across lots of different companies.
Too many people pay far too much money for insurance. If you are in a whole life insurance policy, you are almost
certainly paying too much. The purpose of life insurance is to make sure that people who depend upon you can maintain their
lifestyle if you die. Life insurance should not be a way to save for retirement, and it should not be a way to give your children an
inheritance. That means term life insurance is almost always the best option. Just as it sounds, term life insurance will only
cover you for a specified period of time, whereas whole life covers you for your whole life (the name does make sense). So, in
term life insurance, the insurance company may never pay a claim. In whole life, they definitely will pay a claim. As a result,
term life insurance is much cheaper. You can speak with your local insurance agent to find a good term-life policy.
o Meet Bob. He is 35 years old and has a wife and two children. His wife left her job to be with the kids. So there are three
people who depend upon Bob. He wants to make sure that if he dies, his wife can stay in the house and take care of the
kids. He makes $100,000. So he buys a $1,000,000 30-year term life insurance policy (10x his income). If he dies before he is
65, his family will receive $1,000,000. At 65, the policy expires. And he can get that policy for less than $100 per month.
When he is 65, the kids are on their own, and his retirement savings is available for retirement. By buying a term life policy
instead of whole life, Bob is saving hundreds every month.
It is so easy to sign up for something and forget about it. The first month (or year) is free, and then the billing starts. It gets
charged to your credit card, and you dont even mention it. Just cancel all of those recurring charges. You will be amazed at how
quickly they add up. If you dont even know what you are paying, there is a really good tool called Prosper Daily (formerly
BillGuard). Just visit BillGuard.com and it will look at your expenses to find recurring transactions. They can also help you cancel
those transactions. It is worth taking a look.
13
People end up spending silly money on checking accounts, when they should be free. If you are spending monthly fees,
overdraft fees, or ATM fees, you should consider switching banks. At MagnifyMoney, we make it easy to find a checking account
that is actually free. You can compare bank accounts here: magnifymoney.com/compare/checking-accounts-offers.
We had to spend a lot of time on the topic of spending money and budgeting. You just cant spend more money than you make,
because your debt will continue to increase. Any type of debt consolidation plan will not solve the core, underlying problem. I have
seen far too many people move their debt from a high interest rate to a low interest rate, and think the problem has been solved.
But because their core spending problem was not solved, they ended up in even more debt. Deal with your spending first, and then
you can deal with your debt.
Here is a quick summary of what we reviewed:

If your fixed expenses are higher than your income, you have to make some serious changes in your life. You might have to
move to a cheaper house. You may have to start renting. You may have to sell your car. It may feel painful, but it is necessary.
And you will feel much better once you get to a lower cost base. The longer you delay, the bigger the problem will become.
If your problem is with everything else, then you need to find ways of controlling your spending. There are a lot of way
to budget. You just have to choose a method that makes you comfortable. Some people use cash and envelopes. I receive
daily text messages from my credit card company to keep me on target. If you cant control yourself, none of our
recommendations later in this guide will help. They will make you feel better but the debt will continue to increase until
you get your spending under control.
Regardless of how much you spend each month, it always feels good to save. Consider the options in our checklist
(refinancing your mortgage, looking for a better deal on auto insurance, etc.). Real money can be saved and it wont take
a whole lot of your time to see what types of savings are possible.
If you have done everything possible, but you just cant earn more than you spend, you will need to meet with a credit
counselor to explore more dramatic options, including bankruptcy and public benefits. You can find a nonprofit credit
counselor here: nfcc.org.
Choose a Plan of Attack:

Now that you have gotten your spending under control, its time to choose your debt payoff strategy.
You now know the answer to three critical questions:

Have I learned how to control my spending?
How much debt do I have?
How good is my credit score?
Based upon your answers, we will give you a recommended plan.
There are 5 different strategies you can use to pay down debt:
1. Transfer and Attack Debt: Balance Transfer
14
2. Transfer and Attack Debt: Personal Loan
3. Build and Blitz
4. Time to Negotiate
5. Bankruptcy and New Beginning
15
Skip ahead to Transfer & Attack: Balance Transfer if:
You spend less than you earn each month.
Your debt burden is below 50% and your total debt is below 50% of your annual income.
You have a credit score above 700.
Skip ahead to Transfer & Attack: Personal Loans if:
If your credit score is between 650 to 700

You have a credit score above 700.
Skip ahead to Build, then Blitz if:

Your credit score is below 650, or you dont have a credit score.
Skip ahead to Time to Negotiate if:

Your debt burden is above 50%, and/or
Your total debt is more than 50% of your income.
Skip ahead to Bankruptcy and a New Beginning if:

Your total debt is above 75% of your annual income.
There is good news: From a balance transfer to a bankruptcy, you can find a way out of your current situation. The sooner you start,
the sooner your situation will improve. It may not be fast and easy, but it will happen.
And regardless of how we help you in the future chapters, dont lose the discipline of watching your expenses and finding ways to
augment your income.
16
Transfer & Attack: Balance Transfer
-------------------------------------------------------------------------------------------------------------------------------------------------
Congratulations. If you are in this section:

You have good credit. Your score is likely above 700.
You are not behind on any of your payments.
You have a debt burden well below 50%.
Your debt is well below 50% of your annual income.
You are in a great position to attack that debt and pay it off quicker than you imagined.
The best interest rates are with balance transfer offers (on credit cards). After balance transfers, personal loans can be a good
option. You would want a personal loan if:
You really dont want another credit card.
You want a single, simple contract.
Your score is below 700, and you arent approved for a balance transfer.
You werent able to get enough balance transfers to cover all of your debt, and you would like to move the rest of your debt to a
personal loan.
The debt that you are looking to pay off is not on a credit card or a store card. For example, you have a high interest rate payday
loan, medical debt, or a personal loan that you would like to refinance.
If it sounds like a personal loan is a better option for you than a balance transfer, skip ahead to the next chapter, Transfer & Attack:
Personal Loans.
In this chapter, we will help you walk through the following steps to find the best balance transfer for your needs:
1. Make a list of your debt, from the highest interest rate to the lowest interest rate. It is important to write down the name of the
bank, the amount of the debt, and the interest rate that you are paying.
2. Find good balance transfer options, using MagnifyMoneys online tools.
3. Complete the balance transfers, starting with the highest interest rate debt first. To complete the balance transfer, you will need
the credit card number of the account that currently has the debt.
4. You should pay as much money as possible to the credit card with the highest interest rate, while continuing to pay the minimum
due on all other credit cards. It may seem odd not to put all of your money toward the 0% interest rate, but your goal is to get rid
of high interest rate debt first, while constantly looking for ways to get your overall interest rate lower.
We will walk through each step in more detail below.
But wait: I get offers from my existing credit card all the time. Are they worth it?
If you have a credit card with a credit limit available, they are probably sending you checks in the mail regularly, offering you 0%
offers. These are usually not bad offers. In fact, you can save money if you use them. However, the best deals can be found when
you shop around for a new card. Offers from your existing credit card company are usually for a shorter duration (typically 12
months) and for a higher fee (4%). You can usually get a much better deal if you shop around rather than responding to an offer in
the mail from your existing company.
1. Make a list of your debt, from highest to lowest interest rate
17
In this exercise, you will need to make an inventory of your credit card debt. Your most recent billing statement will have all of the
information required. On the list, you will need to include:
Your total statement balance. If you only made purchases on your credit card, you only need to include the statement balance.
However, if you have taken out a cash advance or have a promotional (for example, 0%) balance on the card, you should list each
balance separately. The balance by each category is usually listed toward the end of the statement, under a section call interest
charges. In the example below, you can see that each balance is listed separately:
Your annual percentage rate (APR): As you can see in the example above, there are very different interest rates depending upon
whether you have a cash advance or a purchase. You will want to list each balance separately, with each APR listed separately.
The issuing bank: You will need to determine which bank issued your credit card. For most credit cards, it is obvious. However,
for some store credit cards it is not always clear. Your statement will almost always identify the issuing bank. If you cannot
determine which bank issued your credit card, just call customer service and ask them.
Once you have all of this information gathered, you can complete the list of your balances, from highest to lowest interest rates.
Below is an example:
As you can see in the example above, this individual has $10,500 of credit card debt. The interest rates range from 29% (the cash
advance on Citibank) to 0% (a promotional purchase offer from Chase).
The 16.65% is the blended interest rate, which we calculated. That means that the individual is paying an average of about 17%
across all of the debt. We will continue to use this example, as we move to step 2.
18
2. Use MagnifyMoney to find a balance transfer offer
Now that you have an inventory of your total debt, you can come up with a strategy for transferring that debt to a lower interest
rate.
At MagnifyMoney, we review thousands of offers and update the best deals every day. You can visit
magnifymoney.com/compare/balance-transfer to find the best deals.
When you look to find a balance transfer, just remember:

