Credit Crunch: Top 7 Ways To Get Out Of Debt Now
What do you do when you max out on your credit and suddenly realize you're in trouble? You're not alone in this situation as countless millions of people are finding themselves in big financial trouble in the middle of this recession. Financial planners often say it takes pain to prick people into action.
You can dig out of debt faster than you think, if you attack it in an organized way. Here's a seven-step rehabilitation program:
- List each and every one of your borrowing accounts, including what you owe, the minimum payment to be made each month, the gross interest rate, and the rate after-tax (the interest on home equity loans, mortgages, and certain loans against securities is tax deductible if you itemize on your returns, but not the interest on other loans). Then total it all up.
- Restructure your entire borrowings, with the specific goal of reducing interest. You can move around credit card balances to credit cards that carry no annual fee or have a lower rate of interest. You can even consolidate alll of your consumer loans on a single loan from a credit union or get a home-equity line of credit. However, you have to be careful that you don't just go out and ring up your credit cards from zero again.
- Reduce your loan balances if you can. For example, have a big garage sale and use all the income to pay down your debt. Sell off a few shares of stock you may have. Use your savings, (hopefully you have some). It's smarter to cut debt than to hoard money in a savings account. (But keep adding to your individual retirement account at work, because those contributions lower your taxes.)
- Pay the monthly minimum payments on your lowest-rate loans, while applying the rest of your available money at the loan which carries the highest rate. The faster you kill off highest rate borrowings, the faster your overall financial burden will diminish.
- Increase your debt-reduction budget every month even if it has to be only by a fairly tiny amount. Say you owe $6,000 at 18 percent interest, and you are dutifully paying the monthly minimum: $120 a month. It will take you over 60 years to get out of debt. If you add just $30 to your payments, you'll be out of debt in just 5 years and save over $11,000 in interest.
- Continue to pay the identical amount each and every month, even though your borrowing balance decreases. As soon as you have eliminated the highest-rate loan, start paying on the next highest loan, while still contributing the same non-varying amount.
- Work your way down this list of borrowings all the way to the bottom. To be successful, you have to take pleasure in the process. Affix your payment schedule on your bathroom mirror and check off each one every morning. Or give yourself a monthly treat for staying on the wagon.
If your debt is too big to handle by yourself, a local office of a credit counselling service can negotiate with your creditors to lower payments. You don't have to wait until it hurts to reduce your debt. Instead, train yourself not to borrow anymore. Say to yourself, "Today, I am not going to put down a charge card for anything." When you buy something, pay cash, use a debit card, or write a check. Tomorrow, say the same thing: "I am not going to put down a charge card for anything." Take it slowly, one day at a time. It's like giving up smoking. You'll be nervous at first; you won't see how it's possible to live... you'll suffer relapses and sneak a debt or two. But when you get up every morning, renew your pledge. Check off each successful day on your calendar.
To make it easier, quit carrying credit cards. If you have to use cards for business purposes, deduct each expenditure from your check register, just as if you had written a check, and pay the full debt at the end of each month.
Of course, no borrowing reduction program will work if your overall spending continues to be out of control. When discussing budget matters with your spouse, neither of you should suggest a spending cut for the other. Instead, match each other's suggestions. If you agree to save, say, $40 a week on clothes, your spouse should find a specific $40 they can cut from their personal budget. Get your children to stop asking for stuff, not by scaring them into thinking you're broke but by talking about the value of improving your financial position.
For hard-core spendaholics: Freeze your credit cards in a block of ice. Then, when you get desperate and you're standing at the sink running hot water over the block, you'll have plenty of time to reflect on your financial priorities.