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Yahoo
08-05-2025
- Business
- Yahoo
Here's how to use an extra paycheck this month
For workers who are used to receiving their paycheck every other week, the calendar is aligned in May to give some biweekly wage earners 'bonus' third paychecks during the year. For 2025, the bonus months are either January and August (if the first paycheck is paid on Jan. 3), or May and October (if the first paycheck is paid on Jan. 10). Having an extra paycheck in a month can really help if you're living paycheck to paycheck. It can provide the financial means to help you establish, or add to: an emergency fund pay down high-interest debt afford daily expenses And in some instances, you'll want to apply this extra paycheck towards multiple financial goals. Say, for example, you earn $5,000 of income after taxes and withholding each month — paid bi-weekly — and after you've paid all of your monthly expenses, you have $100 remaining. But in a month when you receive a third paycheck, you'd have an extra $2,600. What you can do with that bonus paycheck is ultimately up to you and your financial needs. But if you're looking for ideas to bolster your financial bottom line, here are Bankrate's five wise ways to put that extra paycheck to good use. An emergency fund can help you pay for unexpected costs that come your way, such as car repairs or medical bills. However, only 41 percent of Americans would use their savings to pay for an unplanned expense of $1,000, according to Bankrate's latest Emergency Savings Report, for which a survey was conducted in December 2024. If you're low on emergency savings, it can pay to deposit the money from an extra paycheck into a high-yield savings account. In addition to providing a financial cushion, money in a savings account also earns interest. For example, $1,000 in a high-yield savings account with an annual percentage yield (APY) of 4.30 percent would earn around $43 in interest over a year. In the months you don't receive an extra check, you can also try to save a little at a time, perhaps through a split direct deposit whereby your employer deposits a portion of your paycheck into a savings account via direct deposit. Bankrate's take: It's advisable to have upwards of six months' worth of expenses saved in an emergency fund. But the more money saved, the better. For those who are starting an emergency fund, let Bankrate's emergency fund primer guide you to building your rainy-day fund. Almost half of credit cardholders in the U.S. report carrying a balance, according to Bankrate's recent Credit Card Debt Survey. While the average credit card interest rate has been decreasing, annual percentage rates (APRs) are expected to remain pricey in 2025. For example, in one year, it would cost you $111 in interest to pay off a $1,000 balance on a credit card at a 20 percent APR. Extra money from a third monthly paycheck could be used to pay down high-interest credit card debt more quickly. In turn, this can help free up money for other purposes such as adding to savings, paying down a mortgage or decreasing student loan debt. Generally, you're able to adjust the amount you contribute to a retirement account. Some people might want to increase their contribution percentage to a 401(k) during a month with an extra paycheck. This could be a temporary increase, if your employer allows this. It could be even better for your retirement savings if you're able to use this extra money to permanently increase your 401(k) contribution for the year, using the extra paycheck to help pay for expenses throughout the year. If, for example, your annual salary is $100,000, and you're paid every other week, a six percent contribution to your 401(k) would be around $231 per paycheck. Increasing your contribution to eight percent would be around $308. So, the extra paycheck could cover that $154 monthly increase in your monthly 401(k) contribution, during a regular two-paycheck month, if you're paid every other week. You could also contribute money to an IRA or an IRA CD, though the latter option might not be appropriate for people many years away from retirement age. You might decide to devote some or all of a third monthly paycheck to it, if you know you'll be faced with a significant expense in upcoming weeks or months. Examples include a new appliance, repairs to your home's roof or an upcoming medical expense not covered by insurance. Devoting the extra paycheck to such purposes can be a relatively easy way to have some money on hand when it's needed in the future. Other examples of upcoming large expenses can include property taxes and car insurance, which are commonly due quarterly or biannually. While it's important to set aside money regularly for such expenses, an extra paycheck can provide a lifeline if you've fallen behind on saving for them. Let's say you're not in credit card debt, and you have money set aside for emergencies and other planned expenses. In this case, you might consider saving a third monthly paycheck toward other goals you have in mind. Perhaps it could fund your upcoming holiday shopping, or you could set it aside for a vacation you've been planning. When saving extra paychecks or other such windfalls for specific purposes, it can be challenging to keep the windfall money separate from funds set aside for other purposes. One solution can be a savings account — such as that from Ally Bank — that allows you to separate your money into different categories or buckets. Similarly, Alliant Credit Union provides the option of using up to 19 'supplemental' savings accounts for different purposes, each of which can be named for its goal. Using accounts that make it easy to categorize your savings can make it easier to stay on track when you're saving for multiple things at once. It can also help keep you from dipping into money for emergencies to fund other purchases. Those paid on a bi-weekly basis will have a three-paycheck month based on their first paycheck of the year. First paycheck First three-paycheck date Second three-paycheck date Jan. 3, 2025 Jan. 31, 2025 Aug. 29, 2025 Jan. 10, 2025 May 30, 2025 Oct. 31, 2025 People paid weekly have five-paycheck months in January, May, August and October in 2025. Budgeting can help you prepare for an irregular payment, be it a tax bill or an insurance payment. You can project when you'll be billed for such expenses, and the approximate amount, though sometimes increases can be unpredictable. Your extra paycheck could be larger if your employer has a benefit that's deducted from your paycheck only twice a month, says Chris Snyder, director of eastern SMB operations at Paychex, a provider of payroll services. 'It really depends on how the employer wants to set up that deduction for that particular benefit that they're offering their employee,' Snyder says. Savings accounts offered at big, traditional banks generally don't offer competitive yields. The national average yield for savings accounts is currently around eight times lower than what you can earn from top-yielding savings accounts. That's why it's worth considering allocating a portion of an extra paycheck to a high-yield savings account. Compare banks to find the right one for you. Opening a high-yield savings account can work together with several of the strategies above. And make sure to go with an account that won't have you paying fees, which could eat into your interest earnings. It's easy to find an account with a high yield and without monthly service fees at some top FDIC-insured online-only banks. Money tip: Now that you've decided to put that extra paycheck to good use, let Bankrate's savings goal calculator help you crunch the numbers to meet your savings objectives. A month with an extra paycheck can be a game-changer for your finances. Generally, there are only a couple of times a year when you'll earn more money than usual in a month — so consider making the most of this financial opportunity, be it by building an emergency fund, paying off high-interest debt, contributing to a retirement account, divvying up the extra money to last you throughout the year, or saving it to pay for large, irregularly-timed payments.