If you have a balance at 0%, you should not transfer that balance until the end of the promotional period. If it is at 0%, keep it
there.
You can only transfer debt to a different bank. So you could never transfer Citibank debt to another Citibank credit card.
In the example above, $2,000 of the $10,500 is already at 0%. So we are looking to transfer $8,500 of debt to a lower interest rate.
In order to use the balance transfer tool, you need to know how much you can actually afford to pay each month toward that debt.
Lets say that you can afford to pay $300 per month toward $8,500 of debt. In summary, you are looking to transfer $8,500 of debt,
at an average interest rate of 20% (remember, we excluded the debt you already have at 0%), and you can afford to pay $300 per
month.
We have input this information into the balance transfer tool, and here are the results (listings from December 28, 2016):
19
The results show a number of excellent options, which can help save you a lot of money. (We are only displaying the first four results
there are many more.)
Here is how MagnifyMoney presents the results:
Savings: We rank the results based upon savings. The transfer deal that offers the most savings is at the top. This will tell you
how much less interest you will pay during the balance transfer period, compared to your current situation.
Transparency score: The more fine print a credit card has, the higher the chance that you can end up paying hidden fees or
charges. We look at all the fine print and grade cards based upon their simplicity. The best cards get an A, the worst get an F.
Offer terms: We then show you the key features of the offer, which include the balance transfer fee and the promotional interest
rate (including how many months the promotional offer would last).
The top three results are all from credit unions (FCU = federal credit union). That means you would have to join the credit union, and
then apply for the credit card.
The fourth result, from Santanders Sphere Visa Signature Credit Card, does not require you to join a credit union.
When you make a decision about which credit union or bank to select, you should consider:
Is the savings the most important element to you? If you are looking to save the most amount of money, regardless of any other
element, then you would probably want to choose the first result.
Do you want to support local credit unions? The downside of a credit union is that you have to join first, and then apply for the
credit card. This can take extra time. Some credit unions make it very easy, but others make it a bit more of a challenge.
Do you only want to reward cards that have an A transparency score? At MagnifyMoney, our goal is to reward simpler, more
transparent cards with fewer hidden fees. We hope that our transparency score becomes a part of your decision-making process.
Regardless of which card you choose, you will end up saving a lot of money. You can see that the top four cards have savings ranging
from $2,165 to $2,649. So you know that you will be better off after a balance transfer.
20
Here are a few more tips:

Life-of-balance deals: If you see an offer that lasts for the life of the balance that means the
promotional offer expires once you pay off the balance, and not before. Those are great deals.
Just because one credit card company rejects you, doesnt mean that they will all reject you. Every bank and credit union
has its own unique underwriting criteria. We wish it was easier, but banks dont like to share their approval criteria. In our
experience, we have seen many people approved by one company but rejected by another and the reason for the
difference is not always clear. You are reading this section because you are likely to be accepted, but you are not guaranteed.
Every application will take about 10-20 points off your score. If you are not applying for an auto loan or a mortgage in
the next year, you should not be afraid of applying to multiple credit card companies. Just keep applying until you have
been able to move the majority of your credit card debt from high interest rates to low interest rates. We have helped a lot
of people using balance transfers, and they rarely were able to get all of their debt transferred to one credit card. And many
people are approved by one bank but rejected by another.
You will not always get the credit limit that you want. Even if you are approved, you may be approved for a credit limit
that is much lower than you wanted or expected. That is OK. Remember even a lower credit limit will still help you save
money. If you are given a lower limit than you want, dont be afraid to call the bank and ask them to reconsider your credit
limit. That can often work. But if it doesnt, dont be afraid to apply for a few other cards to transfer the debt.
Fears about your credit score should not keep you from saving money. The purpose of a good credit score is to use it to
save money. Remember, applying for new credit is only 10% of your credit score. Much more important is utilization and
on-time payment behavior. So long as you keep your old credit cards open after you transfer the balance, you should expect
to see an even better score than you have now in 6-12 months, because you will be paying off your debt more quickly and
will have a lower credit utilization. (If you want to learn more about how your credit score is calculated, you can read the
chapter on credit scoring in this guide.)
Once you decide which credit card makes the most sense for your needs, you just need to click Apply Now. That will take you to
the credit union or bank website, where you can complete the application process. If you ever feel stuck or confused, you can always
call the bank directly to complete the application process.
In the example above, lets assume that our individual was approved for:
$4,000 at American Heritage FCU (2.99% for 24 months), and
$4,000 at Santanders Sphere Visa Signature Credit Card (0% for 24 months).
That is an excellent outcome. We wanted $8,500 and we were able to get $8,000 across two credit cards. Because we would
transfer the highest interest rate first, then we would be able to transfer all of the Citibank accounts ($500 cash advance, $3,000
purchase), all of the Target account ($2,000), and $2,500 of the Chase account. We would only have $500 remaining at Chase, at a
15% interest rate. The average interest rate will reduce from close to 17% to below 2%!
Here is the summary:
21
3. Complete the balance transfer
This is the easiest step! But you dont start saving until you complete this step, so make sure you do it right away. In fact, if you wait
too long, you could lose the offer.
In order to complete the balance transfer, you will only need to have the credit card number of the credit card that currently has
your debt. The bank that approved you for the balance transfer credit card will handle the balance transfer on your behalf.
There are two easy ways to complete the balance transfer:

You can call the bank or credit union, and complete the transfer via telephone.
You can complete the balance transfer online.
If you want to complete the transfer online, we have written guides for some of the most popular banks. Here are the links:
How to do a Balance Transfer with BarclayCard >
How to do a Balance Transfer with Capital One >
How to do a Balance Transfer with Chase >
How to do a Balance Transfer with Discover >
Just remember:
Complete your balance transfer as soon as possible. Typically, if you dont complete the transfer within 60 days of being
approved, you will lose the deal. But the promotional offer usually starts from the day you were approved, not the date of the
transfer. So the earlier you start the transfer, the more you can save.
22
The transfer may take up to two weeks. Make sure that you continue to make payments on your existing credit card until you
have verification that the transfer has been completed. You want to ensure that you dont pay any late fees or other penalty
interest rates.
4. How to make your payments
Once you have completed your balance transfers, you need to come up with a plan for how to make payments.
Note: Many people will have heard of Dave Ramseys debt snowball. He tells people to pay off their smallest debt first, regardless of
the APR. The reason for that method is psychological, not mathematical. A big part of paying off debt is staying focused, and by
setting attainable goals (and celebrating them), you increase your chances of success.
In addition, he does not want people to ever take out a balance transfer offer, because he believes credit is evil and you will only end
up being tempted by debt.
We understand and respect that approach. And if it works for you go for it. However, it will end up costing you more money and
more time. We believe that your goal should be to eliminate debt from the highest interest rate to the lowest interest rate.
Lets give you a very simple example. You have two credit cards:
If you were following the snowball method, you would tackle the $3,000 credit card first, despite the fact that the interest rate is
lower. Lets assume you can afford to pay $300 per month ($3,600 per year) toward this debt.
If you followed the debt snowball (minimum due on Credit Card #2 and all other money toward Credit Card #1), then you would:
Have paid $1,702 of interest over the next 12 months.
Have a balance of $7,102 at the end of Month 12.
If you reversed that order, and put all of your extra money toward the higher interest rate credit card debt, then you would save
about $25 of interest. Not a big deal.
However, if you completed a balance transfer, and moved $9,000 to a balance transfer, you could save a lot of money. For example:
If the deal is 2.99% for 24 months, you would save $1,479 in the first 12 months and the balance at the end of Year 1 would be
$5,556.
So the single best way to accelerate your debt payoff is to transfer your debt to a lower interest rate credit card.
23
Just Remember:
A balance transfer can be a great to way to Transfer and Attack your debt. But, like most financial
products, there are tricks and traps that you need to avoid. If you follow these tips, you will be able to save money without
worrying.
Dont spend on the credit cards. Your goal is to get out of debt. The credit card company is betting that you will be
tempted by the credit limits and start spending again. You must avoid the temptation and only use the card as a way to
pay down debt quickly.
Pay on time, every month. If you pay late, you are giving the credit card companies the chance to start charging you a lot
of money. Even if you are just a day late, you will be hit with a late fee. If you are 30 days late, your credit score will be hit
(which can make everything in life more expensive). And, if you are 60 days late, you will lose your promotional interest rate
and could end up with an interest rate close to 30%.
Dont close the credit cards once the balances are paid off. When you have a credit card that does not have a balance,
you are showing discipline. It keeps your utilization low, and it keeps your long credit history. If your credit card has an
annual fee, just give them a call and ask to do a product transfer to a credit card with no annual fee (but with the same
account number).
Have a plan for the end of the promotional period. It would be great to be able to pay off all of your debt during the
promotional period. And if your balance transfer deal is a life of balance offer, then you have nothing to worry about.
However, if your promotional rate expires (and most do), you should have a plan for the remaining balance. The credit card
company is counting on you being lazy. They expect you to keep the debt after the 0% offer goes away and that you will
start paying the much higher interest rate. Once the promotional period is over, you can transfer the remaining balance to
another balance transfer offer.
When used properly, a balance transfer strategy can save you thousands and take years off your debt repayment. Dont let the
myths or the complexity keep you from saving money. If you have any questions (or concerns), please dont hesitate to email us at
info@magnifymoney.com.
In addition, if you want to receive an email every two weeks with the best balance transfer offers in the market, sign up for our
newsletter (which we called the PriceChecker). We promise we wont overwhelm you with mail, and it will keep you up to date on
the best offers. You can sign up here: magnifymoney.com/newsletter.
Now that you have your balance transfer plan, we recommend that you spend some time future-proofing yourself so that you can
avoid debt traps in the future.
24
Transfer & Attack: Personal Loans

-------------------------------------------------------------------------------------------------------------------------------------------------
In a complicated financial world, the personal loan stands out as a rare, simple product. You borrow a fixed amount of money, for a
fixed period of time, at a fixed interest rate.
If we turn back the clock 60 years, the only real way to borrow was with a personal loan. However, banks quickly realized that they
could make more money with credit cards, and they stopped issuing personal loans and started pushing credit cards. There are a few
reasons why banks like for people to use regular credit cards more than balance transfers:
Interest rates on credit cards are much higher than on personal loans.
People tend to spend more money on credit cards the temptation of plastic is just too easy.
There are more ways to charge people fees with a credit card. You have over-limit fees, late fees, higher interest rates on cash
advances, and more.
The minimum due on a credit card means that it can take nearly 30 years to pay off your debt, because you are only paying 1% of
the balance every month (and that goes down over time). For personal loans, the longest loans are usually only five years.
So you can see why a simple personal loan can be attractive. A balance transfer is almost always cheaper, but it is also almost always
a bit more painful, a bit less transparent, and a whole lot more tempting.
In this section, we will explain:

1. How to shop for a personal loan
2. How to apply for a personal loan
3. Tricks and traps to avoid
1. How to shop for a personal loan
Applying for a personal loan will be different than applying for a credit card. Here are some things to remember:
Most personal loan companies are very small (and you probably have not heard of a lot of their names). Each one of them has
very specialized criteria for who they accept.
At most lenders, you can see if you will be approved without hurting your credit score. They will use a soft pull to let you know
if you are approved, how much you can borrow, and the interest rate and fees associated with that approval.
You may need to provide verification of income, employment, or other items on your application. Credit card companies will
almost never ask for documentation: There is a high chance that personal loan companies will ask for documentation.
The best place to start the personal loan application process is at the MagnifyMoney personal loan tool, which you can
find here: magnifymoney.com/compare/personal-loans/.
You can input some of your personal information (credit score, loan amount, and college degree), and you will see
results like the list below:
25
We highly recommend that you apply to more than one company, so that you can compare the interest rates that you receive.
Once you receive your customized list of potential personal loan companies, you can then click Go to Site. Once there, you can
answer just a few questions, and you can see if you will be approved and for how much.
For each personal loan, you will want to keep track of:
The fee
The interest rate
The APR
26
These are the most important factors to compare when looking at personal loans.
It will take you no more than five minutes to get pre-approved at each lender. It makes sense to compare 3-5 companies, and then
you can go with the lowest cost.
Make sure you compare the APR: The APR is a combination of the interest rate (which is paid each month) and the upfront fee
(which is taken out of the loan proceeds at the beginning of the loan). The APR is the true cost of the loan, and you can compare the
APR across all providers.
However (and this is important): The APR assumes that you will not pay off the loan early. If you do pay the loan early, you will not
get a refund of the upfront fee. That means your effective APR would be higher if you pay off your loan early. Many personal loan
companies say that they do not have a prepayment penalty. While that is technically true, you will not receive a refund of your
upfront fee.
2. How to apply for a personal loan
Once you have found the personal loan company that offers the lowest APR, you can go forward with a full application. When you
do a full and formal application, you will have an inquiry on your credit report. That will result in a decrease in your score of about
10-20 points (on average).
Just because you were pre-approved does not mean you will be formally approved when you apply. When you formally apply for the
loan, you will be providing a lot of additional information that will be used for the credit model. However, chances are very good
that you will be approved.
When you make a formal application, you may have to provide documentation to verify your income or employment. That could
include pay stubs, tax returns, or more. Be prepared to substantiate everything you say. If you dont have good documentation, you
could find this phase a bit challenging.
From applying for your loan to getting the loan funded can take a few weeks with the online lenders. Just make sure you proactively
manage the documentation process and supply all required information and answer any questions.
In most cases, the upfront fee is taken out of the loan proceeds. So make sure you apply for enough to cover the fee. For example, if
you need $5,000 and there is a 4% fee, then apply for $5,208. That way you can pay the 4% fee ($208) and still receive your $5,000
proceeds.
I heard about peer-to-peer lending. What does that mean? Should I worry about this?
Personal loan companies need to find money that they lend to you. Some of the personal loan providers are banks or credit unions,
and they use deposits. Others, like Discover, issue bonds and borrow on the public markets.
There is a new type of lender (like Prosper and Lending Club) that directly matches investors with borrowers. Investors can put in
just a few thousand dollars to get started. So when you apply for a loan, a peer-to-peer lender will actually go out and try to get your
loan funded. That takes time.
But you should not worry about the difference between the different types of lenders. At the end of the day, you have all of the
same consumer protections regardless of where the money comes from.
3. Tricks and traps to avoid
27
A personal loan is a relatively simple contract, which means that there are not many ways for you to get into trouble. Here are the
biggest traps that you need to avoid:
Insurance: At the end of the loan process, you may be offered add-on insurance products. They will typically sell products like life
insurance (it will pay off the loan in the event of your death), unemployment insurance (it will make payments if you lose your
job), and disability insurance. Although every insurance policy is different, the vast majority of the policies reviewed by
MagnifyMoney are not worth it. If you need life insurance, you should shop for term life insurance and make sure that you have
enough coverage for everything you need, including your loan. If you need disability insurance, you should look for a policy that
covers all of your needs, not just the loan. In all of those cases, you will get a better deal than a pressure sale at the end of a loan
closing.
Early renewals: Remember that the upfront fee is nonrefundable. So although there is no prepayment penalty, the fee does
not go away. And, if a personal loan company tries to get you to renew the loan, they will likely charge you another
nonrefundable fee. Not only does this get you stuck in a debt trap, but it also makes the effective APR that you pay much higher
than what you originally signed up for.
Precomputed interest: Very few companies even offer this any longer. However, precomputed interest is a different (and very
old-fashioned) way of calculating interest. If you do not pay off your loan early (you pay it to maturity), it does not matter.
However, if you pay off your loan early, you will end up paying more interest.
If you say no to insurance, dont renew your loan, and pay it off according to the amortization schedule, then you have nothing to
worry about. When you do that, the disclosed APR is the true cost of your loan. If you fall for the traps (insurance and frequent
renewals), you will end up paying a lot more.
Tips about personal loans:

A personal loan can be a great way to borrow money at a lower interest rate than your existing credit
card. You can take a lot of money (and time) off your debt repayment.
To make a personal loan work for you:
Take advantage of the soft pull that many personal loan companies offer. Just write down the APR (that includes both
the interest rate and the upfront fee). Compare the APRs, and go with the lowest.
Be prepared to verify your income and address. Unlike credit card companies, the personal loan companies will probably
ask you for proof.
Avoid the insurance, which is usually sold at the very end. These add-on products are almost always a bad deal.
Once you receive the proceeds of the loan and pay off your existing credit card debt, dont close the old credit cards. It
will help your score to keep them open (so long as you dont spend on them).
Although most personal loan companies will start tempting you with renewals (more cash in your pocket), avoid it. Not
only will you get stuck in a debt trap but your effective APR will go way up (because those upfront fees are never refunded).
When you apply, remember to apply for enough money to cover the upfront fee. That fee is usually taken from the loan
proceeds. For example, if you need $5,000 and the fee is 4%, then you should borrow $5,208 (so that $208, or 4%, goes to
the fee).
28
If you want to receive an email every two weeks with the best personal loan offers in the market, sign up for our newsletter (which
we called the PriceChecker). We promise we wont overwhelm you with mail, and it will keep you up to date on the best offers. You
can sign up here: magnifymoney.com/newsletter.
Our next chapter is dedicated to people who need to improve their credit score. But if you are interested in credit scores (and how
they are calculated), you may want to read it anyway.
We also recommend reading our chapter dedicated to future-proofing yourself, so that you can try to build a more secure financial
future.
29
Build, then Blitz
-------------------------------------------------------------------------------------------------------------------------------------------------
To get debt free as quickly as possible, you need to:
1. Set a monthly budget, and stick to it. You should be putting as much money as possible toward your debt repayment.
2. Make a list of your credit card debt (from the highest interest rate to the lowest interest rate). Attack the highest interest rate
debt first. There are two ways of attacking high interest rate debt.
a. Reduce the interest rate on that debt. You can do that by transferring the debt from a high interest rate credit card to a low
interest rate balance transfer (on a new credit card) or a personal loan.
b. Make the minimum payment on the lower interest rate debt, and put all of your extra money toward the highest interest rate
debt until it is paid off.
c. Repeat steps A and B until you have completely paid off your debt.
The more money you put toward your debt, and the lower the interest rate, the quicker you will be debt free.
In order to reduce the interest rate on your existing credit card debt, you will need to have a good credit score. Interest rates are
determined by your credit score: the better your score, the lower your interest rate. If you really want to move debt from a high
interest rate credit card to a low interest rate balance transfer or personal loan, you need a score of at least 650, and preferably 700.
If you have been directed to this chapter, it is because you need to get your credit score up. Dont worry: It is easier to do than you
think. It just takes time and discipline.
So, your plan should be:

Put all of your cash toward the highest interest rate credit card debt.
Work on improving your credit score.
Once your credit score improves, you can transfer the debt and attack, using either our Balance Transfer chapter or our Personal
Loans chapter.
In this chapter, we will help you build your credit score so that you can blitz your debt and make your life a lot less expensive.
Although credit scoring may sound complicated, confusing, or scary, it is actually remarkably simple. In this chapter, we will walk you
through:
How a credit score is calculated

How you can improve your credit score
How you can monitor your score over time
You will often hear people ask what is your credit score? The question makes it sound like there is only one score. However, there
are actually hundreds (if not thousands) of scores out there.
30
The original, and most dominant, is the FICO score. This score is used in over 90% of lending decisions, and it has formed the basis
for all other scores that have been created. In other words, the other scores are variations of the FICO score, rather than completely
different versions of the original.
So, if you want to have a good credit score, focusing on the FICO score is a safe bet.
The FICO score is calculated based upon information in the credit bureaus. There are three bureaus: Experian, Equifax, and
TransUnion. Certain creditors will report information to the credit bureaus, and that information is used by FICO to calculate a score.
That score is then passed along to the lenders when you apply for a credit card, personal loan, or other product. If something isnt
reported to the credit bureau, it doesnt impact your score. So the starting point to understanding your score is understanding what
is in the credit bureaus.
Positive and Negative Information
Certain companies report positive and negative information to the credit bureaus. Other companies report only negative
information. So the most important concept to understand is the difference between positive and negative information.
Positive information includes your credit limit, your balance, and your on-time payment history. In other words, every time you
make an on-time payment, it is reported to the credit bureau (like a gold star that you may have received when you were in grade
school for good behavior).
Negative information includes missed payments, collection agency accounts, foreclosures, lawsuits, wage attachments, liens,
judgments, and bankruptcies. For example, your doctor does not give you a gold star when you pay on time. But if you dont make
your payments on time, he will report that missed payment to the credit bureau. So doctors only report negative information.
To have a good credit score, you want as much positive information as possible in your credit bureau. In addition, you want little (or
no) negative information.
The following accounts typically report both positive and negative information:
Credit cards
Store cards
Personal loans
Auto loans
Mortgage loans
Student loans
The following accounts typically report only negative information (you get in trouble if you dont pay, but you dont get credit if you
do pay):
Doctors/hospitals/other medical bills
Cellphone payments
Rent
Utility bills
On-time child support payments
So if you pay your rent and utilities on time every month, but have no other credit, you will have no positive information in your
credit bureau. That means you will not have a good score.
31
We will explain below how your score is calculated. There are a lot of myths out there about credit scoring so hopefully we can
help you understand, so that you can take action to build your score.
35%: Payment History
This is the single most important part of your credit score. Quite simply, this looks at how many on-time payments that you make.
You will:
Get rewarded for on-time payments.
Be punished for missed payments.
Not all late payments are created equally.
If you are fewer than 30 days late, your missed payment will likely not be reported to the bureau (although you still will be subject to
late fees and potential risk-based repricing, which can be very expensive).
Once you are 30 days late, you will be reported to the credit bureau. And the longer you go without paying, the bigger the impact on
your score. Sixty days late is worse than 30 days late, for example.
A single missed payment (of 30 days or more) can still have a big impact on your score. It can take anywhere from 60 to 110 points
off your score.
If you dont pay a medical bill or a cellphone bill, your account may be referred to a collection agency. Once it is with an agency, they
can register that debt with the credit bureau, which can have a big negative impact on your score.
Most negative information will stay on your credit bureau for seven years.
Positive information will stay on your credit bureau forever, so long as you keep the account open. If you close an account with
positive information, then it will typically stay on your report for about 10 years, until that account completely disappears from your
credit bureau and score.
If you dont use your credit card (and therefore no payment is due), your score will not improve. You have to use credit in order to
get a good score. However, there is a big myth that you have to borrow money and pay interest to get a good score. That is
completely false! So long as you use your credit card (it can even be a small $1 charge) and then pay that statement balance in full,
your score will benefit. You do not need to pay interest on a credit card to improve your score.
Remember: Your goal is to have as much positive information as possible, with very little negative information. That means you
should be as focused on adding positive information to your credit report as you are at avoiding negative information.
30%: Amount Owed
This part of your credit score will look at how much debt you have.
32
Your credit report uses your statement balance. So even if you pay your credit card statement in full every month (never pay any
interest), it would still show as debt on your credit report, because it uses your statement balance.
This part of your score will look at a few elements:

The total amount of debt that you owe across all of your accounts
On your credit cards, the utilization
If you have a lot of credit card debt, your score can be hit.
In addition to the total amount of debt that you have, your utilization is very important.
To calculate utilization, divide your statement balance (across all of your credit cards) by your available credit (across all of your
credit cards). For example, if you have credit limits of $40,000 across four credit cards, and you have a total balance of $20,000, then
you have a utilization of 50%.
To have a good score, you will want your total utilization to be below 20%.
Why is utilization such an important concept? If you use every bit of credit made available to you, then it looks like you do not have
self-restraint. Maxing out all of your credit cards is a big warning sign to lenders.
If, however, you are able to restrain yourself and have a lot of available credit (that you do not use), then you are showing self-
discipline.
It may sound strange (and, in fact, it is): but the key to having a good credit score is having a lot of available credit and not using it.
15%: Length of Credit History
This is the easiest part of the credit score to get right. So long as you dont close accounts, every day this part of your score improves
(because all of your accounts become one day older).
FICO will look at the age of your oldest account, as well as the average age of accounts.
10%: Types of Credit in Use
If you have experience with different types of credit (installment loans, revolving loans, credit cards, etc.), then you will get more
points than if you dont have a variety of experience.
The most important product is a credit card. If you have a credit card and manage it well, then you will be rewarded in this.
Remember: There is no greater temptation than a credit card. If you are able to withstand the temptation of plastic, you get the
most points.
10%: New Credit
If you open up a lot of new credit in a short period of time, you will be sending a warning signal to the credit bureau. But this part of
the credit score has turned into a myth that scares a lot of people. They are afraid to shop for the best deals, because they are afraid
of what shopping for credit would do to their credit scores.
The FICO score will look at credit inquiries from the last 12 months.
33
This factor is only 10% of your total score. And there are a lot of myths. Lets break a few of them now:
Checking my own credit report will hurt my score: FALSE! If you check your own credit report at AnnualCreditReport.com, it will
not hurt your score.
If I shop around for a good mortgage or auto loan rate, my score will get crushed: FALSE! Multiple inquiries for a mortgage or
auto loan are usually treated as a single inquiry.
If I shop around for a balance transfer credit card, my score will get crushed: FALSE! If your score does decline, it probably will not
decline by much. You can expect 10-20 points per credit application. But remember: You apply for a balance transfer to help
reduce your balance faster. When you open a new credit card and transfer your balance, then you will be able to:
o Have a lower overall utilization, because you have new credit available (and of course you will not use it!).
o Pay off your debt faster, because the interest rate is lower. At the end of 12 months, your score should be even higher than
when you applied for the balance transfer or personal loan.
The key to having a good credit score:

Use your credit card every month, but keep your utilization well below 20%. In other words, never charge more than 20% of your
available credit. You can reduce your utilization by (1) paying down your debt and (2) increasing the credit that you have
available.
Make your payments on time every month.
If you repeat these two things over time, you will eventually have a score above 700.
However, if your score is below 700 and you want to improve it, you need to focus on:
Putting more positive information into the credit bureau.
Getting your utilization below 20%.
Dealing with the negative information.
More Positive Information
If you have credit cards, making on-time payments is the best way to improve your score. Remember: The longer a payment is
overdue, the bigger the negative impact on your score.
If you dont have any credit cards, your bad score is probably a result of a thin file. (Bankers call it a thin file, because in the olden
days, when credit reports were actually paper files, they would be very thin if you didnt have any credit cards.) So if you are just
looking to get a personal loan to pay off some medical debt, you need to build a good credit score in order to get a good rate on a
personal loan.
It is actually very easy to start building your score, by applying for a secured credit card. You can compare secured credit cards at:
magnifymoney.com/compare/secured-cards.
The purpose of a secured card is to help you build a credit history, not to help you borrow money. Here is how it works:
34
You give a deposit to the bank. The deposit can range from $50 to a few hundred dollars. The bank will hold onto that deposit
and give you a credit line equal to that deposit.
The bank will report the credit limit to the credit bureau like any other credit card.
You can use the secured card like a credit card. However, your goal should be to keep the utilization below 20%. So if you have a
$200 credit limit, dont spend more than $40 per month.
Make your payments on time every month. When you do, the on-time payment information will be sent to the credit bureau. It
is like a gold star for good behavior.
After 12-18 months, you can graduate to a normal credit card and receive your deposit back. Some banks even pay you interest
on your deposit.
If you dont make your payments on time, the bank holds your deposit as collateral. They can eventually take your deposit and
use it to pay the delinquent balance. But the late payments will have been reported to the credit bureau further harming your
score.
It may seem odd that a secured card can have that big of an impact on your score. However, it does. At the end of the day, a credit
score measures your discipline and responsibility. It takes a lot of work to open a secured card (requiring an upfront deposit), to not
spend the whole available limit, and to pay on time every month. By doing this for 6-12 months, you are demonstrating your
discipline, and the credit score will reward you. So long as you follow these steps, you can expect a rapid increase in your score over
time.
Utilization Below 20%
Remember: Utilization is the percent of your credit limit that you use. If you max out your credit card, you have 100% utilization. If
you dont use your credit card at all, you have 0%. Your goal is to be less than 20%, but more than 0%.
If all of your credit cards are maxed out, you may think that it is impossible to get the utilization lower. The single best way is to start
paying down your debt more aggressively and to stop putting your monthly expenses on your credit card. If you start using a
cash/debit card for monthly expenses and pay down as much as you can every month, you are making progress.
But there is another slightly unconventional way to reduce your utilization: apply for a new credit card and dont use it. Now, you
will need to have discipline. But I dont think you would be reading this page if you didnt have discipline.
Because your credit score is low, you will not be able to get all of the credit cards out there. But if your score is above 600 (and
maybe even as low as 580), there are some options out there. The best option: a store credit card. For example, if you apply at
Walmart for their Discover card, you have an excellent chance of being approved. Target also accepts people with a score as low as
600 (and sometimes lower). It may be worth applying for one of these cards and just keeping the limit open. Dont spend on the
card. The reason we like store cards: They have no annual fee. The goal of a store card is to get you to spend money in the store. So
long as you have self-restraint, you can lower your utilization and avoid any fees.
This strategy would backfire on you if you spend on the new credit card, or end up taking out a very expensive credit card with fees.
But if you apply for a card and have the discipline not to spend on the card, this strategy can help you. (Note: It may reduce your
score in the short term, because a credit inquiry can take points away from your score.)
35
First, you need to make sure that you have a record of all negative information on your credit report. The best way to get a full credit
report is to visit AnnualCreditReport.com, where you can get a free report from all three credit bureaus. There are a lot of sites that
offer free scores, but you need your full report in order to understand what negative information is impacting you.
Some of the information may be incorrect. If you see collection items that you do not recognize, you should dispute them. You can
easily dispute these online, with each of the three credit-reporting agencies. Here are the links where you can dispute:
Experian: http://www.experian.com/disputes/main.html
Equifax: https://www.ai.equifax.com/CreditInvestigation/home.action
TransUnion: https://dispute.transunion.com/dp/dispute/landingPage.jsp
If you are not happy with the resolution, you can complain to the Consumer Financial Protection Bureau (CFPB). It is easy to do, and
collection agencies do not like being under the spotlight of the bureau. You can complain online here:
consumerfinance.gov/complaint/.
If you have legitimate negative information on your report, you probably need to take care of it. There is a reason we have written
probably.
Negative information impacts your credit score for seven years. If you have almost reached Year 7, you may want to ignore the
charge and let it disappear. Seven years after the original default date, the collection item will have to disappear from your credit
report and will no longer impact your credit score. It is better to try and deal with younger collection items.
If the item will disappear from your report in just 1-2 years, you may want to ignore it. Dont speak to the collection agency, and
dont reaffirm the debt.
If you have recent collection items on your credit report, you need to deal with them as quickly as possible. With the new FICO
score, settled collection accounts will no longer impact your score. So your goal is to reach an agreement.
Warning: A lot of companies out there will try to get you to sign up for a debt-settlement service. Beware of these companies.
Everything they do, you can do.
Speak to the collection agency. If it is a small balance, and you can afford to pay the item in full, then you should do it. Just make
sure that you receive (in writing, before you submit the payment) confirmation that the payment will completely satisfy the debt
obligation.
If you cannot afford to pay the full amount, then you should negotiate a settlement. You can read all about negotiating a settlement
in the next chapter, Time to Negotiate.
36
Time to Negotiate
--------------------------------------------------------------------------------------------------------------------------------------------------
You may reach a point in time where you have just accumulated too much debt relative to your income or your assets. When you
can barely (or cant even) afford to make the minimum due, you will end up struggling every month to make a payment where 90%
(or more) of the payment will go to interest. At this rate, it will be 30 years (or more) before you are debt free. And, along the way,
you will spend your working years giving interest to the bank, rather than paying down your debt and saving for retirement.
If this description sounds familiar, you may want to take action. And there are a few options:
You can try to negotiate settlements or forbearance directly with your creditors.
You can visit a nonprofit consumer credit counselor to get help negotiating settlements (or putting together a plan).
You can consider bankruptcy, depending upon the level of debt (which you can read about in the next chapter).
In all of these cases, your credit score will be hit. There is no avoiding that fact: You have borrowed (or owe) money that you cannot
afford to pay back. Your credit score measures how successfully you paid back your debt. So, by definition, your score will suffer.
However, the sooner you take action, the sooner you will get your debt situation under control and the sooner your score will start
to improve.
You may also be sued, and this could result in wage garnishment. If you are able to repay your debt, but choose not to, the law will
catch up with you. Your wages would be garnished, and you probably would not be able to file for bankruptcy. So it is important to
proceed with these options only if you really are drowning in debt, and you dont see any way of paying back this debt. Before
making this decision, it makes a lot of sense to sit down with a nonprofit consumer credit counselor to review your options. You can
find a counselor near you here: nfcc.org.
Be alert: All of the recommendations in this section apply to unsecured (credit card, personal loan) debt. None of this applies to
student loans, unpaid taxes, and unpaid child support and alimony. All of that debt is treated differently under the law. (Put simply:
You just cant walk away from that debt.) It also does not apply to any secured debt (mortgages, auto loans, etc.) because failure to
repay can result in foreclosure or repossession. In other words, the creditor can take your home or your car if you stop paying.
When you are drowning in debt, it is just as important to be aware of the things you shouldnt do. Make sure you avoid:
Credit repair companies, which make bold promises and charge hefty fees. If you hear things like we can remove bankruptcies,
judgments, liens, and bad loans from your credit file forever! beware. No one can remove a legitimate claim from a credit
report (unless they resort to fraud, which is punishable in a court of law; in my career, I have punished such cases). And, if there
