Many times I talk with people and they don’t feel having debt is a problem. Actually, not having debt seems like the oddity to them, and whenever they plan a new project or have an emergency come up, using credit just seems like the normal thing to do.
I want you to know that getting out of debt is possible AND a great idea. Money you are using toward debt are funds you could be using for things you need today or setting aside for other goals. Also you are paying off today things you bought years ago, with interest. That’s crazy! Let’s take a look at a credit card with $2,957 balance for example. The rate on this card is 25.99% and minimum payment is $96.00. Paying the minimum payment on this card (meaning your payment goes down as the balance comes down) will take 12 years to pay off the card and will be around as long as the family pet! The payback will be $7574, which is $4617 in interest! That’s over 2 and a half times the original balance. And that’s just one card. Many people I talk to have multiple cards, and with balances much higher than that.
Debt in itself is not evil, however it becomes a problem when you don’t have a plan to get it paid off or you begin relying on credit for everyday expenses like food and gas. The first thing that needs to change is your mindset though. If you have gotten comfortable with having debt and don’t see a problem with it, you need to work on your way of thinking before you can get serious about paying it off. Let’s talk about options how to turn this around.
1. First take a look at what basic bills and expenses average per month. Rent or mortgage, utilities, food, gas and car insurance. In food, I would also include pet expenses, cleaning supplies, toiletries, etc. So take your monthly net income minus that total for basics. That is how much is left for everything else. Also make sure you begin an emergency fund, and put something into it every two weeks as an automatic deduction, even if it’s $20 per pay. Now you find out what left towards debt and any discretionary spending.
2. If there’s enough to pay all your debt payments you can do that and just put them away, or close the accounts you won’t use again. Don’t worry about what it may do to your credit score. If you really want to get out of debt, don’t plan on applying for anything in the near future. Your credit score is really a “lender score”. If you’re serious about getting out of debt, just put blinders on and go. Once the smallest debt is paid off, add that payment money to someone else, either next smallest or highest interest rate. You can check out www.powerpay.org for a free debt snowball plan. You can print a calendar to follow and it will show you how the save the most time and money.
3. If there is not enough money to pay the debt as it is, you need to consider other options. Maybe a non-profit Debt Management Company can help reduce the payment. It is a 3 to 5 year plan to become debt free and they can usually get the credit card companies to bring down interest rates and payments, although someone that has really low interest rates are not always helped by this plan. Their contact info is NFCC (www.nfcc.org) 800-388-2227. Other things to consider are debt consolidation loans, or refinancing a house or taking a home equity loan. *If you do a debt consolidation loan, close out all the cards except one and make sure you opt out of new credit card offers. If you build up new debt while you still have the loan, you will dig yourself into a hole you may not be able to get out of. The only way to be financially free is to spend less than you make, and set aside funds for reasons you typically would use credit for- repairs, traveling and gifts are the biggest budget busters. Start a Christmas club, emergency fund, home and car repair fund and vacation club and you will be off to a great start.
To opt out of Credit Card offers: Call toll-free 1-888-5-OPT–OUT (1-888-567-8688) or visit www.optoutprescreen.com.
4. If you can’t consolidate with a loan (like you are getting denied by lenders) and the payment with a non-profit Debt program in unaffordable this is when you consider other options that are more difficult. You can talk with a bankruptcy attorney if you are unable to pay the debt back, or need protection against law suits, garnishments or defaulting. Another strategy if you have been unable to pay is to offer a settlement. This works great with a tax refund or a windfall of money, such as a bonus. I recommend AVOIDING debt settlement companies (such as Freedom Debt Relief) because they charge high fees, and do not start settling for a year and a half to 2 years. The funds you are paying are going towards the majority of the fees the first year or two.
The best way to turn this around is to act before you have a problem. Take a look at spending and see where you can make reductions, such as trimming eating out, stopping subscriptions and automatic payments for things you don’t use or could go without. Look at insurance plans, phone, cable and internet rates and shop around to see if you can save anything by switching to another provider. Free up expenses to start paying off debt and pay more if you are able. Pay things off with a tax refund, but always put some into your savings too, so you have some funds to fall back on if needed. Take on a second job, rent out a room or find ways to make extra income if needed. You have the power to fix this and I know you can do it.
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