Yahoo
06-05-2025
- Business
- Yahoo
The psychological benefits of paying off debt
Relief is more than a feeling. Dr. Pearl Chiu, a psychology professor at Virginia Tech, notes that while we often think of reward or loss as behavioral drivers, relief can shape our decisions in profound ways. Debt-related stress often creates a 'constant pull on our attention,' making it difficult to focus on other aspects of life, such as work, relationships or personal goals. Becoming debt-free can lift that psychological burden, freeing up cognitive space and emotional energy. Dr. Mark Aoyagi, a professor at the University of Denver's Graduate School of Professional Psychology, explains that while short-term stress can sharpen our focus, chronic stress does the opposite — it drains mental energy and narrows our ability to think clearly. In Bankrate's latest Money and Mental Health Survey , 42 percent of U.S. adults reported that money negatively impacts their mental health. Among those aged 35 to 54, that number jumps to 52 percent. It's no surprise that debt causes stress — but few realize just how deeply it affects mental health. According to experts, paying off debt comes with perks beyond making space in your budget. Since 1976, Bankrate has been the go-to source for personal finance data, publishing average rates on the most popular financial products and tracking the experience of consumers nationwide. Making a plan to pay what you owe — whether that be through debt consolidation or another repayment strategy — can improve your well-being and help reduce your mental and emotional stress. Americans across the nation feel the impact of rising prices and increasing financial strain. Bankrate's Credit Card Debt Survey found roughly one-third of U.S. adults (34 percent) have at least one credit card that carries a balance month-to-month. But the burden of debt extends beyond the numbers. Debt carries a psychological weight that affects mental, emotional and even physical health. The pressure to repay debt can lead to chronic stress, strained relationships and harmful coping behaviors. Once debt is paid off, maintain your emotional well-being by following a budget and paying bills on time and in full each month. Creating a plan to pay down debt can improve your emotional outlook. It gives you a sense of control, shifts you from panic to action and helps reduce harassing creditor calls. High debt levels can lead to increased stress and anxiety, pessimism about the future and a diminished social life. Story Continues 'Being debt-free is really relieving in some ways and can have positive impacts on behavior,' she says. Feeling relief not only signals emotional safety but also encourages more confident, future-oriented choices. By eliminating the immediate threat of debt, individuals can shift from survival mode to strategic planning — researching for the best loan rates, setting savings goals and making empowered financial decisions. Improved relationships Debt doesn't just affect your internal world — it can impact your relationships as well. According to Bankrate's 2025 Financial Infidelity Survey, 40 percent of Americans in a committed relationship have kept a money-related secret from their partner. Nearly a third (33 percent) reported spending more than their partner would like, and 23 percent secretly racked up debt. Financial strain is a common source of tension in relationships, often leading to conflict, secrecy and emotional distance. Paying off debt together — or individually — can reduce that strain and foster healthier communication. Psychological challenges of paying off debt Becoming debt-free has significant mental health benefits, but the path isn't always easy. Many individuals face internal barriers that make debt repayment psychologically difficult. Shame Shame is one of the most overlooked obstacles to financial recovery. People in debt often feel embarrassed, believing their situation reflects personal failure. According to Aoyagi, this is basic biology. In their evolutionary past, humans became apex predators not with claws and teeth but by cooperating, which made maintaining their status in the 'tribe' vital. 'How others perceive us and how we see ourselves in the tribe, is our biggest strength,' he says. 'People who have a lot of financial stress — they're seen less favorably.' Fear of being seen as a social failure 'prevents us from using our most effective resource' — other people, Aoyagi says. Overcoming shame by seeking support — whether from credit counselors or financial advisors — can be a major psychological breakthrough. Scarcity mindset and risky behavior Debt can also trap individuals in a 'scarcity mindset.' Dr. Elliot Berkman, a psychology professor at the University of Oregon, explains that financial stress can impair long-term thinking. 'When you're low on resources, it's the same as being cognitively distracted,' says Berkman. 'Scarcity makes it hard for us to focus and engage in high-level thinking.' In this state, individuals often take riskier financial actions — not because they're reckless, but because they're desperate to escape the pressure. Paying off debt can break this cycle, helping people shift from reactive decisions to strategic, long-term planning. With greater mental clarity, people can focus on building financial stability. Strategies for paying down debt To unlock the psychological benefits of becoming debt-free, it's essential to create a plan that feels manageable and empowering. Here are some debt payoff strategies that can also support your mental well-being: Debt management plan (DMP): Through a DMP, you work with a credit counseling agency to consolidate debts into an affordable monthly payment. Your creditors may agree to waive fees or reduce your interest rates. Credit counseling : Credit counseling involves working with a reputable agency that examines your finances and helps you develop a budget and debt payoff strategy, such as a DMP. Negotiating with creditors: You could contact creditors and discuss credit card hardship programs or more favorable repayment terms (such as reduced interest rates or lump-sum payments). Or, you might work with one of the best debt relief companies. For a more in-depth guide to approaching your debt, check out Bankrate's expert advice on getting out of debt. Try this tool: Bankrate's debt payoff calculator How to avoid future debt That final debt payment is a great reason to celebrate. But the celebration shouldn't involve taking on more debt or spending more money. Resist the temptation to get that extra credit card unless it's part of a carefully considered plan to rebuild your credit score — secured credit cards can be valuable credit-building tools. Instead, put your newfound motivation into sticking to a budget and keeping track of your bills. Money you free up when your monthly debt payments end can go into an emergency fund to prevent debt from unexpected expenses. If you already have a healthy emergency fund, consider investing in a high-yield savings account or retirement account so your money can grow. Other ways to avoid getting back into high levels of debt include: Borrowing only what you need Being cautious with Buy Now, Pay Later (BNPL) programs Paying credit card bills in full each month Bottom line Paying off debt isn't just a financial achievement — it's a psychological liberation. From reduced stress and improved focus to better relationships and clearer thinking, becoming debt-free transforms more than just your bank account. By making a plan and taking consistent action, you can shift from survival mode to thriving.
