Make Reducing Debt Your New Year's Resolution
It's a Lot Easier than Losing Weight
Getting into debt is a lot like gaining weight. The culprit is usually not one big splurge. Sometimes, it happens for the best of reasons, like buying a home or paying for college. And sometimes it happens for the worst of reasons, like losing your job or a serious illness. Add on a series of excesses – big and small – and all of a sudden, you’re carrying too much of a load.
1. Make sure your debt diet doesn’t leave you feeling deprived. Hopefully, you don’t have to cut back on your spending to such an extent that it hurts. In fact, penny pinching just a few dollars a month can make a huge difference.
For example, say you owe $10,000 on a credit card. If you only send in the required payments, it could take you 50 years to pay it off -- at a total cost of $33,447. But if you squirrel away a measly quarter a day, and send in the $7.50 that accumulates every month on top of your minimum payment, you’ll save $5,970 and 20 years of payments. (Make sure to send in your required payment as well!)
Important: Don’t put yourself on a “starvation diet,” or you may quit. But do earmark all the money you penny pinch to pay down your debts. A dollar a day will save more than $12,000 on our sample bill above.
Pee-Wee Pre-Payments on a $10,000 Credit Card Bill at 17%
Chances are, there are lots of painless ways you can cut back a wee bit. The more you send in, the more you’ll save. For example, if you send in an additional $100 a month on this $10,000 bill, you’ll save $18,237 and over 43 years of payments. You can start by simply pooling the pocket change that every member of the family has every day.
2. Kick it up a notch. After you’ve savored the victory of some “painless penny pinching,” most personal finance experts will tell you to get more serious about paring expenses by creating a written spending plan. Most people hate the dreaded word “budget” , even if it is exactly what they need. Click here if you want to create your own spending plan .
Important: If the idea of creating a budget makes you dizzy, don’t do it – and don’t let it derail your debt-defying resolution. Hopefully, seeing the benefits of penny pinching will make you motivated enough to think about how much could you save if you:
Use all the money you save to get yourself out from under. To save the most, send in as much as you can on the debt with the highest rate – usually a credit card. Once that plastic monster has been tamed, transfer those extra payments to the next highest rate debt, probably another credit card. Then start paying off your car, college loan, or mortgage.
3. Know Yourself. There’s more to think about when you develop your own debt diet than just saving the most money. If you’d feel better knowing the roof over your head was actually yours, start by pre-paying as much as you can on your mortgage. True, you won’t save as much at 6% as you would at 17%, but peace of mind is worth a lot, too. And chances are you owe a lot more on your home loan than you do on a credit card. At least I sure hope that’s true!
If immediate gratification will help keep you motivated to stay on your debt diet, pay off a bill with the lowest balance. If you would be more likely to succeed if you were paying off your mortgage, do that. Your savings will be significant no matter what you choose. For example, say you have a $150,000, 30-year mortgage at 6%. If you pre-pay $25 with every mortgage payment, you’ll save $14,606. $100 a month will save you $45,586 and $200 a month will save you $71,062!
Or maybe you want to do both – pay down your mortgage and your credit cards at the same time. Great! Go for it! Do whatever is most likely to help you keep your New Year’s resolution. The most important thing is to develop your own unique debt-busting plan. While you’ll save the most money by paying your most expensive debts first, the strategy you develop has to be one you believe in enough to stick with over the long haul. So tailor a payoff plan to fit your personality, and give yourself a little break when you need one.
Nobody’s perfect. Life will get in the way of your plans from time to time. You may overspend, or financial emergencies may appear out of nowhere. When setbacks happen, feel free to complain for a day. Then get yourself back on the debt reduction track as soon as you can.
4. Give your fingers a little workout to save big bucks. Get your credit card issuers to do some of the heavy lifting by lowering the interest rate and removing annual fees. Call customer service for your cards, and say your version of:
If you’ve been paying your bills on time, the answer will probably be “Yes!” You don’t have anything to lose, and you will not gain anything by not asking. Lenders realize that it is harder to get a new customer than it is to keep an old one. Still, you may need to assert yourself a little by asking for a supervisor.
You want to move as much of your debt as possible to lower rate cards, so also ask about balance transfers. Be sure to find out if there’d be any fees and what the interest rate would be. (Read more about debt consolidation below.)
5. Leave home without them! Studies show that people tend to spend more when they can put their purchases on plastic. Does that sound like you? If so, send your credit cards away for a nice, long vacation -- perhaps into a locked desk drawer. If the temptation is too great, freeze them in a block of ice. There are only a few true emergencies in your day-to-day life that necessitate your carrying a credit card “just in case.” You’ll be amazed – and delighted – by how much impulse buying you avoid if you can’t say, “Charge it.” Again, use all the money you save to pay down your debts.
