SafeAmerica Credit Union

Pay Off Debt

• By Kevin Alvarez

Five Steps to Prepare for a Big Purchase

A financial journey typically includes several twists and turns – such as understanding how to manage spending, build savings and control debt. There might be “speed bumps” in the form of unexpected changes in income.
Along the way, you might also navigate milestone purchases such as financing a home or car. When considering a big purchase, the destination is within reach when you steer through the following five financial steps.

1. Look at Your Financial Picture

Start by considering what you can afford given your current income, expenses and other debt obligations. Get a handle on how much money comes into your household each month, and where the money goes. Make sure to consider your net income-what is available to you after taxes. Use Greenpath's Budgeting worksheet to calculate your monthly expenses and income to get an idea of what you have to work with, what your commitments are, and what they have remaining to devote to their goals.

For Homebuyers

When purchasing a home, a common rule of thumb is to spend about 30% of your monthly gross income on housing. That includes costs like mortgage principal and interest, property taxes, insurance and maintenance.

For Car Payments

A general rule of thumb is to keep total monthly car costs at about 20% of monthly take-home pay.

2. Check Your Credit Score and Report

Checking your credit score and report is key when considering a big purchase like a home or car.

Pull your credit report from AnnualCreditReport.com and follow the additional instructions to see your current credit score–which influences your overall cost of financing your purchase. The lower your credit score, the more likely you will have a higher interest rate and greater overall cost.

Tip:

Be sure to check your report for accuracy. Resolving errors or incorrect information often helps increase your credit score, giving you more attractive financing options. If the report is inaccurate, file a dispute with the credit bureau. Make sure to check all three bureaus, as sometimes one has information that the another does not. Before making a big purchase, it's important to fully vet (and make sure toy understand) your financing options.

3. Research Your Financing Options

For a home purchase, that means giving yourself enough time to explore mortgage options including types of mortgages, terms, fees, interest rates and other information. Consider getting a preapproval or prequalification letter from a lender, especially in a competitive market with low housing inventory.

If you’re looking to finance a car or other big purchase take inventory of the most competitive loans offered by the dealership, credit union, bank or other lender.

Also be sure to read through any fine print: for example: Is there a pre-payment penalty if you pay your loan off earlier than expected?

Tip:

When conducting your research, remember to use trusted, unbiased information sources, rather than depending upon advice from someone who might benefit from your choice.

4. Plan Your Purchase

Timing is everything, and having a plan in place for when to pull the trigger can make all the difference. Do you have enough in savings to provide a good down payment on a home or car? Is there a certain time of year that special financing or promotions are generally available?

Now’s also a good time to find someone you trust to help you carry out your big purchase – if you’re buying a home, ask friends or families for a real estate professional they can refer.

Having someone in your corner who can help you to understand your options and know warning signs to look out for can make all the difference. For a car purchase, do you feel like the dealership is able to provide advice and guidance? Have you taken the time to research vehicle make and model from a reputable source of information?

Tip:

This is also the time to get your documentation in order, like proof of employment, insurance or other financial information.

5. Make the Deposit

Finally, get ready to make an earnest money deposit for your purchase. In the case of a home purchase ,which indicates you are a serious buyer. Generally, earnest money deposits range from 1% to 2% of a home’s purchase price and are only refundable under specific circumstances.

For a new car purchase, deposits typically total about $500 once you agree to the vehicle price in writing.

Tip:

Make sure you understand whether the deposit is refundable before making a purchase - especially if you think you may change your mind later.

The Journey Ahead

While not an exhaustive list, these steps should help prepare for the financial road ahead. As you travel along your financial journey, take advantage of financial counseling and guidance provided by the trusted national
nonprofit GreenPath Financial Wellness.

To help spread the knowledge, read our Understanding Financial Terms blog post to become even better equipped to make any of your upcoming big purchases.

GreenPath Financial Wellness

• By Kevin Alvarez

Pay Off Your Debt

Information brought to you by our partner, GreenPath Financial Wellness

If you are dealing with debt, you aren’t alone. The average American household has an average balance of about $6,600 in credit card debt,  and that’s not taking into account home, auto, and student loans. Paying off your debt isn’t always easy, but having a plan can go a long way in achieving your financial goals.

Two of the most popular strategies for paying off debt on your own are the snowball method and the avalanche method. Both methods require making the minimum monthly payments on all but one debt, which you put extra money towards.

The Snowball Method

With the snowball method, you begin by paying off your smallest debt first. This method creates a sense of motivation and accomplishment from being able to pay off smaller bills at a higher frequency.

How it Works

Let’s say you have the following debts:

  • Credit Card A: $3,500, 17.99% APR
  • Credit Card B: $7,500, 15.00% APR
  • Personal Loan: $1,000, 10.05% APR

Using the snowball method, you would pay the minimum monthly payments to the credit card debts, and pay any extra that you can to the personal loan until it is paid off. You would then apply the extra payments to Credit Card A until it is paid in full.

Pros and Cons

With the snowball method, you are able to see progress faster. Quick wins can help you stay motivated to keep going. However, with this approach, it will take you longer to pay off your largest debts—and those are often the ones that carry the highest interest, so you’ll likely end up paying more overall.

The Avalanche Method

The avalanche method takes into account the fact that high-interest debts cost you the most money over time. Using the avalanche method, you pay off your highest interest debts first.

How it Works

Let’s look at the same scenario as above.

  • Credit Card A: $3,500, 17.99% APR
  • Credit Card B: $7,500, 15.00% APR
  • Personal Loan: $1,000, 10.05% APR

With the avalanche method, you’d pay the minimum monthly payment on Credit Card B and the Personal Loan, and pay extra towards Credit Card A, since it has the highest interest rate. Once it was paid off, you’d move on to Credit Card B.

Pros and Cons

This is the fastest way to eliminate debt and save on interest payments. However, it can take years to eliminate this debt while other smaller bills still trickle in.

Which option is best for you?

It comes down to what you feel most comfortable with. Ultimately the best method is the one you can stick to. If you’re motivated by quicker victories, the snowball method may be the right option for you. If you want to pay the lowest amount of interest, you’re likely better off choosing the avalanche method.

Learn More