Yahoo
16-04-2025
- Business
- Yahoo
Should you use a home equity loan to pay off your debts?
A home equity loan can be a good option to consolidate debt, as it usually carries lower interest rates and longer terms than other financing options. Advantages of using home equity loans or HELOCs to pay off debts include having fewer bills to pay and lower monthly payments (compared to credit card bills, especially). Putting up your home as collateral and diluting your ownership stake are disadvantages of using home equity for debt consolidation. If you made a New Year's resolution to get those outstanding bills off your back in 2025, welcome to the club: Over one-fifth (21 percent) of Americans have put paying down debt at the top of their financial to-do lists this year. It's not an easy goal to accomplish, though – the double whammy of inflationary prices and elevated interest rates have boosted credit card balances, a major source of consumer debt, to record levels. Small wonder that nearly half (48 percent) of credit cardholders carry debt from month to month and the majority (53 percent) have been in credit card debt for at least a year, Bankrate's Credit Card Debt Survey found. If you're a homeowner, however, you might be able to find relief by borrowing against your home's value. The average interest rate on home equity loans — and HELOCs, their line-of-credit cousins — is currently less than 8.5 percent, far lower than the double-digit APRs on credit cards and personal loans. As you can imagine, less interest means smaller monthly payments and cheaper borrowing costs overall. But using a home equity loan to pay off your debts isn't a no-brainer. Doing so comes with some unique risks. Here's how it all works, along with the key pros and cons to consider before adopting this financial strategy. 30% Almost one-third (30 percent) of homeowners agree debt consolidation is a good reason to tap home equity. Because they have lower interest rates than other loans, using a home equity loan or a HELOC to pay off debt is a viable choice for people who own much of their property outright, free of mortgage debt. The average interest rate on home equity loans — and HELOCs, their line-of-credit cousins — is currently in the 8 to 8.5 percent range, far lower than the double-digit APRs on credit cards and personal loans. As you can imagine, less interest means smaller monthly payments and cheaper borrowing costs overall. According to Bankrate's Credit Card Debt Survey, the amount of cardholders who carry debt from month to month varies among generations, from 54% of Gen X cardholders to 45% of boomer cardholders, with millennials and Gen Z at 48% and 47%, respectively. However, older generations are more likely to have home equity reserves at their disposal, since they've probably paid off much, if not all, of their mortgages. Using your home equity for debt consolidation can be a smart move for a number of reasons, including: You'll have one streamlined payment Lock in a lower interest rate Your monthly debt payments may be lower When you consolidate your debt by using your home equity, you can simplify your life. Rather than paying one credit card bill on the 15th, another on the 20th and your personal loan on the 27th, you'll just have one due date to remember every month. Since on-time payments are a critical component of your credit score, this can help eliminate the potential for missing a payment due to calendar confusion. Since your home is acting as collateral, a home equity loan generally comes with a lower interest rate than other, unsecured forms of debt that aren't backed by anything. As of April 2025, the best home equity loan rates (for the most creditworthy borrowers) are under 8 percent, which can shave a sizable chunk off your bill compared with an average credit card rate of more than 20 percent. Plus, a home equity loan carries a fixed rate, so your payment will always be the same. That's a big difference from a credit card, which has a variable APR. (Note: Most home equity lines of credit also have fluctuating rates, though you can sometimes switch to a fixed-rate HELOC.) Both HELOC and home equity loan rates began to drop in the final months of 2024 as the Federal Reserve lowered interest rates, a decline that's continued in 2025. Rates could decline further in 2025, predict Bankrate analysts, assuming the Fed continues its cutting policy. Using a home equity loan for debt consolidation will generally lower your monthly payments since you'll likely have a lower interest rate and a longer loan term. If you have a tight monthly budget, the money you save each month could be exactly what you need to get out of debt. While a home equity loan for debt consolidation might work for some people, it's not necessarily the best choice for everyone. Among the drawbacks: Home at risk in case of default Your interest rate could still be high Risk of increased debt load (if you resume old spending habits) Upfront and ongoing fees There's a reason that home equity loan rates are lower than a lot of other borrowing routes: The lender gets to take your house if you don't pay it back, which offers a pretty nice piece of reassurance. The potential for foreclosure should be top of mind if you're thinking about applying for a home equity loan. Should you sell your home while the loan is outstanding, you'll have to repay it all at once, the same way you'd have to settle your original mortgage. Don't confuse 'cheaper' with 'cheap.' Home equity products cost less than other loans, true, but anything charging interest in a 7-to-10 percent range is hardly free money. And that's especially true if you're looking to settle outstanding bills. Don't let an advertisement for 'rates as low as' fool you: These tempting teaser percentages are reserved for sterling applicants, with sky-high credit scores and low debt levels. If you've maxed out your credit cards, owe a lot on student loans or have mounds of medical bills, you probably aren't in the running for the best offer. 'If you are carrying large credit card balances, that can signal to lenders that you are a high-risk borrower,' says Linda Bell, senior writer on Bankrate's home lending team. 'While you can still get a home equity loan if your credit card debt is substantial, lenders will compensate for that added risk by giving you a higher rate. If you fall into this group, it makes sense to wait until you get your debt levels down before applying.' While a home equity loan can consolidate your debt, it's only helpful if you limit the spending that caused that debt to pile up in the first place. If you clear your card balances, and then promptly start charging again, you're making your debt worse: Now you'll owe a home equity loan payment as well as credit card payments. It's crucial to address the root cause of your debt before taking on another loan. Borrowers need to have a healthy amount of home equity (owning at least 20 percent of the home, and preferably closer to 40 or 50 percent), to qualify for these loans. But bear in mind that, by borrowing against your home equity, you're essentially depleting your ownership stake. Your assets will have shrunk, and your obligations will have increased. That's not going to improve your debt-to-income ratio or your loan-to-value ratio, two aspects of your financial profile that lenders often look at. When you take out a home equity loan, you will likely be charged a series of upfront fees or charges in order to close on the loan. Some of these expenses are imposed by the lender, others by outside authorities or professionals (like your local county clerk or a real estate attorney). The