6-step debt-elimination program
Is debt overwhelming your finances? If you have nightmarish visions of being surrounded by creditors, it's time to put down all credit cards, tighten the proverbial belt and start living not only within your means, but under them until you've paid back what you owe.
Take control of your debt and commit to the following strategies so you can start using credit to get ahead, rather than always playing catch-up.
Debt management
Seize control of your debt by following these steps.
6 steps to debt relief
1. Know where you stand
2. Create a plan
3. Set aside some savings
4. Pay more than the minimum
5. Improve your terms
6. Seek counsel
1. Know where you stand
Ignorance may be bliss, but it won't solve your problems. The only way to get out of a debt predicament is to know how beholden you are to creditors.
Where are you starting from? Look honestly, as painful as it may be, at how much you currently owe.
It's stunning how many people are afraid to take this step.
"The majority of people I speak with, when we sit down and add up their debt, have no idea how much they owe," he says. "I have people say, 'No that can't be right, add it up again.'
"It's no mistake, it's how much you owe, and they're absolutely shocked."
Once you've tallied your debt, add up your income and subtract fixed expenses. The amount leftover is money for discretionary spending and paying down debt.
Now that you know where you are, stop. Stop using your credit cards. End the debt cycle so that every move from now on carries you forward.
"Decide to live off what you make, only have a debit card," "That is where we see the biggest resistance from people -- even people who are past-due on half their credit cards.
"The real key is not to rely on credit cards again, because if you're mismanaging credit, you have to look at it as an addiction. Because that's really what it is."
2. Create a plan
Now that you know where you stand, take a short self-inventory to determine the appropriate repayment plan.
There are two main approaches to paying off debt.
2 ways to pay off debt:
1. High to low. You pay off the card with the highest interest rate first. This gets the most out of every cent you send.
2. Big to small. You pay off the card with the biggest balance first, regardless of interest rate. This creates big results fast, but may not be the best bang for your buck.
A simple example illustrates how each approach works. Let's say you can afford to pay down $1,000 worth of debt each month. You have 10 cards and the minimum payment due on each of your accounts is $50, for a total of $500.
Regardless of which approach you choose, you pay $50 on nine of the cards, for a total of $450. That leaves you with $550 to apply to your remaining debt.
Using the high-to-low, approach, you would apply the remaining $550 to the card with the highest rate.
Using the big-to-small approach, you would apply the remaining $550 to the card with the biggest balance, regardless of interest rate.
"Either method is effective, it just depends on what type of consumer you are.
"Knowing your own style is the most important thing because if you come out of your style, you're not going to stick with it." Whatever method you use, don't forget to apply a little common sense to your calculations.,
"You'll hear a lot of experts say you should pay off the one with the lowest balance first," he says. "But that doesn't work out very well if the lowest balance happens to be zero percent and the highest balance is 20 percent.
Why on earth would you want to focus on the zero-percent card first?" Once you've settled on a plan, take a minute to put pen to paper (or fingers to keyboard) and write down your goals: How much will you devote each month to paying back debt? How much will you save? What are your other financial goals?
"If you put it in writing, you're more likely to get where you want to be,"."Part of what I researched for my master's degree was financial psychology, and the research tends to show that those who write down and monitor those goals are more likely to get there."
3. Set aside some savings
While it may seem counterintuitive, saving is a crucial aspect of a sound strategy to pay down debt. If you have three to six months of living expenses saved up, you're golden; otherwise, build an emergency savings buffer while paying down your debt.
"The No. 1 problem we see consumers fall subject to is when someone is good-intentioned and wants to pay their debt down, they put every dollar toward it and as soon as an unexpected expense happens, they find themselves using credit again,"
Think about it: If you're in debt, it could take you years to get out. During that time, you are bound to face an unexpected expense or setback. A savings cushion can keep you from falling back into the deficit-spending cycle.
"We see consumers who are doing really well paying their debt down, then they get to the holidays and charge things because they don't have any savings," "They see that they've been good all year and have been paying it down, so they figure they can pick up again next year. Well, it doesn't get any better -- it's a trend that just continues."
