Is there a connection between foreclosure and payment of credit card debt?
While in the process of foreclosure, some consumers paid off their credit cards.
The Counselor’s Corner reported that economists from the Federal Reserve Bank of Philadelphia looked at data from U.S. households that were already delinquent on at least one credit card before falling behind on mortgage payments and going into foreclosure from 2004 through 2010. They provided a report that found a connection between delayed foreclosure and payment of credit card debt.
Some consumers were able to pay down or pay off credit card debt while they were in the process of foreclosure. But the flip side is that having relief from making a mortgage payment did not always turn around a consumer’s spending habits. The study found that that people whose home foreclosed were likely to become delinquent on their credit card again within a year and a half after the foreclosure was completed.
Even though experiencing foreclosure is certainly not a positive experience, households can take advantage of this event and make choices to change their spending habits and begin to improve their financial health even while in foreclosure. Jim Buxton, Michigan State University Extension Foreclosure Counselor says, “The best course of action is to face your situation honestly. Openly discuss spending decisions with all family members. This will help everyone understand the changes and sacrifices needed for the household’s plan to succeed.”
Your success will be greater if you select a debt pay-down strategy that meets your financial goals. Pick one approach and start using it. Here are a few methods for paying down debt. Choose the one (or two) that make the most sense for you and your situation.
Use the “Debt Snowball” Method
This method helps you determine which debt to pay off first by having you list them in order of total balance, starting with the smallest. The reason this plan works for so many people is that you see success quickly and the success builds upon itself, like a snowball, to help motivate you towards getting rid of all the debts. Start out with the smallest debt first and attack it with all your available money after basic household expenses are paid. If there is money left over, apply the extra funds to the second debt, and so on. Once those smaller balances are gone, take the money that had been set aside to pay those bills and apply it to the balance with the highest interest rate.
Use the Highest Interest Rate
If you want to take the path of saving the most money, then you need to prioritize your list of debts by interest rate on the loan or credit card. Start paying on the debt that has the highest interest rate (as it is costing you the most money) and attack it full force until it is paid off. Then, add any extra funds to the second highest interest rate loan/credit card, and so on.
Use Power Payments
Power payments can be made in a variety of sequences including starting with debts with the highest interest rate first, smallest balance first, or shortest term first. While paying off debt with the smallest balance can provide a psychological boost, starting with the highest interest rate first often provides the greatest reduction in interest and repayment time. The Utah State University Extension PowerPay® website provides a free personalized analysis. Users simply need to enter the names of creditors, the interest rate (APR) on debts, the monthly payment, and the outstanding balance. PowerPay® will provide a customized debt analysis (i.e., the time and interest savings) for each repayment scenario and a create debt repayment calendar for the borrower to follow.
If you’re wondering about your financial health, take a financial health survey from MI Money Health to get your financial health score! It’s confidential and your answers never connect back to your name. This survey can help you evaluate your current financial situation, provide ideas on how you may improve your financial health, and connect you to resources in your local community.