fees may include the following: : Usually between 0.5-1% of the total loan Home appraisal fee: Anywhere from $314-$423, according to 2025 data from Angi, the renovation site and search service Credit report fee: $10-$100 Legal fees: Flat hourly rate or percentage of loan amount Notary fee: $100 and up Title search fee: $100-$450 These closing costs tend to be less than those for mortgages, but they do add up — sometimes to as much as 5 percent of the principal (and if you have a six-figure loan or credit line, that can be a few thousand dollars). Plus, many HELOCs carry annual maintenance fees. If you have a lot of debt to consolidate, paying these extra fees might still make sense, but it's wise to budget for them, and compare them to the amount you'd ultimately save in interest with the loan over the credit card bills. These are the types of debts that are well-suited to being paid off with home equity loans. Bankrate insight Using home equity for debt consolidation is particularly popular among Gen X homeowners. Well over one-third — 37% — thought it a good reason, according to Bankrate's Home Equity Insights Survey. Many homeowners use a home equity loan to settle outstanding credit card balances — after home renovations, it's the most common application. The reason is simple: home equity loan interest rates (currently averaging less than 9 percent) run at least half of those of credit cards (over 20 percent). That means you can pay your credit cards off with one lump sum, faster and more cheaply, than you would by just making the minimum credit card payment each month. Personal loans vary a great deal, but odds are the interest rate on yours will be higher than that of a home equity loan, especially if it's unsecured. Loans that aren't backed by any collateral usually are pricier than secured ones, because the lender is assuming more risk. Home equity loans often offer much longer repayment terms — as much as 20 years — than personal loans do, too. According to the Consumer Financial Protection Bureau, 15 million Americans have medical debts on their credit reports with an average balance greater than $3,100. You can use your home equity to cover such healthcare costs, if a substantial amount isn't covered by health insurance. And if you opt for a HELOC, you can benefit from flexible repayment amounts (most allow for interest-only payments during their initial draw periods). Before you make any moves, however, talk to the healthcare provider about any low-cost payment plans they offer. If you need to pay off student loans, borrowing money from your home is one possible way to do it — provided the home equity loan offers a lower interest rate or other more favorable terms. However, you won't get to take advantage of the student loan tax deduction, and if it's a federal loan, you'll lose other potential benefits, like forgiveness or income-based repayment options. A better course might be to pay college tuition directly with a HELOC, which allows you to withdraw funds in installments, owing interest only on what you borrow. Whatever your type of debt, always be sure to compare several home equity lenders' offerings. Shop around not only for the best interest rate/APR, but the smallest fees and closing costs. There are some times when a home equity loan may not be the best idea. A car is an item that depreciates, meaning that it loses value over time. That means in a few years, your home equity loan balance could be more than the value of your car. Plus, if you have good to excellent credit, current rates for purchasing a new car are well below average home equity loan rates. Though tempting, it is not a good idea to use a home equity loan for a holiday or a big-ticket item. If you have to take a loan, it means that your income cannot sustain your spending and this bad habit can sink you lower into debt. Before you splurge, remember how long a loan will last; you will be still repaying it long after the good times are over. Since mortgage rates generally run lower than home equity rates, it rarely makes sense to pay off your primary mortgage with an HE Loan or HELOC. In some cases, you might consider refinancing instead (see 'Other ways to consolidate debt,' below). A surprising large number of millennial homeowners — 30 percent — think making other investments (other than in the home, that is) a good reason to use home equity, the Home Equity Insights survey found. Investing is important, but going into debt to do so is debatable — especially given the current high cost of borrowing, which rivals any stock market returns (it was arguably a good strategy a few years ago, when loan interest rates were at historic lows). Avoid using a home equity loan for investments: Better to use savings or earned income, especially if you can invest via a company 401(k) plan. Applying for a home equity loan will feel fairly similar to the process you went through to secure your first mortgage. Here's a rundown of what you'll need to do: Know your borrowing power: Before you apply, it's a good idea to figure out your credit score, estimate what your home is worth and calculate your equity stake. You'll be more educated when you start comparing different lenders. Look at different offers: Every lender is different, so you'll want to do your research on closing costs, rates and other pieces of the fine print. You may want to start your search at the financial institution where you have a savings or checking account, or your primary mortgage. Some lenders offer rate discounts for existing customers. Complete a formal loan application: You'll need to submit paperwork verifying your income and employment, along with any other necessary documents. You'll have to agree to allow a hard pull of your credit history and score. Get your home appraised: The estimate of what your home is worth isn't the final word on your home's actual value. Your lender probably will require an appraisal – which you will pay for – to determine the current market value of the home. An increasing number of lenders are using AVMs – automated valuation models – to skip the appraisal process, however. Wait: Don't expect to get the money immediately. While some lenders offer relatively fast funding for HELOCs – online lender Figure, for example, can disburse funds in as little as five business days – getting full approval for a home equity loan can feel closer to the timeline for a first mortgage, with up to eight weeks of waiting. Review and sign the closing documents: You'll need to pen your autograph on a range of paperwork about your agreement to pay the loan back, along with the serious repercussions of failing to do so. Receive the loan proceeds: Home equity loans are disbursed in one lump sum. Once you receive the money, you can use those funds to pay off your other debts. Home equity loans aren't your only option for debt consolidation. Before you hock your home, be sure to compare these routes, too: Personal loans: Even though personal loans carry higher interest rates than home equity loans, they don't carry the weight of your home with them. If an emergency comes up and you can't make payments, you won't lose your home through a personal loan. Balance transfer credit cards: If the majority of your debt is through credit cards, you can consider transferring your balances to a new credit card that comes with an extended introductory period offering a 0% APR – meaning you won't incur any interest charges on the amount, during a certain window of time (often up to two years). However, some card issuers may limit how much you can transfer — up to $10,000, for example. So, you might not lose as much