After paying your minimums, put half of any extra money into savings and half into paying down debt.
Boost your income
Once you've checked for coins under the couch cushions, try looking at these places for additional income:
• Ask for a raise.
• Get a second job or work overtime.
• Use your tax refund to pay down some of your debt.
• If you have plenty in savings, apply a portion to debt.
• Rent out a room.
• Sell anything you haven't used in a year on eBay or hold a garage sale.
• Move in with family, at a lower rent.
Don't sit on too fat a cushion if debt is a problem for you.
"If you save the money, you're going to get 4 percent interest -- and you'll only see interest that good if you've got an online money market," "On your cards, you're paying 20 percent. No way does it make sense to earn interest at 4 percent while you're paying 20 percent."
4. Pay more than the minimum
Do you understand how much you're paying if you only make minimum payments or how long it will take you to repay your debt?
It is crucial to pay down more than the minimum each month. If you can't afford to pay down more than the minimum, sit down to figure out where you can save more. Leave no stone unturned.
Ms Debtor learned to make deep cuts during drastic times. Tired of creditor harassment, Ms Debtor slashed her spending to the bone to get out from under $19,000 of credit card debt.
"I didn't go out to eat, I took my lunch to work, I took public transportation, I didn't buy any new clothes or shoes and I got a part-time second job," "All of those things helped me to start paying down my debt."
It took four years to fully repay her debts, but she now has decent credit and only carries mortgage debt. Taking control of debt doesn't necessarily require an all-or-nothing approach and not all of Debtor's advice is so extreme. "If you spend $300 a month going out to eat, try to reduce that to $150 and use the other $150 to pay down debt,"
5. Improve your terms
Creditors may waive fees, reduce interest rates or agree to more flexible repayment terms. All you have to do is ask. Knowing how to ask is important, though.
Buy some breathing room
Options for improving your terms vary depending on the type of debt.
Student loans:
• Deferment: postpones payment.
• Forbearance: temporary reduction in payments.
• Loan forgiveness programs allow you to work in exchange for reduction in student loan debt.
Mortgage:
• Call the loss mitigation department if you are behind on your mortgage. You may be able to get your mortgage modified and add the missed payments on to the end of the loan.
• Try to sell your home before it goes into foreclosure. In extreme cases, the lender may agree to a short sale.
Medical:
• If your debt is due to a lack of health insurance, ask for an itemized bill for your medical charges and look for duplicate charges or services you never received. Make sure all the charges are accurate before asking for a payment plan.
Credit card:
• Negotiate interest rates and fees.
• Request a financial hardship plan that lowers the interest rate and the minimum payment amount for a year.
Your chances of successfully negotiating with creditors increase greatly if you have a "deal breaker," such as another creditor willing to take on your debt at better terms. "Pretty much everything is negotiable. Those banks want to keep us." The better your credit, the more you'll be able to save; however, no matter how bad your credit has been, you'll often be able to make some improvement.
Tips
• Have a deal breaker. Tell the creditor what you'll do if they don't give you the deal. For instance, refer to a low-rate credit offer from another bank that you received in the mail.
• Be persistent. When you call, they put you on hold. If the first person can't help you, ask to speak to supervisor. Keep calling back until someone helps you.
• Have confidence. Remember that you're in control. Be prepared and know what you've spent on your account.
You may even negotiate down debt amounts if you demonstrate your dedication to repayment.
If you feel uncomfortable negotiating, let a more confident friend or family member intervene on your behalf. Make sure to get all agreements in writing. You may have even greater success with the help of a credit counseling service.
Sometimes the best way to improve your terms is to take matters into your own hands. Many suggest a system of continuous balance transfers to get the best rates while hacking away at debt.
"It's not a solution, just a tactic to lower your interest rate," "You still have to focus on getting your balance paid off. But the lower your interest rate, the faster the process will be." This process works even for those with less-than-stellar credit, just not as well. "You may not get the 2.99 percent offers," "But as long as you're reducing it from 25 percent to 15 percent, that's significant progress."
There's normally a fee for balance transfers, usually about 3 percent of the transfer or amount of the check. It's all in the fine print, so make sure you understand the details and factor that in when deciding if it's a good deal for you.
Remember that creditors will apply your payments to the amount with the lowest interest rate first, so to get the most from the transfer, you really need to steer clear of new purchases. Also, be on the lookout for other balance transfer trip-ups.
6. Seek counsel
If you don't have the time or know-how to get results on your own, turn to a good credit counseling company rather than stalling or feeling frustrated by ineffectual attempts at vague behavioral changes.
"Once you're in debt and you're in a position where you can't save, it's almost impossible to get out from it," A consultation with a good credit counselor takes an hour or so -- you can even phone in. A credit counselor can get you on a budget or refer you to other options.
Signs that you may need help!
• You're over the limit on any of your accounts.
• You've missed a payment.
• After budgeting, you can't pay more than the minimum.
• You're behind on your debt.
Good credit counseling agencies construct an individualized budget and repayment plan for free. For less than the penalty fees you might already be facing, a credit counseling agency can put you on a debt management program and intervene on your behalf.
Working with a counseling agency may also help you negotiate with creditors, making them more likely to reduce high rates, waive fees going forward and offer other concessions.
"We're the validation tool, and once we've determined that someone needs some help from the creditors, negotiations with the credit card companies are a lot easier," "We can get the consumer out of debt for less than it would cost on their own."
Watch out for bad agencies that charge more but don't do a lot of the intervention work and counseling necessary to construct a good plan. Find a reputable agency through your local Better Business Bureau or state licensing department. The banking department of each state will have a list of all the accredited agencies in that state.
If you're struggling with debt, don't wait too long before asking for help. "Unfortunately, many consumers come to us too late and we have to recommend they speak with a bankruptcy attorney,"
5 balance transfer trip-ups
Transferring a high-interest balance to a card with a low rate can save a bundle of cash and speed up your path to debt freedom. But, be careful. The rules are different for each card.
5 balance transfer trip-ups
1. Check the time limit carefully.
2. Know what zero interest covers.
3. Beware of hefty fees.
4. Watch out for bait-and-switch.
5. Always pay on time.
1. Check the time limit carefully.
Most offers last only six or nine months, then revert to a more traditional rate, usually around 16 percent. If it's not clear what rate the card will eventually charge, call and ask. Use this work sheet to keep track of what the companies tell you.
2. Know what the zero or low interest really covers.
Many cards charge the low rate only for balances transferred from other cards. Sounds like a good deal. And it is -- if you remember that new purchases on these types of cards will be charged at a higher interest rate. What's more, the credit card company will apply all of your payments to the zero or low-rate balances first, until they are paid off. That means your new purchases will continue to revolve on the card and rack up interest costs. Of course, if you know that's how it works, you simply never use the card for new purchases. Instead use it as a smart way to lower the cost of your outstanding debt. Other cards work the opposite way, applying the zero or low interest only to new purchases. If you don't realize this you can end up paying full interest on your existing debt plus the transfer fee. Best to avoid balance transfers on these cards,
3. Beware of hefty fees.
Most cards charge a certain percentage when you transfer a balance from another card, usually about 4 percent, with a cap of $25 or $50. But, more and more cards are eliminating the cap. So, if you transfer, say, $5,000, you'll pay a $200 fee. Worse, some cards count the fee as a new purchase and charge the higher rate on that part of your balance. You want to only consider cards that have a cap on their transfer fees.
4. Watch out for bait-and-switch.
Just because you applied for zero percent doesn't mean you'll get it. Credit card companies will sometimes issue you the card but assign a higher rate if your credit score is low. Most people don't realize this has happened until they get their first statements. Be sure to read the agreement of terms that comes with your card carefully before you transfer a balance or make a purchase.
5. Always pay on time.
That zero rate will disappear the minute you're late. You'll end up paying the full rate that the card converts to immediately. Another late payment and your rate might be bumped as high as 30 percent.