6. Find out what kind of shape you’re in. Once you’ve shed an annual fee or two and lightened your interest rate by a few points, see if you can get the interest rate lowered on all of your debts. How low you can go depends on your credit report, so take advantage of the free credit report you can get once a year from each of the three major credit reporting agencies: Experian, TransUnion, and Equifax.
When your credit report arrives, take a hard look — but don’t be surprised by what you see. In almost eight out of ten reports, there’s some type of error. A quarter of reports include errors that are so serious that you might be denied credit. So the first thing to do is look for mistakes. Credit.com makes it easy for you to spot mistakes and get them fixed.
7. Find out how you score at the “Ratings Game.” Lenders decide how risky we’ll be as borrowers based upon credit scores, which compare what people who pay their bills on time have in common with each other, and what people who don’t pay on time have in common. Depending upon our credit scores, we may be rejected outright, charged higher interest … or maybe approved for a great rate.
Even if you’re a model bill payer and you find no errors on your credit report, there may be problems lurking that will make it harder for you to consolidate your debts at a lower rate. For example, if you’re spending more than 36% of your gross income on credit card bills and installment loans, your application could be denied. Similarly, carrying a balance close to your credit limits — even if you’ve never gone up past 50% — makes potential lenders nervous. And naturally, a record of late payments and other delinquencies will hurt your chances for low cost credit. You can improve your credit score over time. Read how here .
8. How low can you go? A card with a zero percent introductory rate is possible, but may not be reachable. For example, if you’ve had some hard financial times in the past, and you can’t get your current card issuers to budge below 19.8%, it’s unlikely that you’ll be approved for a card at 6.9%. The key is finding your best deal, and then taking advantage of it by consolidating your debts so you get the lowest rate possible.
There’s a dizzying array of credit card choices out there, ranging from the card offers that arrive in your mailbox to those you see advertised online or on television. It’s hard to know how to compare credit cards, so turn to reputable sources for help winnowing down your options:
9. Beware of Santa Claus scenarios, but do investigate your other debt consolidation options. If you’re a homeowner, someone may suggest that further mortgaging the roof over your head is a great way to get out of debt. While home equity loans can get you a much lower rate and perhaps some tax deductions, they can be very dangerous, especially if you’re in credit trouble. Believing that a simple call to an 800 number can “cut your payments in half” has buried many homeowners deeper in debt than ever and has put their houses on the foreclosure line.
You may have more debt consolidation options than you realize. For example, do you have money sitting in a savings account earning you next to nothing? You might be much better off using that money to pay down your debts, since credit card users regularly pay five to six times more on their cards than they earn on their savings accounts. Plus, they have to pay taxes on those savings!
Can you borrow from family or friends at a lower rate? Only consider this if you know you’ll honor the debt! You might also want to consider borrowing against your 401(k), stocks, or life insurance policy. While you don’t want to totally rob your nest egg or leave your family in the lurch, you could cut your interest rate significantly.
In a true emergency (not for a meal out or a new sweater), you could always defrost a credit card!
10. Don’t ignore any financial crises that crop up. If an unexpected problem puts you in a cash crunch – medical emergency, unemployment, etc. – be sure to let your creditors know. Most companies would much rather work out a revised payment schedule than turn your account over to a collection agency. Click here for step-by-step instructions.
For help in budgeting or negotiating with creditors, consider a non-profit credit-counseling agency. Find a local affiliate of the National Foundation for Credit Counseling . And if you’d like ongoing support, consider joining Debtors Anonymous , which sponsors groups based upon the Alcoholics Anonymous 12-step program.
Even if you’re not in serious trouble, there’s a lot to be said for getting some support. A friend or relative can become your “money buddy,” who monitors your progress and helps you stay on track. You may want to talk to your minister about programs through your house of worship and/or join Debtor’s Anonymous.
12. Look for ways to generate more income. Can you work some extra hours or get a part-time job? Do you have a skill that you could freelance or use to start a small side business? How about selling things you no longer want at flea markets, tag sales, or even on eBay? Earmark all your extra earnings toward reducing your debt. You’ll get out of the red much faster.
However you pursue your debt busting diet, get going! By investing as much as you can in reducing your debts, you’ll end up with the most money, the greatest peace of mind, and the largest number of options for how you spend your time -- and your newfound wealth. Remember: The rewards of carrying less debt are as great for your well-being as the rewards of carrying less weight are for you health. So stick to it!
A high credit score often equals savings on loans and credit cards.
/life of loan
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