of your high-cost debt as you'd like. Plus, the clock will be ticking: The new card's interest rate will kick in after the promotional period ends, and you'll be back in the same fix unless you've settled the balance before then. Cash-out refinance: Rather than taking out a second mortgage with a home equity loan, you can replace your original mortgage altogether – and borrow even more – with a cash-out refinance. The additional amount you can get in cash is based on the amount of home equity you have built up. This move makes the most sense if you can score a lower rate with the new loan. Debt consolidation loans: There are loans specifically designed for combining and paying off debts. Some of the best lenders offer rates that can rival home equity rates if your credit is excellent. However, the terms tend to be much shorter. While home equity loans may offer 20-year repayment terms, debt consolidation loans tend to work on tighter timelines – often seven years or less. Using home equity for debt consolidation 'can be a smart move for borrowers with a large amount of high-interest credit card debt because the [HE] loans usually have lower rates than credit cards,' Bell says. 'That can save you some big money in the long run by reducing your monthly payments and the amount of interest you pay over time.' While that can make a positive impact on a borrower's bottom line, however, it isn't going to get rid of the problem, she points out. 'Remember that you are simply shifting one form of debt for another,' Bell says. You're still going to have to pay off all the money you owe; it just will cost you less to do so. Additionally, Bell notes that some forms of debt, such as student loans and credit cards, are unsecured, meaning there isn't anything a lender can take back from you if you fail to repay. Home equity loans and HELOCs, on the other hand, are secured: Your home acts as collateral for the debt. That's why their rates are lower – the lender has a recourse if you default. So proceed with caution before committing to home equity financing. 'Sure, you could potentially lower your interest rate,' Bell says, 'but there's the possibility of losing your home if you can't pay the loan back.' Who is eligible for a home equity loan? Well, you have to be a homeowner, of course. After that, the requirements for a home equity loan vary from lender to lender. Generally speaking, you'll likely need to own at least 15 to 20 percent of your home outright, have a credit score that's in the mid-600sat least in the mid-600s and a debt-to-income ratio around 43 percent. Who should use a home equity loan? Anyone who has a significant ownership stake in their home can consider using a home equity loan. But If you're planning to use one for debt consolidation, it's important to have a solid plan in place to tackle your debts and avoid additional overspending. Ultimately, the decision to get a home equity loan comes down to having confidence in your ability to make regular on-time payments to make sure you don't risk losing your property. How much of my home's equity can I borrow? It depends on a few factors, including your credit score, the type of home (investment properties and second homes are typically more limited than primary residences), the size of your mortgage and the lender's criteria. In most cases, lenders will cap the amount of tappable equity at 80 percent of your home's appraised value. However, if you have excellent credit, some lenders offer the ability to tap between 90 and 95 percent of your equity. What are the other ways to borrow against home equity? If you don't want to take out a second mortgage, you can consider a home equity sharing agreement, in which an investment company provides you with a lump sum in exchange for partial ownership of your home, and/or a share of its future appreciation. If you're at least 62 years old, you may also want to explore a reverse mortgage, but you'll need to be mindful of the potential complexities that this move can create for passing on the property to an heir. Sign in to access your portfolio
Yahoo
14-04-2025
- Business
- Yahoo
How to negotiate debt with credit card companies
If you find yourself in too much debt to keep up with, you might be able to negotiate with your credit card issuer to settle some of your debt. Debt settlement works by negotiating with an issuer until they agree to let you pay off part of your debt in exchange for forgiving — or settling — the rest of it. The process might include paying a portion of your debt upfront or going on a structured payment plan for a set period of time — and it's not without consequences. Debt settlement isn't the best option for everyone, so make sure you consider alternatives, like using a balance transfer card or creating a debt management plan with a credit counselor before you call your issuer. Credit card debt can pile up faster than most people realize — and once it starts piling up, it becomes all the more difficult to pay down. The average credit card balance in the U.S. rose to $6,730 in 2024, according to Experian data. That's a 3.5 percent increase from the average balance in 2023. If you've been relying on credit cards to stretch your finances, only to watch your credit card debt grow and grow, you may feel like you're never going to pay it all down. Know that you're not alone. Forty-eight percent of U.S. credit cardholders are carrying a balance, according to Bankrate's 2024 Credit Card Debt Survey. Like many others in your situation, you may have more options than you realize. One possibility is that you can negotiate your debt with credit card companies. This can help you get back on track and avoid more damage to your credit score. When finances get tight, credit card payments are often one of the first bills people let slide. After all, most credit card debt is unsecured. If you don't pay your auto loan or your mortgage, your car or house could be at risk. The same isn't usually true with credit cards. That's not to say that falling behind on credit card payments isn't dangerous. When you pay any bill late, credit card bills included, you could damage your credit. Credit problems can haunt you, often taking several years to fall off of your credit report. Plus, if you default on a credit card bill, there's a chance that you could even be sued by a debt collector, and that leaves you vulnerable to more potential problems. Credit card issuers are aware that your unsecured credit card debt may be at the bottom of your priority list if you're in a financial bind. Rather than risk the chance of you ignoring the debt or filing for bankruptcy, a card issuer may be willing to consider negotiating your credit card debt so that it gets back some of its money rather than nothing. Credit card issuers also have an incentive to retain you as a customer — so they may be willing to negotiate in order to maintain a lifelong relationship or keep you from missing payments. Credit card settlement is a type of debt settlement that will let you pay off credit cards for less than what you originally owed. You can negotiate these terms by yourself but is sometimes done through a third-party agency, typically called a debt settlement company. These companies can call up creditors and negotiate on your behalf to get your bills lowered. They will then typically put you on a payment plan to pay off any remaining debt you have. You will be responsible for sending payments to the agency, which then pays your creditors. However, not all agencies are trustworthy or upfront about their fees. If you're not careful, you could find yourself out of debt with your issuer but into debt