Recs

4

De-Leverage Your Wallet

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

There are plenty of lessons to be gleaned from our current economic turmoil. One of the most important ones is so simple that evidently all the Wall Street suits thought it beneath them. The silly little rule they ignored? Leverage is bad. In other words, borrowing money to buy stuff you can't afford doesn't always work out so well.

Sound familiar? Of course it does. Most of us have a wallet full of leverage opportunities -- credit cards. Still, while leverage might be the American way, it should not be yours.

Leverage is a four-letter word: debt
I never get tired of this magic trick, in which I turn less than $20 a week into more than $12,000 in debilitating debt. (Apologies if you've heard this spiel before.)

Consider the difference between setting aside $75 a month versus coming up $75 short and patching over the difference with a credit card. Over five years, that monthly $75 in savings amounts to $4,500 if you simply stuff your loose money into a coffee can. But $75 of debt each month, if you let it go untouched, turns into a $7,600 pair of financial cement galoshes -- including $3,100 in interest debt alone, if you assume an 18% interest rate.

Tah-dah: Borrowing money to patch over a weekly shortfall of less than $20, versus setting aside that money in a non-interest-bearing account, amounts to a $12,100 difference over five years.

Got debt? Use the good kind of leverage
Your story needn't have the same tragic ending as it did for overly leveraged investment banks. The time to right your overspent wrongs is now.

If you are a good customer (meaning, you haven't had any late payments or other blunders in the past nine to 12 months), then you, my friend, may have some leverage -- the good kind -- with your lender.

Don't be shy: Call customer service and ask for a lower interest rate, particularly if yours is more than 14%. Seriously, ask. Lenders are very willing to talk turkey if that means keeping a customer from moving a balance over to a competitor's card. More than half the people who call their credit card customer service departments are successful in reducing their annual interest rates by an average of one-third.

If your debt can be paid off in a matter of months, even better -- that means you can settle for a short-term rate reduction. You want to shoot for something in the 6% to 11% range. But don't be discouraged if you don't get it, because you have another trick up your sleeve ...

Swap your debt for more affordable debt
If your balances will take awhile longer to exorcise, then there are a lot of offers out there for 0% to 5% balance-transfer deals. (Check out indexcreditcards.com for current balance-transfer offers.) In these days of tighter credit restrictions, the debt transfer two-step is best performed by those with a decent credit track record.

If that describes you, then moving your balance from your current card to a new lower-rate one is as easy as mailing a balance-transfer check with your statement.

Sounds easy, right? It is. But it's not simple. There are a lot of "gotchas" in the balance-transfer process, including fees, transfer limits, and other zingers that can turn a great deal into an awful one after one misstep. (See the related links below for more guidance.)

Mostly, though, you want to make sure you don't inadvertently sabotage that great balance-transfer deal. That means (lecture alert!):

  • Put no new charges on the card (those charges -- usually subject to a higher interest rate -- will be the last ones your payments will touch).
  • Pay all bills on time (lenders regularly check your credit report).
  • Tattoo the deal's end date onto your forehead.
  • Give the bank no reason whatsoever to change the terms of your contract.

I also caution against opening new lines of credit if you plan to get a loan (car, mortgage, refinance) in the next six months or so. Opening new lines of credit can raise red flags on your credit report. You can do better than the money pros by avoiding the kind of behavior that puts your finances in jeopardy.

More de-leveraging advice:

Dayana Yochim likes to feign either a British or thick Southern accent whenever she negotiates on the telephone with customer-service reps. There is no empirical evidence that doing so increases the likelihood of getting what you are asking for. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 780004, ~/Articles/ArticleHandler.aspx, 9/17/2014 9:38:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dayana Yochim
TMFSchool

Today's Market

updated 22 minutes ago Sponsored by:
DOW 17,156.85 24.88 0.15%
S&P 500 2,001.57 2.59 0.13%
NASD 4,562.19 9.43 0.21%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement