Debt Guide

How to:
Slash your interest rates

Boost your credit score
Negotiate hard with your creditors, and
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 ................................................................................ 6
Control Your Expense ...................................................................... 15
Transfer & Attack: Balance Transfer ................................................ 18
Transfer & Attack: Personal Loans ................................................... 26
Build, then Blitz ............................................................................... 30
Time to Negotiate ........................................................................... 37
Bankruptcy ...................................................................................... 42
Future-Proof Yourself ...................................................................... 45
Introduction
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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 3 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-fuelled 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 for help, 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.
We believe that everyone should be able to:
Stop the pain and have a credible plan within 30 days
Be on the road to recovery within 3 months
Be a different person in 24 months
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 copayments 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.

Just remember: He, who is without sin among you, let him be the first to throw a stone. Nearly 1 in 2
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 3 months. And you can feel
like a different person in 2 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, 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.
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?
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2. How much debt do I have? And how does that debt compare to my income?
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3. How is my credit score?

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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 of the debt, and 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 money will promise.

But they can be improved over time, and we can help you. We have seen great stories in 6 months,
and amazing stories over 12 months).
OK, lets get started.
1. Do I spend more than I earn each month?

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 + 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 the 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 www.mint.com. You need to be computer-savvy and comfortable linking accounts
from your bank and credit card relationships (which mean 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 Budget 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.
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 EVERYTHIGN ELSE (the number you got from Mint, or
from your 30 day experiment) MINIMUM PAYMENT ON ALL OF YOUR CREDIT CARDS.
MONTHLY BUDGET FORM

INCOME (A)
FIXED
EXPENSES (B)
(A)
Monthly Income After Tax (Include all Sources)

Mortgage/Rent
Auto payment
Insurance (all insurance that you have purchased,

including car insurance, life insurance, etc.)
Utilities (electricity, water, cable TV, etc.)
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).
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)
OTHER
EXPENSES (C)
CREDIT CARD
EXPENSE (D)
Gas
Groceries
Eating Out
Others
MINIMUM PAYMENT ON ALL OF YOUR CREDIT CARDS

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

So, you spend less than you make each month. Congratulations! We can now move on to #2.
2. How much debt do you have? And it is too much?
In this section, we are going to look at 2 measures:
Debt burden: the % of your monthly salary that goes towards servicing your debt
Total debt as a % of your total income
With these 2 figures, we can understand your probability of being able to pay back the debt.
Debt Burden (otherwise know as DTI, or debt-to-income)

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 expense and divide them by your gross (pre-tax) monthly income.
For example, if your annual salary (before taxes) is $36,000, than 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 2 type 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.
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%.
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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 %ages, as we move to the final section.
Calculate your debt and income ratios

(A)
Debt Expenses
(B)
(A)
GROSS MONTHLY INCOME (Income before taxes)
Mortgage payment
Auto loan payment
Credit card minimum payment
Other expenses that appear on credit report if any
Note: Do not include expenses like utilities that do not appear on

credit report
TOTAL (B)
DEBT BURDEN % [(B) / (A)] * 100
UNSECURED
DEBT (C)
$
%
TOTAL PERSONAL LOAN
TOTAL CREDIT CARD DEBT
TOTAL STUDENT LOAN DEBT
TOTAL MEDICAL DEBT
OTHER UNSECURED DEBT (if any)
Note: Do not include mortgage or auto loan as they are loans against
assets
11
TOTAL (C)
DEBT TO INCOME [(C) / (A)] * 100

3. What is my credit score?
In order to see what options you have available, you should see your credit score. Ideally, you will see you
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 Barlcaycard and Discover.
Obtain your credit score. If you want your official FICO, you will have to pay for it. You can order it at
www.myfico.com
You can get an approximation for free from a number of sites (and this is our recommendation). Sites
include www.creditkarma.com and www.quizzle.com
Warning: these site give you a good indication of your credit score, but they are not your actual FICO.
In addition, beware the product recommendations made by these sites. They are not
recommendations they are just advertisements. Unlike MagnifyMoney.com, CreditKarma 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?

