Q: In your last column, you answered a question about consolidating debt by using one credit card to pay off the others. I don’t want to do that, but I do want to consolidate debt. Any good options for me? — Brandon (via Facebook)
A: Brandon, I hear your concern about credit card juggling as a method for debt consolidation and I’m also not a fan as you probably noticed from reading my response. The answer to your question depends a lot on what type of debt you have. Generally speaking, Americans struggle with credit card debt, student debt, auto loans, and maybe mortgage debt. So let’s look at what might be a fairly typical scenario.
As of statistics gathered at the end of 2019, the average household in the US who owed these types of debts was dealing with the following:
Credit card — $6,849
Student loans — $46,822
Auto loans — $27,804
Mortgage — $189,586
Now I’ve written before about mortgages and student loans being considered “good” debt because of the income tax benefits afforded by the interest. Feel free to debate me on this (and I’m not entirely convinced myself) but regardless of your opinion, this isn’t going to play much of a role in my response to Brandon. You’ll see why shortly.
I can tell you that if I found myself in a household with these debt amounts, I would seriously consider going to my friendly neighborhood credit union and getting a personal loan. And the reason is simple. In the US, the average interest rate on credit card debt is just over 19%. For auto loans, that rate varies dramatically depending on your credit score, but a mid-range would be in excess of 11%. Meanwhile, personal loans at Heartland Credit Union right here in town is 7.78%. And a Home Equity Line of Credit is 4.74%. Just an option to consider.
I mentioned above that I wouldn’t be including so-called “good” debt in this response. The reason is that — in addition to the interest being tax deductible — federal student loans average around 4.5%. And mortgage loans are even lower, at less than 4%. So it clearly wouldn’t make sense to pay off a 4% loan with money you got from a 7% loan.
Q: I’m trying to decide whether to pay someone to prepare my taxes or if I should just pay someone. Any tips? — Shelly (via Twitter)
A: Shelly, I am not aware of any objective sources that have documented a big financial benefit to paying someone instead of doing your taxes yourself. That’s not to say they aren’t out there, but I haven’t seen them. So my gut reaction would be that if you feel comfortable using the software and have a few hours to kill between now and early April, do it yourself.
The arguments that I’ve found have not been financial, but rather center around the circumstances in which tax prep software might not cover your situation. The ones I hear about most often are for business owners and self-employed individuals, or for those who are buying or selling a capital asset such as a home, substantial invest vehicle, or business holding.
If you’re really curious, you could try an interesting experiment. First, complete your taxes yourself with some version of the software. Don’t file them ... just put in all the numbers. Then take the documents to one of the many H&R Block kiosks that spring up everywhere this time of year and have them do your taxes too. If you like their numbers better — or if you just have more confidence in their abilities — go ahead and use what they give you. If not, you’ve already done yours at home, and you can eFile those with the click of a button.
I appreciate you asking the question, because I’ll be the first to admit that I’m not always clear on the nature of the questions being asked on the tax prep software that I buy. So there is something to be said for off-loading what I’m going to call my “ignorance risk” onto someone else who is signing their name to the documents. The call is yours. Let me know how it turns out!
If YOU have a question for Ask Eric, tweet it to @AskEricKSUN, send an e-mail to AskEric@mail.com, or like “AskEric” on Facebook.
— Eric Litwiller has spent the last nine years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options. He is a firm believer in the importance of using earthly riches to fulfill a mission of Christian stewardship. Eric is not a licensed financial planner.