is incorrect information, you can apply (online, in a matter of minutes, for free) to have that incorrect information removed. You
do not need to pay a company to do this for you, and they will not get the promised results.
37
For-profit debt-settlement companies. There are a ton of companies out there that are willing to take your money and negotiate
on your behalf. The scenario typically works like this: You stop making payments to your credit card companies. Instead, you put
the money into an account. As you become increasingly delinquent on your payments, the settlement company will try to
negotiate with the companies to get a settlement. Once a settlement is achieved, they will make a lump-sum payment, taking a
fee for themselves. Stopping your payments and starting to negotiate may be a good option. But paying 20% - 40% to a debt-
settlement company is just a waste of money. Banks and credit card companies will have certain settlements that they are willing
to grant. The more money you pay to the debt-settlement company, the longer it will take (and the more money it will take) for
you to meet the settlement requirements of the bank. You can always do it yourself, or with a nonprofit company.
OK, now we are going to talk about how you can negotiate. There are three types of debt that we will discuss:
You are current on your debt, making payments. But you cant continue to make payments at this level.
You are delinquent on your debt, but it is still relatively early. In other words, it has been less than six months (180 days) since
you stopped paying.
You have debt with a collection agency. Either the debt was sold to a collection agency by a credit card company or given to a
collection agency by a medical company, cell phone company, or someone else.
Depending upon your situation, your approach will be very different.
1. You are current on your debt, struggling to make payments
Ironically, this is the hardest situation. When you are making payments, the goal of the bank or credit card company is to keep you
making those payments. They are very happy receiving the minimum due. By making the payments, you are demonstrating that you
are capable and willing to pay. So the banks are very keen that you keep doing it.
Having said that, you should still try to negotiate with them and see what they can offer. Just give your credit card company a call,
and tell them that you are in financial difficulty and will no longer be able to make payments on time. Tell them that you wont be
able to make the payment next month, and you would like to see what forbearance options are available.
Most banks offer two types of forbearance programs:
You are having a temporary problem, so look to reduce your payment for a temporary period of time. For example, you could
pay interest only for a few months, and then have the payment increase once your temporary problem is over.
You have had a significant change in circumstance (e.g., death in the family and subsequent reduction in earning potential), and
you need to have principal forgiven.
Since you are reading this chapter, you most likely are suffering from the second (more serious) problem. However, banks are much
more likely to give you solutions to the first problem, especially if you are current on your debt.
When you are speaking to the bank, dont accept a solution that only gives temporary relief. For example, if they offer interest-only
payments for three months, reject that offer. You are looking for serious debt relief right now, not a temporary solution.
Your chance of success is low. But you should always give the bank a chance. And some credit unions may be even more generous,
working with you in person. I am still old-fashioned. Even though the banks probably wont treat you like an individual, it is worth
trying. See if you can negotiate a settlement that works.
If it doesnt work, then you may want to consider that you stop paying. Once you become delinquent, you will have more options
with your bank. And the more delinquent you become, the greater the chance that you can reach a settlement.
38
Warning:
Once you stop making payments, you will seriously hurt your credit score. In fact, once you start down this
path, it will be a few years before you will be able to borrow again, and it will be seven years before this mess completely
disappears from your credit report. But just think about this: If you barely afford to make the minimum payment,
it will be at least 30 years before the debt disappears. If you stop paying, it will be seven years until the debt completely
disappears from your credit report.
Second warning: Once you stop making payments, expect the collections calls, letters, texts, and emails to start coming.
And they will come with incredible intensity. You should expect to hear from every creditor every day for at least six
months. They will then sell that debt to a collection agency, who will start to contact you daily as well.
Third and BIGGEST warning: Your wages could be garnished. That means your creditor could sue you, and money could
be taken out of your salary automatically to make payments on your behalf. There is a federal limit on how much can be
garnished (and this only applies to the unsecured debt that we mentioned, not student loans, alimony, and other debt).
At most, 25% of your disposable pay can be garnished. (Disposable income is your gross salary minus most of your
deductions, including federal income tax, Social Security, Medicare, state tax, health insurance premiums, and any
involuntary pension contribution.) You can use a calculator to see exactly how much money you could have garnished
from your wages here: fiscal.treasury.gov/fsservices/gov/debtColl/dms/xservg/awg/debt_awg_calc.htm.
In summary: This is not an easy path that you are walking down. You owe money, and you have decided not to pay all of it back (for
various reasons). You can expect that the companies will try to get their money back. And, if you have money and are just trying a
shortcut, you can expect the courts to catch up with you. Wage garnishment is likely, if you are just refusing to pay.
But if you cant afford to get out of debt, the pain of the next few months may be worth it, because you will fix the problem in a few
years, rather than living with this debt for the next 30+ years.
2. You are delinquent on your debt, but it is still with your bank (and likely less than 180 days past due)
Once you stop making on-time payments, you are considered delinquent. And once you are delinquent, banks and credit card
companies will make a guess. Their guess: What is the likelihood that you will pay them back? The higher the likelihood, the less
likely they will be to agree to a settlement.
The longer you go without paying, the higher the probability that you will not pay back the bank. And the higher the probability that
you will not pay back the bank, the greater the settlement that you could be offered.
39
Although the policy of every lender varies, it is highly unlikely (given our experience) that you will see a wonderful offer during the
first 30-60 days of delinquency. The good deals come much later. And the best deals come after 180 days (six months), when the
bank has written off the debt and likely sold it to another collection agency.
So your approach should be simple: Know how much you can afford. Offer that amount to the bank or credit card company as a
settlement. If they refuse to accept the offer, just continue to wait. Eventually, one of the collectors will likely accept your offer it
will just take a while.
While you are waiting, make sure you know your rights. The CFPB has a good section that helps you understand your rights:
consumerfinance.gov/askcfpb/search/?selected_facets=category_exact:debt-collection.
If you are unable to reach an agreement with the bank or credit card company during the six months while the debt is collected
internally, you will likely have much better luck when the debt is with a collection agency.
3. Your debt is with a collection agency, and is likely more than 180 days past due
It is important to understand how collection agencies work, and then you can understand how to negotiate with them.
Debt-collection agencies, for the most past, are tiny compared to the big banks you were dealing with previously. Some of them are
incredibly tiny, and you have to be careful. Although this is not the case with all of them, many debt-collection agencies are
extremely liberal with the law and will try to scare you and manipulate you into paying.
But here are a few things that you need to remember:
Debt-collection agencies buy debt for pennies on the dollar. Imagine you have $100 of debt with Citibank. They try for six months
to collect the debt. At Month 6, they write off the debt (take a loss) and then sell the debt to a collection agency. The agency will
likely only pay $1 - $2 for the debt. So you may have originally owed Citibank $100, but the debt-collection agency only paid $1
or $2 to get that contract. Although they have the legal right to collect the full $100, they are happy even if they collect much
less. If they pay $1 for the debt, and then collect $2, they have doubled their money.
Be careful giving your account information to a debt-collection agency. They are famous for trying as often as possible to get
money out of any account where they have account information. Even if you dont authorize them, it can get very difficult to
prove. It becomes your word versus their word. So there are specific ways that you should make a payment to a debt-collection
agency, which we describe in more detail below.
So now you know that the debt-collection agency only paid pennies on the dollar. With that information, you can negotiate hard for
a settlement. Just remember the following:
After seven years (from going to the collection agency), the debt will no longer impact your credit score. The agency will still have
the legal right to collect, but the statute of limitations will limit their ability to sue or garnish wages. So, if you are close to seven
years, you may not want to pay. You may just want to wait.
Negotiate hard on the phone. They will try to threaten you (and they are good at it). Tell them that you know your rights and that
you are not afraid to go to the CFPB if they dont respect your rights and protections. You should be able to settle for at least 50%
of the face value. You may even get a better deal. (For example, if you owed $5,000, then you can offer $2,500.)
When you reach an agreement with them, make sure:

o You do not make any payment until you get confirmation of the settlement terms in writing.
o The debt-collection agency writes that, upon payment of the settlement, the debt will be considered closed. They need to
make it clear that this is a full and final settlement, and no further collection activity will take place.
o Warning: The forgiven debt may be subject to income tax. For example, in this case, the $2,500 that is forgiven will be
taxable.
40
o You should ask the debt-collection agency to delete the collection item from the credit bureau. They may or may not do this
but it is certainly worth asking.
o Once you agree on the settlement amount, open a separate account to make the payment. Remember: You never want to
give the collection agency access to your core checking account. We recommend going to Walmart and opening a Bluebird
account. It is free, and comes with checks and online billpay. Only put into the account the amount that you agreed for the
settlement, and then make the payment. You can close the old account once you verify that the old account is settled and
complete.
Make sure you keep a paper trail of your settlement. If something goes wrong in the future, it is your PAPER against theirs.
If the collection agency tries to play dirty, or if another collection agency calls and tries to get money out of you, make sure you DO
NOT AFFIRM THE DEBT. Tell them that you do not recognize the debt. You can then complain to the CFPB
(consumerfinance.gov/complaint/).
Finally, if you see a collection item on your bureau that does not belong to you, it is easy to have it removed. You just need to
protest online, at each of the three credit-reporting agencies. You can dispute those records here:
Experian: http://www.experian.com/disputes/main.html
Equifax: https://www.ai.equifax.com/CreditInvestigation/home.action
TransUnion: https://dispute.transunion.com/dp/dispute/landingPage.jsp
IN SUMMARY:
If you have just accumulated too much debt (more unsecured debt than you can pay back in the next 10 years), it may
make sense to try to negotiate a settlement with your creditors.
This will be a difficult process. You will be called by collectors daily. Your credit score will be hit. You may be taken to
court, and you could have your wages garnished.
But, if done properly, you could get all of your debt settled in the next 1-2 years. And seven years after a settlement,
it will disappear from your credit score (and it will become a lot less meaningful to your score over time). This can be a
much better way than bankruptcy, which can stay on your credit report for 10 years and have a much more negative
impact while it is on your report. Remember: Bankruptcy hurts your score more than a negotiated settlement with your
creditor.
Just make sure that once you stop making payments to creditors, you save the money and have it ready for the settlement.
And once you make your settlement, you get it all in writing.
If, however, you cant even afford to get money together for a settlement and think a bankruptcy might be the only option,
read the next chapter.
41
Bankruptcy and a New Beginning
--------------------------------------------------------------------------------------------------------------------------------------------------
For some people, bankruptcy may be an appropriate option. In a bankruptcy, you may be able to eliminate some or all of your debts.
However, debt forgiveness does not come lightly. Chapter 7 (where all eligible debt is eliminated) stays on your record for 10 years.
Chapter 13 stays on your report for seven years. And during that time (especially in the first 3-5 years), you may find it virtually
impossible to apply for any new credit. And credit is not limited to mortgages and auto loans. It can even include pay-as-you-go
mobile phone packages. If you work in the financial services sector, you may find that bankruptcy will make it impossible to get a
job. So this decision should not be taken lightly.
However, for some people, this may be the only option. Here are two examples of people whom I have met, where bankruptcy
made complete sense:
A hardworking man had a medical emergency. Unfortunately, he did not have medical insurance. The total bill was over
$500,000. And his annual salary was $40,000. There was no chance that he would ever pay off that debt. Bankruptcy made
perfect sense.
A married couple unfortunately did not plan for the future. They had no life insurance, no savings, and credit card debt. The
husband was a professional, and the wife stayed at home with the children. The husband died unexpectedly. Between the
funeral, the credit card debt from before the marriage, and the costs of the transition, the widow had over $75,000 of debt. She
was able to get a secretarial job for $25,000. It made sense to eliminate the debt with bankruptcy.
The biggest reasons for bankruptcy are medical and divorce. We always try to work with people to help them prepare for the worst.
Everyone should have medical insurance, even if that means paying for a high deductible (low premium) policy that at least insures
against bankruptcy. If someone depends upon you (like the husband in the story above), term life insurance is a necessity, and it
doesnt cost much. In medicine, it is always better to prevent (via a good diet and exercise) than to fix after something goes wrong.
The same is true in financial matters. However, if you are now in the emergency room, a bankruptcy may be the right option.
What can a bankruptcy do for me?
A bankruptcy gives you the opportunity to eliminate a significant portion of your debt. The bank has to write off the debt and is no
longer able to collect on the debt.
In Chapter 7 bankruptcy, all of the eligible debt is eliminated. It takes about 3-6 months to have the bankruptcy discharged.
Most or all of your unsecured debt will be erased. Unsecured debt would include things like credit card debt, personal loan debt,
medical bills, mobile phone bills, and other debt.
Certain types of debt are usually excluded from bankruptcy. These include student loan debt, tax obligations, spousal support,
and child support, and some other types of debt cannot be eliminated.
Some of your property may have to be sold to pay off your debt. However, in most cases, your primary property is exempt.
For secured property (like an auto loan), you will be given a choice. You can continue to pay, you can have the property
repossessed, or you can make a lump-sum payment (at the replacement value).
If your problem is with credit card debt and/or medical debt, then Chapter 7 makes sense. All of that debt will be wiped out. You
continue to pay (and keep) your mortgage and auto loan.
In a Chapter 13 bankruptcy, you are not able to eliminate all of your debt. Instead, you will be forced to make regular monthly
payments toward your debt before it is completely eliminated.
42
If given the choice, most people would choose Chapter 7. From a credit score perspective, they both have equal (negative) impact on
your score. In fact, here is what FICO says:
The formula considers these two forms of bankruptcy as having the same level of severity and, for both types, uses the filing date
to determine how long ago the bankruptcy took place. As with other negative credit information, the negative effect of a
bankruptcy to one's FICO score will diminish over time.
So if you get the same penalty, but in one form of bankruptcy all of your debt is wiped out and you still have to pay back some debt
in the other form, then you would probably choose Chapter 7. And most people did, until the law was changed in 2005.
Note: There may be some instances when you will want to file Chapter 13 instead of Chapter 7. For example, if you are behind on
your house payments and want to keep your house, Chapter 13 may make more sense. Why? In Chapter 13, you can put your past-
due mortgage payments into your repayment plan and pay them back over time. In Chapter 7, your past-due mortgage payments
may be due right away.
However, in the majority of cases, Chapter 7 is more favorable to the borrower than Chapter 13.
There are now some means tests required to see if you can file for Chapter 7. Here are some very basic rules:
If your family income is below the median income of your state, you will probably be able to file Chapter 7. The income used is
the average of your last six months of income. (You can find the median incomes here:
justice.gov/ust/eo/bapcpa/meanstesting.htm.)
If your income is above the median, you may still be able to file bankruptcy. However, you will have to pass a means test. Your
income and expenditures will be looked at to see if you have the ability to make payments toward a payment plan over five years
toward the accumulated debt.
In addition, if you tried to be clever, you will likely be caught. Any recent cash advances on your credit card and any recent luxury
purchases can be completely exempt from the bankruptcy.
It used to be very easy to file for Chapter 7 and have all of your unsecured debt eliminated. That is no longer the case. But if you
have low income, you can still proceed. And, if you have a very difficult situation, you can still find a path toward eliminating a
significant portion of your debt.
How to Proceed
Also as part of the bankruptcy legislation, you need to meet with a nonprofit debt counselor before you are allowed to file for
bankruptcy. So whether you are thinking about negotiating settlements or filing for bankruptcy, it makes sense to meet with a
counselor. You can find a list of the approved agencies here: justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
43
For further reading on bankruptcy, we recommend this website (NOLO): nolo.com/legal-encyclopedia/bankruptcy. They have an
excellent library of information.
IN SUMMARY
If you are in too deep, bankruptcy may be the only remaining viable option. I have met many people who filed bankruptcy and went
on to live very fulfilling and prosperous lives. Companies file bankruptcy all the time and I believe that people should have the
same legal protections that companies have.
You just need to be realistic about what bankruptcy can and cannot do. If you have student loans, tax liens, spousal support, or child
support, you will not be able to use this tool. You need to find a way to pay back your debt.
But if you have been hit with a big medical bill or your credit card debt is just too large relative to your income, bankruptcy could be
the best option. It will be a very difficult two years. But by Year 3, things will look a lot better. And seven years later, your score will
reflect the person you have been in the last seven years. A very good friend of mine had filed bankruptcy. He now has a home
(purchased with a mortgage at a low rate). He has a car (purchased with a 0% car loan). And he has a rewards credit card (that he
pays off in full every month). His score is high. It was a rough couple of years, but it made sense. Otherwise, he would have been
making minimum payments for 30 years and still wouldnt be out of debt.
Weigh your options carefully. Meet with a nonprofit counselor. We are always available at MagnifyMoney to talk as well. Just email
us at info@magnifymoney.com.
Good luck with your decision.
44
Future-Proof Yourself
--------------------------------------------------------------------------------------------------------------------------------------------------
Well, you made it. This is the last chapter of (the first version) of our guide. Our goal is to make this better over time. As we continue
to meet and help more of you, we will add your stories and examples.
If you have too much unsecured (credit card or personal loan) debt, we have tried to help you with this guide. As a reminder:
Step 1 for everyone is making sure that you spend less than you earn, every month. Until you fix your spending, there is no real
solution. So long as you continue to add to your debt every month, your situation will never improve.
o We gave you a lot of tips for bringing down your monthly expenses and budgeting.
Step 2 is checking to see how much debt you have, relative to your income. So long as your unsecured debt is less than 50% of
your income, you should be able to find a way to pay it off. If it is more than 50%, a trip to a credit counselor would make a lot of
sense to explore your options further.
Step 3 is to view your credit report and see your credit score. If you have a good credit score, you have a lot of options to pay off
your debt.
Within 30 days, you should be able to figure out your spending, your total debt, your credit report, and your credit score. With that
information, you can then choose the plan that is right for you. Our plans include:
Transfer & Attack: Use that good credit score to slash the interest rate on your debt, and then attack that debt to pay it down as
quickly as possible.
Build, then Blitz: Your score just isnt good enough to reduce the interest rate on your debt. But that is OK. You can start paying
down your debt and working on your credit score at the same time. Once that score is above 650, you can graduate to Transfer &
Attack.
Time to Negotiate: If your debt is just too high, you may want to negotiate. Dont give away your money to dodgy debt-
settlement companies. You can use our tactics to negotiate your way to a good agreement with your creditors.
Bankruptcy and a New Beginning: Depending upon how much debt you have and your earning potential, a bankruptcy may be
your best option. We help you weigh the options, and encourage you to visit a nonprofit counselor to discuss your options
further.
Once you start on these plans, progress can happen quickly. We believe that within three months of starting the plan, you will begin
to see the light at the end of the tunnel. And, within two years, most of the hard work will be done and you will feel like a different
person.
But you never want to end up in this situation again. You want to make sure that, as you deal with your debt, you also future-proof
yourself. That means you take certain steps to make sure you never end up in this situation again.
You could write an entire book on these tips, but we wanted to just share the basics with you here, so that you can keep them in
mind as you move forward.
45
1. Your budget remains king: You cannot spend more money than you earn. And you need to stay on top of that every month.
There are different ways to do it (envelopes, cash only, using mint.com, etc.). You have to choose a method that you feel
comfortable with and then you have to stick to it.
2. Build emergency savings: Cash is king. You never again want to be in a situation where you dont have any cash in your pocket. At
a minimum, you should have $1,000. Over time, you want to build it to be 4-6 months of living expenses. That way, if you lose
your job or have a medical emergency, you have funds available. Put that money into an internet savings account. They pay
higher interest rates than traditional accounts, and they are harder to get to. That means you cant raid it. Here are the best
internet savings accounts: magnifymoney.com/compare/savings-account/.
3. Build an emergency borrowing opportunity: Sometimes you just need to borrow money. I dont care what the good and the great
of the financial experts tell you it can happen. And you dont always want to burn your emergency cash as soon as it happens. I
recommend a low interest rate credit card. One of the best out there is the PenFed Promise credit card, with a 9.99% interest
rate. If you have that card, you know you have two lines of protection in an emergency: your fund and your card. You can read a
review of the card here: magnifymoney.com/cards/balance-transfer/penfed-promise-visa-card.
4. Keep your other financial costs low. In our budget section, we talked about some of our favorite websites to help you keep your
other costs low. You should revisit your auto insurance every year, and thezebra.com is a great place to go. You should make sure
you have a completely free checking account partnered with a great savings account, and you can see those here:
magnifymoney.com/compare/link-accounts/. And you should talk to your life insurance agent about term life policies, which can
both protect and save you money.
5. Save for retirement. If your company offers a 401(k) (especially with a match), you should take advantage of that opportunity.
Having a lot of money at retirement is actually an easy process. You have to consistently set aside money, every month. If your
company does not have a 401(k), or you have maxed out your 401(k) and still have more options, consider an IRA or a Roth IRA.
And the easiest way to invest is with a target-date fund from a low-cost provider like Vanguard, which is like a credit union for
investors. You just choose the date when you want to retire and put your money into that
account. You can see Vanguard target-date funds here: investor.vanguard.com/mutual-funds/. If you dont feel comfortable
doing it online, just give them a call at 1-800-252-9578. They are based in Valley Forge, Pa., and are very friendly!
6. Make your everyday spending work for you. If you spend $2,000 per month, you could get at least $480 a year in cash back from
a credit card. Only do this if you have the discipline to pay off the balance in full every month. Remember: Your budget is the
most important element. If that means you need to spend cash, then only spend cash. But if you are looking for the best cash
back credit card, you can look here: magnifymoney.com/compare/cashback-rewards/.
7. Make sure you still have fun! It is always important to have fun. And if you dont allocate any fun money, you will quickly burn
out. Make sure you set something aside (both money and time) and enjoy yourself. Life is a precious gift, and we dont know how
long we will be around to enjoy it. So while you are here, make sure you find those chances to really enjoy yourself.
46
We know this can all be confusing or scary. Our goal at MagnifyMoney is take away the fear and make it just a little bit easier. But
we know you may still have some questions. Please dont hesitate to reach out to us we love hearing from you. Send an email to
info@magnifymoney.com, and we will get back to you within 24 hours. We can also set up a telephone or Skype session where we
can talk to you one-on-one. Every problem has a solution, and our goal (between this guide and our website) is to make it easy for
you to find the solutions.
Thanks for reading, and good luck!
47