with a debt settlement company. Learn more: Discover Bankrate's list of the best debt relief companies If you don't want to use a third-party agency, you can also negotiate with your issuer directly. Many credit card issuers offer hardship programs, and some might agree to lower your interest rates for a set period of time while you pay down your debt. The benefits of credit card settlement are clear: You may be able to get out of debt more quickly without the responsibility of the full debt load. However, your credit score will likely drop as a result of debt settlement, and you may have tax consequences down the line. If you settle a $15,000 debt for $10,000, for instance, you may be taxed on that $5,000 difference. If you are, you'll receive a 1099-C Cancellation of Debt form. Bankrate's take: Settling your debts yourself doesn't mean you can't ask for help. Working with a certified credit counselor from a nonprofit agency can be a great first step in putting together a plan to negotiate with your card issuer. Card issuers are likely to agree to one of three types of settlements. The best one for you depends on your current financial situation. With this negotiation technique, you offer to settle your outstanding debt in one big payment, albeit for less than your balance. For example, you might owe $4,000 between charges, interest and fees on your credit card, but you ask the bank to accept $2,500 to settle the account in full. If the card issuer accepts, it will forgive the remaining balance. Lump-sum settlements have two potential downsides: A notation may be added to your credit report showing that the account was 'settled for less than the full balance.' This could be bad for your credit score. However, if your account was already past due, the notation may not cause additional damage. You might have to claim the forgiven debt as income on your upcoming tax return and potentially pay taxes on that amount, so if you go this route, it's a good idea to start saving toward those tax payments. A workout agreement typically involves your credit card issuer lowering your interest rate or temporarily waiving interest altogether. The bank may also be willing to take other steps to make it easier for you to keep up with your debt, including reducing your minimum payment and potentially waiving past late fees on your account. On the other hand, your card issuer may close your account as part of the arrangement. Although your credit score is likely already damaged from late payments, closing your account (and thus wiping out your available credit limit) could raise your credit utilization rate. Credit utilization is responsible for up to 30 percent of your FICO score, so if your credit utilization increases, your credit score may drop further. Sometimes called a forbearance program, a hardship agreement may be an option if your financial setback is temporary. If you were to suddenly lose your job or have an unexpected illness or injury, you should call your card issuer right away to see if it offers a hardship program. With a hardship plan, your card issuer may agree to lower your interest rate, suspend late fees or reduce your minimum payment on a temporary basis. You might even be able to skip a few payments while you work to rebound from the financial setback. Unfortunately, your credit history and scores could still be at risk with this type of agreement. Depending on the terms of the bank's hardship agreement, it may report negative information to the credit bureaus during the forbearance period. If you have credit card debt that you are looking to settle with the credit card company, consider a few factors beforehand. First, explore other options like credit counseling or bankruptcy. Either of those may be a better fit for your specific situation. Second, consider whether the credit card issuer will even be willing to negotiate with you. Many issuers won't negotiate with cardholders unless they're several months behind on their payments already. The credit card company will also want to make sure that you have the financial ability to pay any settlement. This could be a lump sum or enough monthly cash flow to fulfill your settlement obligations. Negotiating with credit card companies can be tricky because many will likely be reluctant to change their terms unless they are worried about you filing for bankruptcy. Whether you choose to negotiate credit card debt on your own or hire a professional to represent you, it's best to come prepared to negotiate. Start with the following steps: Confirm how much you owe. Before credit card negotiations begin, check your account balance online or call your card issuer to discover your current balance. It's also wise to confirm the current interest rate on your account, especially since you may be charged the issuer's penalty APR as opposed to their regular APR. Review your options. Decide if a lump-sum settlement, workout agreement or hardship agreement makes the most sense for your circumstances. Call your credit card issuer. If you've decided to handle negotiations on your own, call your credit card company and ask to speak with the debt settlement, loss mitigation or hardship department; a general customer service representative won't have the authority to approve your request. Once you're connected with someone who has the ability to negotiate with you, explain your situation and make your offer. Be polite but firm. Outline your terms. If you're considering filing bankruptcy or hiring a professional to help you with your debt, let the card issuer know and mention that you'd rather work things out directly. At this point, be prepared for the card issuer to potentially freeze your credit limit or close your account. Take detailed notes and follow up if needed. If you like, you can opt to record the call, although some states require you to let the card issuer know that you're recording the call and vice versa. Don't be afraid to ask for a supervisor or call back multiple times over the coming days and weeks if you're unhappy with the terms being offered. Get the agreement in writing. If the card issuer agrees to a settlement or arrangement that you're happy with, ask for documentation. You don't have a deal until you have it in writing. When you're overwhelmed with credit card debt, it might help to have a professional work on your behalf. In general, there are two types of companies that may be able to negotiate with credit card companies for you: debt settlement companies and credit counselors. Debt settlement companies are for-profit businesses that will try to negotiate lump-sum settlements with your creditors. Typically, you stop making payments to your creditors and start sending funds to your debt settlement company each month to build your account. Once your account with the company grows large enough, the company will call your card issuer and make an offer to settle the debt for less than you owe. If the bank accepts the offer, the debt settlement company sends the funds to your creditor and takes a cut for its services. Debt settlement companies can potentially save you time and money, but there are potential issues with this approach. First, if you stop paying your credit card company, it will report late payments to the credit bureaus. The account may eventually be charged off, sold to a collection agency or worse. All of these actions can have serious consequences where your credit is concerned. There's also no guarantee that your bank will be willing to negotiate, so you could end up with ruined credit and even more debt. Debt settlement companies aren't cheap, either. These companies typically charge a percentage of the amount they save you when they negotiate a debt. In the end, you could end up paying thousands of dollars for debt settlement services. A credit counseling agency may be able to help you handle your credit card negotiations by providing you with a debt management plan (DMP). A DMP may help you consolidate your debts and lower your interest rates. If you meet with a credit counselor and determine that a DMP is a good fit for your situation, the credit counselor will help you contact your creditors to try to negotiate a more affordable payment arrangement. If the credit counselor is successful, you begin making a single monthly payment to the credit counseling company, which, in turn, distributes smaller payments to the creditors included in your DMP. In general, a DMP may help you manage and pay off your outstanding debts in five years or less. Keep in mind: A credit counselor can work out a DMP with you and your creditors, but they cannot negotiate on your behalf to actually lower the amount of debt you owe. They can, however, offer you advice and guidance should you want to settle your debt faster than a DMP would allow. Although credit counseling companies are often nonprofit organizations, their services aren't free. Many credit counseling companies charge startup fees and monthly fees (often $25 to $35) when you enroll in a DMP, although they take your financial situation into consideration before charging. If you work with a debt settlement company, the company might advise you to stop making payments on your debt during the negotiation process. This may cause your debt to fall into delinquency, which your creditors will then report to the credit bureaus. Delinquencies stay on your credit report for seven years, meaning you could feel negative impacts even after you settle the debt. Debt settlement may also affect your credit score if it affects your credit utilization. If you stop making payments on your debt, your balance may climb due to additional charges and late fees. Using too much of your available credit and not paying off debt will cause your score to drop while you're in the process of settling that debt. Debt settlement is the right choice for some people, but keep in mind that it will likely lower your credit score and make it harder to borrow money in the future. Even if you do qualify for future credit, your interest rates will be much higher than they would be if you had an excellent credit score. If you'd like to avoid debt settlement, consider these other debt relief options: If you have a lot of credit card debt, consider opening a balance transfer credit card with an introductory annual percentage rate (APR) offer. These cards are designed for cardholders who want to move debt from a high-interest credit card to a new balance transfer card, typically with a 0 percent introductory APR promotion. These promotions often last between 12 and 21 months, meaning that during that time, you'll pay 0 interest on your debt so long as you make at least the minimum payment on the card and abide by the issuer's rules. You can then come up with a debt payoff plan and have all of your payments go toward your principal instead of toward interest. Balance transfer roadblocks Qualifying for a good balance transfer credit card usually means you need good to excellent credit. Even if you do have the credit score for it, not all balance transfer cards will let you move over your full amount, which means that you might need to make payments on your new card and your old one. Plus, most balance transfer cards charge a balance transfer fee, so you'll have to factor that into your plan. If you have many different kinds of debt or a lot of credit card debt, a debt consolidation loan might help. This lets you take out a lump-sum amount, pay off all of your outstanding debt and then make one monthly payment to your new loan. Debt consolidation loans tend to have lower interest rates than credit cards, helping you pay off your credit card debt without racking up even more interest charges. That said, the interest rate you're charged depends on your credit score. Before applying for a debt consolidation, shop around with a few lenders to see which one offers you the best deal and the best terms. Credit card negotiation may feel overwhelming, but trying to avoid the problem will only make it worse. The truth is that you have many options for reducing your debt. Whether you choose to negotiate credit card payoff yourself or work with a professional, it's important to carefully weigh your choices and come prepared when it's time to call your credit card company. And even if you decide to handle the negotiations yourself, you can still reach out to a certified credit counselor for advice. Don't forget to consider alternative options, too, such as getting a card with a strong 0 percent intro APR offer or looking at debt consolidation loans.
Yahoo
13-04-2025
- Health
- Yahoo
Can you pay medical bills with a credit card?
The best way to pay medical bills is to set up a payment plan with the provider directly, but you can make those payments with a credit card. Medical debt has federal protections when it comes to your credit report. But if it turns into consumer debt, it can affect your credit report and score. If you finance a medical bill with a credit card or loan, the high credit utilization or any missed payments could hurt your credit score. You might also rack up interest charges. Medical bills can be costly and unexpected even after insurance, and many Americans aren't prepared to pay them out of pocket. Some people may pull out their credit card to pay a medical bill if they don't have the cash on hand or simply because they want to earn rewards on the expense. Unfortunately, 15 percent of credit card debtors say emergency and/or unexpected medical bills are the reason they carry a balance, according to Bankrate's 2025 Credit Card Debt Survey. Recently, I broke my tibia and fibula while skiing and underwent emergency surgery for an intramedullary nail. The procedure alone cost a whopping $69,000, and that didn't include the cost of my anesthesia, X-rays, hospital stay, or physical therapy. Fortunately, I have health insurance, so the incident quickly reached the threshold of my deductible and out-of-pocket maximum. Still, I'm staring down several thousand dollars' worth of medical bills. As I'm creating my own repayment strategy, let's explore when paying for medical bills with a credit card is a decent option — and when it's not. I also spoke to a physician and medical billing expert about how to not let medical debt hurt your credit score. You can use a credit card to pay hospital bills or other medical expenses, but there are risks. The biggest consideration is that, by paying your bills with a credit card, the medical debt becomes consumer debt. Federal protections limit how medical debt affects your credit score, and there are additional pending rules that would keep medical debt off your credit report entirely. Consumer debt, however, is under no such regulations. Could take advantage of a 0 percent intro APR offer Rewards potential Convenience No federal protections for your credit score High interest charges if you carry a balance Increased credit utilization Thanks to recent federal rules, medical bills don't impact your credit history nearly as much as other types of debt. In 2023, the three major credit bureaus began removing medical bills in collections under $500, less than a year old or already paid off from consumers' credit reports. Then, in early 2025, the Consumer Financial Protection Bureau (CFPB) ruled that all medical debt