You now know the answer to 3 critical questions:
Do I spend more than I earn each month?
How much debt do I have?
How good is my credit score?
Based upon your answers, we will give you a recommended plan.
12

We recommend (and you can skip ahead to) Control Your Expenses if:
You spend more than you earn each month
We recommend (and you can skip ahead to) Transfer and Attack 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. If your score is below 700, but above 650, you should skip to
Transfer & Attack: Personal Loans.
We recommend (and you can skip ahead to) Build, then Blitz 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
Your credit score is below 650, or you dont have a credit score
We recommend (and you can 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
We recommend (and you can 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.
14
Control Your Expense
-----------------------------------------------------------------------------------------------------------If you are in this section, then:

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 2
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:
Mortgage: 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:
https://www.penfed.org/30-Year-Fixed-Mortgage/ - and, as of the publishing date, it is 3.726%. If your
interest rate is a 4.726% or higher, it may be worth re-financing 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).
o Warning: 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 the home and its maintenance costs. There should be no
shame in moving to a cheaper location. Or, you 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.
Rent: 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
15

banks say you can afford. They are not thinking about your best interests; instead, they are thinking
about their best 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.
Automobile: 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: a high-pressure 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 www.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.
Auto Insurance: shop around and see if you can get cheaper car insurance. There are a lot of sites
out there. We like TheZebra: https://www.thezebra.com/ - it can help you compare across lots of
different companies.
Life Insurance: 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 2 children. His wife left her job to be with the
kids. So, there are 3 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. At 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.
Recurring Expenses: It is so easy to sign up for something and forget about it. The first month (or year)
is free, and then the bill 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 BillGuard. Just visit www.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.
Bank Accounts: 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: http://www.magnifymoney.com/compare/checking-accounts-offers/
16

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 just a quick summary of what we reviewed, before moving on to #2:
If your FIXED EXENSES 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, than you need to find ways of controlling your spending.
There are a lot of ways 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 non-profit credit counselor here: https://www.nfcc.org/index.php
17
Transfer & Attack: Balance Transfer
-----------------------------------------------------------------------------------------------------------Congratulations. If you are in this section, then:

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 re-finance.
If it sounds like a personal loan is a better option for you than a balance transfer, then skip ahead to the
next chapter.
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 towards 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.
18

1. Make a List of Your Debt, from Highest to Lowest Interest Rate
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 towards 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 below, this individual has $10,000 of credit card debt. The interest rates
range from 29% (the cash advance on Citi) to 0% (a promotional purchase offer from Chase).
19
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.
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
http://www.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 we had 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 towards that debt. Lets say that you can afford to pay $300 per month towards the $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, 2014):
The results show a number of excellent options, which can help save you a lot of money. (We are only
displaying the first 4 results there are many more).
20

Here is how we present 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 includes the balance transfer fee
and the promotional interest rate (including how many months the promotional offer would last).
The top 3 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 Santander, 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, than you would probably want to choose the first result.
o 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.
o
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 4
cards have savings ranging from $2,165 to $2,649. So you know that you will be better off after a
balance transfer.
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.
21

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/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 on 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 Santander (0% for 24 months)
That is an excellent outcome. We wanted $8,500 and we were able to get $8,000 across 2 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:
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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 way. 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 2 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 a guide for some of the most popular banks.
Here are the links:
Barclaycard: http://www.magnifymoney.com/blog/balance-transfer/how-to-do-a-balance-transferwith-barclaycard/
Capital One: http://www.magnifymoney.com/blog/balance-transfer/how-to-do-a-balance-transferwith-capital-one/
Chase: http://www.magnifymoney.com/blog/balance-transfer/how-to-do-a-balance-transfer-withchase/
Discover: http://www.magnifymoney.com/blog/balance-transfer/how-to-do-a-balance-transfer-withdiscover/
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.
The transfer may take up to 2 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 credit is evil, and
you will only end up being tempted by debt.
23

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 2 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)
towards this debt.
If you followed the debt snowball (minimum due on Credit Card #2 and all other money towards Credit
Card #1), than you would:
Have paid $1,702 of interest over the next 12 months
Would have a balance of $7,102 at the end of month 12
If you reversed that order, and put all of your extra money towards 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.
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
24

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, than
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 2 weeks with the best balance transfer offers in the
market, sign up for our email (which we called the PriceChecker). We promise we wont overwhelm you
with mail and it will just keep you up-to-date on the best offers. You can sign up here:
http://www.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.
25
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 people like 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 overlimit 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 5 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 at this address:
http://www.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:
26
We highly recommend that you apply to more than one company, so that you can compare the interest
rate that you receive.
Once you receive your customized list of potential personal loan companies, you can then click on Go to
Site. Once there, you can answer just a few questions, and 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
These are the most important factors to compare when looking at personal loans.
It will take you no more than 5 minutes to get pre-approved at each lender. It makes sense to compare 35 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 up-front 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 up-front 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 up-front fee.
2. How to Apply for a Personal Loan

Once you 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).
27

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 paystubs, 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 pro-actively manage the documentation process and supply all required information, and
answer any questions.
In most cases, the up-front 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 LendingClub) 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

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 up-front fee is non-refundable. 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 non-refundable 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.
Pre-computed interest: Very few companies even offer this any longer. However, pre-computed
interest is a different (and very old fashioned) way of calculating interest. If you do not pay off your
28

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.
IN SUMMARY
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 up-front fee). Compare the APRs, and go with the lowest
Be prepared to verify your income and address. Unlike credit cards, they 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 received 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 up-front fees are never refunded)
When you apply, remember to apply for enough money to cover the up-front fee. That fee is usually
taken from the loan proceeds. For example, if you need $5,000 and the fee is 4%, than you should
borrow $5,208 (so that $208, or 4%, goes to the fee)
If you want to receive an email every 2 weeks with the best personal loan offers in the market, sign up for
our email (which we called the PriceChecker). We promise we wont overwhelm you with mail and it will
just keep you up-to-date on the best offers. You can sign up here:
http://www.magnifymoney.com/newsletter
Our next chapter is dedicated to people who need to improve your credit score. But, if you are interested
in credit scores (and how they are calculated), you may want to read it.
And 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 towards 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. And there are 2 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
towards the highest interest rate debt until it is paid off.
c. Repeat the above until you have completely paid off your debt.
The more money you put towards 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 of 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 towards 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
How Your Score is Calculated:
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.
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.
30
The FICO score is calculated based upon information in the credit bureaus. There are 3 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 are 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 as 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
Cell phone 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.
How is the FICO score calculated?
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.
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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 re-pricing, 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. 60 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 cell phone 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 7 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.
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.
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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 4 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.)
than 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.
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
www.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:
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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.
How to Improve Your Credit Score
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 (a) paying down
your debt and (b) increasing the credit that you have available
Make your payments on time every month
If you repeat these 2 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 a credit reports were actually paper files, it would be a very thin if
you dont 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: http://www.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:
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 golden 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
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open a secured card (requiring an up-front 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 % 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 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 new 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 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).
Dealing with Negative Information
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 www.annualcreditreport.com - where you can get a free
report from all 3 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 3 credit reporting agencies.
Here are the links for 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
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If you are not happy with the resolution, you can complain to the CFPB (Consumer Financial Protection
Bureau). It is easy to do, and collection agencies do not like being under the spotlight of the bureau. You
can complain online at this address: http://www.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 7 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 re-affirm the debt.
If you have recent collection items on your credit report, you need to deal with it 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
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.
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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 non-profit 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 non-profit consumer credit counselor to review your options. You
can find a counselor near you at this address: https://www.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, who 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.
For-profit debt settlement companies. There are a ton of companies out there who 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.
37

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 non-profit company.
OK: now we are going to talk about how you can negotiate. There are 3 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 6
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 that 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 2 types of forbearance programs:
You are having a temporary problem, so that 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 chance 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 3 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.
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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 7 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 7 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 6 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:
http://www.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 short-cut, 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.
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 (6 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:
http://www.consumerfinance.gov/askcfpb/search/?selected_facets=category_exact:debt-collection
39

If you are unable to reach an agreement with the bank or credit card company during the 6 months while
the debt is collected internally, you will likely have much better luck when the debt is with a collections
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 6 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 7 years (from going to the collection agency), the debt will no longer impact your credit score.
They 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 7 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 than you can offer $2,500).
When you reach an agreement with them, make sure that:
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.
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 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
40

recommend going to WalMart and opening a Bluebird. 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 account once the 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 (http://www.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 3 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 7 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.
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Bankruptcy
-----------------------------------------------------------------------------------------------------------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 7
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-yougo 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. I will give a few 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 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, child support and some other types of debt can not 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).
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If your problem is with credit card debt and/or medical debt, than 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 towards your debt before it is completely eliminated.
Chapter 7 or Chapter 13?

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 6 months income. (You can find the median
incomes here: http://www.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 towards a payment plan over 5 years towards 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 exempt from the bankruptcy completely.
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 towards eliminating a significant portion of your debt.
How to Proceed:
Also as part of the bankruptcy legislation, you need to meet with a non-profit debt counselor before you
are allowed to file for bankruptcy. So, whether you are thinking about negotiating settlements or filing for
43

bankruptcy, it makes sense to meet with a counselor. You can find a list of the approved agencies here:
http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
For further reading on bankruptcy, we recommend this website (NOLO): http://www.nolo.com/legalencyclopedia/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 can not 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 2 years. By Year 3, things will look a
lot better. And, 7 years later, your score will reflect the person you have been in the last 7 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 non-profit 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, you total debt, your report and your
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 weight the options, and encourage you
to visit a nonprofit counselor to discuss further.
Once you start on these plans, progress can happen quickly. We believe that within 3 months of starting
the plan, you will start to see the light at the end of the tunnel. And, within 2 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 them with you here so that
you can keep it in mind as you move forward.
Here are things you need to know:
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.
45
2. Build an 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 fund 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: http://www.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 2 lines of protection in an emergency: your fund and your card. You can
read a review of the card here: http://www.magnifymoney.com/cards/balance-transfer/penfedpromise-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
https://www.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:
http://www.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 401k (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 401k, or you
have maxed out your 401k 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 (it 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: https://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 do it here: http://www.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 you
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.
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 1-on-1. Every
problem has a solution, and our goal (between this guide and our website) is to make is easy for you to
find the solutions.
Thanks for reading and good luck!
46

Debt Guide

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Debt Guide

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How to:

Slash your interest rates

By Nick Clements, Co-Founder of MagnifyMoney.com

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

Why can we help?

Lets Get Started

DEBT-FREE FOREVER your plan for financial freedom

And now lets get started, with the self-assessment.

DEBT-FREE FOREVER your plan for financial freedom

3. How is my credit score?

Why are these questions important?

DEBT-FREE FOREVER your plan for financial freedom

1. Do I spend more than I earn each month?

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

MONTHLY BUDGET FORM

Monthly Income After Tax (Include all Sources)

Insurance (all insurance that you have purchased,

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

Student loan payments

Any other fixed expense (gym membership, magazine subscriptions,

Any automatic investments or savings that you might have

Others (Do not include CREDIT CARD DEBT, OR

INCOME - FIXED EXPENSES (A) - (B)

MINIMUM PAYMENT ON ALL OF YOUR CREDIT CARDS

DEBT-FREE FOREVER your plan for financial freedom

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

DEBT-FREE FOREVER your plan for financial freedom

Calculate your debt and income ratios

GROSS MONTHLY INCOME (Income before taxes)

Auto loan payment

Credit card minimum payment

Other expenses that appear on credit report if any

Student loan payments

Note: Do not include expenses like utilities that do not appear on

TOTAL PERSONAL LOAN

TOTAL CREDIT CARD DEBT

TOTAL STUDENT LOAN DEBT

TOTAL MEDICAL DEBT

OTHER UNSECURED DEBT (if any)

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

DEBT-FREE FOREVER your plan for financial freedom

NOW WHAT DO I DO?

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

Control Your Expense

-----------------------------------------------------------------------------------------------------------If you are in this section, then:

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

Transfer & Attack: Balance Transfer

-----------------------------------------------------------------------------------------------------------Congratulations. If you are in this section, then:

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

2. Use MagnifyMoney to find a balance transfer offer

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

4. How to Make Your Payments

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom

DEBT-FREE FOREVER your plan for financial freedom