Debt Guide

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Debt Guide

Uploaded by

Copyright:

Available Formats

How to:

Slash your interest rates

By Nick Clements, Co-Founder of MagnifyMoney.com

Control Your Expenses 12

Transfer & Attack: Balance Transfer. 17

Transfer & Attack: Personal Loans. 25

Build, then Blitz.. 30

Bankruptcy and a New Beginning.. 42

Why can we help?

Lets Get Started

And now lets get started with the self-assessment.

3. How is my credit score?

Why are these questions important?

OK, lets get started.

Now, it is time to subtract. Take INCOME FIXED EXPENSES.

Monthly Budget Form

Insurance (all insurance that you have purchased,

Utilities (electricity, water, cable TV, etc.) $

Student loan payments $

Fixed Expenses (B)

Any automatic investments or savings that you might have

Others (Do not include CREDIT CARD DEBT OR

INCOME FIXED EXPENSES (A) (B) $

Other Expenses (C) Eating out $

Credit Card Expense

DISPOSABLE INCOME (A) (B) (C) (D) $

In this section, we are going to look at two measures:

Debt Burden (otherwise known as debt-to-income, or DTI)

There are two types of debt: secured and unsecured.

Divide your total debt by your total annual gross income.

Remember your percentages, as we move to the final section.

Calculate your debt and income ratios

Income (A) Gross monthly income (income before taxes) (A) $

Auto loan payment $

Credit card minimum payment $

Other expenses that appear on credit report if any $

DEBT BURDEN % [(B) / (A)] * 100 %

Total personal loan $

Total credit card debt $

Total student loan debt $

Unsecured Debt (C) Total medical debt $

Other unsecured debt (if any) $

DEBT TO INCOME [(C) / (A)] * 100 %

NOW WHAT DO I DO?

If you are in this section:

Here is a quick summary of what we reviewed:

Choose a Plan of Attack:

You now know the answer to three critical questions:

Based upon your answers, we will give you a recommended plan.

1. Transfer and Attack Debt: Balance Transfer

Skip ahead to Transfer & Attack: Personal Loans if:

If your credit score is between 650 to 700

Skip ahead to Build, then Blitz if:

Skip ahead to Time to Negotiate if:

Skip ahead to Bankruptcy and a New Beginning if:

Congratulations. If you are in this section:

2. Find good balance transfer options, using MagnifyMoneys online tools.

We will walk through each step in more detail below.

1. Make a list of your debt, from highest to lowest interest rate

2. Use MagnifyMoney to find a balance transfer offer

When you look to find a balance transfer, just remember:

Here is how MagnifyMoney presents the results:

Here are a few more tips:

Here is the summary: