Tips for removing the vicious circle of debt
* Don’t consider debt consolidation or consumer credit counseling agencies your first stop. These should be a last resort! Although they may be tempting, if you’re going to get your act together, doing it on your own will help you learn the skills you need to fix your own problem and avoid getting in this situation again.
* If creditors are hounding you, and you have grown fearful of answering your phone or reading your mail, stop and take a deep breath. You are okay. You will be okay. Now, take another deep breath and call them. Better yet, write them. If the company ever decides to take you to court, you will have proof that you are trying to pay off your debts. Most creditors want to work with you and figure out a way to get things sorted out. When you take the initiative to call and explain yourself, you may find them willing to help and may find they offer you terms that can help you get the debt back under control.
* Contact your credit card companies. Ask each credit card company for help. They aren’t likely to forgive you your loan, but they may be willing to reduce your interest rate. If your interest rate is currently 12% or more, ask if they would be willing to cut their rate in half. Why would they consider doing this? Well, creditors do not want you to default on your loan and they want their principal back. Sure, a nice fat interest charge would be ideal too, but if they sense you are ready to default on your loan, you can expect that a lower rate will be offered instead.
* Consider a debt consolidation loan. You can pull all of your debt together into one account, preferably one featuring a fixed, low interest rate. You can use the proceeds from the loan to pay back your other creditors and then make monthly payments back to the loan consolidator.
* Home refinancing. Refinancing your loan may be just the debt reduction help you need as the funds saved by you each month with lower mortgage payments could be used to pay off other debt. Caution: you are placing your home “at risk” if you opt for this choice.
* Visit a credit counselor. There are credit counseling companies who help consumers by offering debt reduction plans to tackle debt. Essentially the way this works is that you will meet with an adviser and lay out a plan to repay your loans. The counselor will negotiate with lenders on your behalf for the lower rate which, in turn, will reduce your monthly payments as well as keep your credit rating intact. Credit counselors work for private companies as well as for government agencies or nonprofit firms. Be careful: a lot of what these people do you can do on your own. Read the fine print to make sure you understand any fees involved; make sure that your credit rating is not adversely affected too.
* Credit counseling is all about you and your financial situation. When it’s your dollars at stake make sure to ask the credit counseling organization about what type of customer service they provide. Credit counseling organizations should have someone available for you to talk to during all business hours of the day. Be leery of a credit counseling organization that requires you to leave a message in order to speak to customer service. This can be a sign that the credit counseling organization is shorthanded and having difficulty keeping up with their clients’ needs. Be sure to ask about counseling fees and the type of management and education programs they have in place.
* Pay yourself first. Many people in debt put their creditors first and themselves last. Create a budget category for a “contingency fund” to help create a cushion for yourself for spending. The wise owl articles you’ll read will say this cushion should have 3-6 months of expenses in it. Don’t get overwhelmed by this. Setting aside something, anything, for unexpected expenses (i.e. transmission replacement for your car) is a great start.
* Can you earn more? Most people can figure out a way to bring in more income relatively painlessly. Do you have a skill or a hobby from which you could earn some income? If so, this money could be put directly toward debt, and might build an entirely new stream of income potential for you over time.
* If you truly feel you need support, consider joining a local group of Debtors Anonymous. Debtors Anonymous is a 12-step program for people who have trouble with debt and spending and can be a source of great support and inspiration for you if money management is a habitual problem in your life. See the links below.
* Use cash as much as possible. Paying with cash has a more significant psychological impact than plastic. It feels like you’re spending more money so you spend less.
* When paying down debt, pay minimum payments on everything but the bill with the smallest payoff. Once that is paid off, move to the next smaller bill. This is another psychological “trick”. It will keep you working your plan because you see progress.
* Remember: Minimum payments lead to the maximum amount of money paid over time. Paying more than the minimum applies more money to the balance, which decreases the amount of money you will end up paying overall. Note that some creditors frown on this practice.
* Realize that Credit Card companies are not your friend. They WANT you to remain in debt paying a minimum payment on their credit cards every month for THE REST OF YOUR LIFE! (They list your credit card payments to them as one of their assets.) So you should pay off your debt to each of them and then after waiting a couple of months (without using their card again) seriously consider closing that account. It is much more to your advantage to use a debit card issued by your checking account’s bank. That way you can still use the convenience of “plastic” for purchases, but the money is deducted from your checking account and you avoid any more debt. And by closing your credit card account a couple of months after paying it off, you’ll keep a good listing on your credit report for it.