We had the opportunity to sit down with Dr. David L Tuyo II, DBA, MBA, who serves as the President and CEO of University Credit Union, to discuss some common questions related to managing personal financial debt.
Dr. Tuyo has been recognized by industry leaders including the National Association of Federally-Insured Credit Unions’ Professional of the Year, Credit Union Times Trailblazer and Northwest Florida’s Top 40 Executives Under 40. He was also the recipient of the first ever award for Innovation from PSCU, the largest credit union service organization in the US.
He is passionate about financial education and he is very qualified to share some of his expert insights on personal finance with the ProFinanceBlog.
Here is what he had to say:
What’s the difference between good debt and bad debt?
As a general rule of thumb for most consumers, creating a plan to eliminate debt is the best place to start. All debt that can be eliminated in the plan is good debt and the debt that cannot be addressed is undesirable or bad debt. For all future debt, post plan, the general rule of thumb is good debt helps increase your net worth or add tangible value. Bad debt would be borrowing money in a way that adds no value to the consumers balance sheet.
What can someone do in order to maintain a positive financial position with their personal debt?
Consumers should understand and aggressively manage their personal debt. Not all loans are created equal. Some will have high interest rates and fees or possibly prepayment penalties.
Fully understanding what a consumer is entering into before taking on debt is key to remaining in a positive financial position.
Consumers have many choices and should investigate to understand all the options they have before making a decision. Many times individuals will overlook important qualitative variables in their decision making process. It is important to look deeper into the partner financial institution after determining the best rate.
What is the reputation of the financial institution?
Have they been around long enough to experience full economic cycles and severe economic swings such as the late 90s or the Great Recession?
A great rate is a good place to start, but when something unexpected happens, will your chosen partner be there to help and how do you know that?
Generally speaking, using a snowball approach to debt reduction or management is the best approach. Snowballing starts with the smallest debt and focuses all excess payments on that debt until paid off. You continue this process until all debt has been eliminated. Many overlook the cost of their time and the effects of managing debt on their quality of life. If you spend 10 minutes per loan per month in reviewing and making payments, you could add hours back to your life each year just by reducing the number of financial partners.
What’s the best way to deal with overburdening debt?
The best way to deal with overburdening debt is to create a plan and maintain the discipline to stick to the plan. Debt can seem overwhelming if there is not a plan in place to get it under control. Even if it seems like you are chipping away at it little by little, over time this will make a difference. And don’t forget to start building momentum of debt reduction through snowballing, it is a great approach in attaining financial independence.
Is it ever a good idea to borrow from your retirement savings to pay off your debts?
This is a complicated solution that really depends on what the consumer is trying to achieve. One should consider the time to payback the retirement savings (including any penalties) and how much money will be saved by paying of the debt. Borrowing against retirement savings should be a last resort option, but really depends on the individual’s situation if it makes sense or not. Retirement savings is protected in many ways and individuals need to keep their goals in mind when making this decision.
Is declaring bankruptcy a viable solution for eliminating debt? What are the repercussions of doing so?
There are a few types of bankruptcy. For individuals, the types include Chapter 7, 12, and 13.
Chapter 7 is basic liquidation and in most cases, eliminates all types of debts unless reaffirmed through the process. There are limitations and requirements for this type of bankruptcy, which is seen as a last resort.
Chapter 12 is for individuals in the fishing and/or farming industry.
Chapter 13 focuses on creating a payment plan with creditors utilizing the assistance of a court appointed trustee.
All of these options have a place and are needed in society today. Individuals also have many resources available at no cost to use prior to using bankruptcy. Utilizing a certified financial counselor is one example.
The effects of bankruptcy are significant in the early years following the bankruptcy. If a car loan is needed, then the rate could be ten times what a standard rate would be for someone with good credit. The cost of insurance also increases. Also, for some it could affect their employment as well. There are many other repercussions, but these are just a few. Again, finding a good financial institution to partner with can help avoid falling into bankruptcy.
What advice do you have for young people who have already incurred debt? And for those who are debt-free?
For young people that have already incurred debt, I always encourage developing a plan to repay the debt and sticking to that plan. Make a game of it, build in rewards as you hit milestones, and take the perspective that whatever interest rate you are paying is a guaranteed rate of return to you as you make those payments, and ultimately payoff. Another key thing is to make your payments on time. These tactics will help build your credit score and put you in a position to receive more favorable interest rates in the future.
For those that are debt-free, I would say to explore a credit card or line of credit that can help with building credit. Even if you do not carry a balance on a credit card, having one for paying for gas, or emergencies, as well as making payments on time will help build credit for future use. The five largest factors of the credit score are payment history, credit utilization rates (% of credit lines used vs available), average length of time per trade, accumulation of debt, and mix of debt. Most consumers will use debt at some point and setting the table is the first step to ensuring you are minimizing the cost of debt.
What’s the single biggest mistake that people make when managing their personal debt?
The single biggest mistake people make in managing their personal debt is allowing emotions to play a role in the decision making process.
This isn’t easy to overcome and many times a disinterested third party can add some sanity and safety to the decision at hand. The third party could be a financial wellness or success coach depending on your situation. The emotional hurdles lead people to not actively managing their debt. It can be easy to overwhelmed and not see the end as debt piles up. However, putting a plan in place and keeping the discipline to payoff the debt is the best way to manage it.
Is there any final advice that you would give for someone who feels overwhelmed by debt?
I would recommend to stop, take a pause, and realize you are not alone on this island. After taking a pause, and a breath, gather all your financial documents. Build a spreadsheet, or make a list on paper, of all debt, include outstanding balances, payments, interest rates, fees, and the reason for the debt. Categorize the debt as needs, wants or desires. List the debts in order smallest to largest. At this point, create a simple in/out monthly cash flow statement. This will show whether or not debt is being accumulated monthly, the first step to getting out of debt is to stop accumulating it. Now armed with data, attack the debt with the aforementioned snowballing approach rewarding yourself along the way.
Make sure to speak openly with your immediate family as well. They can be your accountability partners while you also inspire them to take control of their financial lives as well. If this is unavailable, then seek out a trusted financial partner such as a financial coach.