must be removed from credit reports — an estimated $49 billion for 15 million Americans. Note that this ruling might be challenged by the new administration. Virgie Bright Ellington, a physician and medical billing expert at Crush Medical Debt, advises keeping yourself under these medical debt protections. She explains that consumer debt — credit cards, personal loans and HELOCs, for example — is treated differently than medical debt. Once you pay a medical bill with one of those methods, it becomes consumer debt. With that change, you lose federal protections for your credit. If you end up carrying a balance on your credit card, that can raise your credit utilization ratio, which is a credit-scoring factor. And making late or missed payments on your card or loan will hurt your credit score. If you're paying for a provider payment plan with a credit card. By arranging an affordable payment plan with your hospital or provider, you can space out your payments and make them with a credit card if you want. That can help you turn a too-big medical bill into manageable chunks that you can afford to pay off. Just remember, if you don't pay your credit card statement at the end of the billing cycle, missed payments may show up on your credit report. If you want to earn rewards. Rewards credit cards offer points, miles or cash back on everyday purchases. If you have the money on hand to pay the full medical bill, you could charge it to your rewards card, reap the rewards and then pay off the balance. Keep in mind that carrying a balance and racking up interest will outweigh the value of any rewards, and, once again, this payment method isn't federally protected from showing up on your credit report. If you don't have to pay interest. A 0 percent intro APR credit card can offer you 12 to 21 months (or longer!) of carrying a balance interest-free before the regular APR kicks in. That buys you time to pay off medical bills without accruing interest. Some 0 percent APR cards also earn rewards, which means you could get cash back or points on those medical expenses. You'll just want to have a plan for paying off the balance by the end of the intro period. Again, your medical debt becomes consumer debt as soon as you pay it with a credit card, so it isn't federally protected and can affect your credit score. Learn more: Best credit cards for medical expenses If it might hurt your credit score. Paying for medical bills with a credit card may affect your credit score in more ways than one. A credit card is considered consumer debt, which — unlike medical debt — isn't protected from appearing on your credit report. It can raise your credit utilization ratio, and it could also lead to late or missed payments. If you apply for a new card to pay those bills, that hard inquiry will also ding your credit. If you'll accrue interest. The average credit card interest rate is above 20 percent, which is higher than that of most personal loans. Other medical bill payment options charge no interest at all. If you're not able to pay off the full medical bill on your credit card without carrying a balance, it's best not to use your credit card. Those interest charges will only add to your debt. If it maxes out your credit limit. Maxing out or getting close to your credit limit raises your credit utilization ratio, which affects your credit score. Experts recommend keeping your credit utilization below 30 percent. Let's say you charge a $2,500 medical bill to a card with a $3,000 limit; your credit utilization will reach 83 percent. If your credit utilization stays this high over several months, your credit score may take a hit. Learn more: 10 credit card mistakes to avoid If you were handed an application for a medical credit card at your provider's office, you might wonder if that's the right way to pay. Medical credit cards, offered by issuers like CareCredit, help you finance large medical bills in monthly payments at zero interest — at first. However, you'll want to check the fine print for something called deferred interest. If you still have a balance once the promotional period ends, the issuer will charge for all the interest you would've owed since day one, based on the regular APR. You could end up owing a lot more interest than planned — especially because medical credit cards often charge higher interest rates than typical credit cards. Plus, debt on a medical credit card doesn't receive federal protections and will show up on your credit report. Bright Ellington's advice is to always pay the provider directly. 'Once you have determined that the bill that you receive and you're paying is 100 percent accurate,' she says, 'make a payment plan directly with the provider who is issuing the bill for the services you received.' That's because your debt will stay classified as medical debt, and will have less or no impact on your credit report. Bright Ellington suggests calling your provider first to ask for a bill with CPT codes, which lets you calculate a fair value for your bill based on Medicare rates. Then, you can try to negotiate a new bill with the provider based on what you're willing and able to pay. You can also apply for financial aid, which nonprofit hospitals are required to offer. Your provider will typically offer an interest-free payment plan for a number of months. It might also offer you a discount for paying the bill in full by the first due date. She says that some people make their payments to the provider with a credit card to get points or cash back. But 'make sure that it is an amount that you can pay every single month,' she advises. Otherwise, a missed payment on your credit card bill can affect your credit score and start accruing interest. If you're facing medical debt, there are several ways to get financial help and start paying it off. Read these 12 ideas As I mentioned, I have several thousand dollars in medical bills due to an emergency surgery. When I called my provider to ask about payment options, I was offered a 20 percent discount for paying my bill in full by the due date. Or, I could choose an 18-month payment plan with no interest. Conveniently, I'm about to receive my tax refund. And like 19 percent of Americans who expected a tax refund in 2024, I'll use it to pay off debt — specifically, my medical debt. The 20 percent discount saves me several hundred dollars in the long run, and I have the cash on hand to pay what's left after my tax refund. So I'll pay my whole bill at once. Because I want to earn rewards, I'll use my credit card and earn 1X points per dollar. But I'm only using my card because I know I can pay off the balance, so it won't hurt my credit score. If you're self-employed, unemployed or an early retiree and enrolling in your own health insurance, you may be able to pay your premiums with a credit card. Many of the main healthcare providers accept credit cards. But if you receive health insurance from your employer, you probably can't pay for it with a credit card. Employer-sponsored plans let you pay premiums pre-tax, which means they must be deducted from your paycheck. How to pay your medical bills is complicated — on purpose. Many institutions profit by overcharging and collecting interest from Americans. By doing your homework, you can pay off your medical bills while protecting your credit score and avoiding interest. The best way to pay your medical bills is by paying the provider directly, either all at once — if you have the cash on hand — or with an interest-free payment plan. You can use a credit card to pay the provider, but try not to carry a balance or miss payments. Your credit score may end up paying the price.
