Debt. At some point in our lives everyone has it in one form or another be it a student loan, a mortgage, an auto loan or a credit card. What many don't understand is that debt does not have to be the evil four-letter word that causes sleepless nights and generates countless arguments. It can be managed. You can control it. And yesif you are suffering from an overwhelming amount of debt, you can get out from under the weight and eliminate the stress it causes.
For many, debt has become a juggling act. Payments are made regularly without late or over-limit fees being tacked on, interest rates could be better but are not outrageous, income is stable and everything appears to be working just fine. Except for one tiny problemthe debt never seems to disappear.
Whether you turn on the television, open the newspaper or browse on the internet, you are bound to run into a "get-out-of-debt-fast" tagline that promises you fast results with little to no work on your end. Some of these advertisements promise relief through filing bankruptcy. Some offer a debt management solution granting you one monthly payment with reduced interest rates getting you out of debt in five years or less. Still others urge you to obtain a low interest loan (often a home equity loan) to pay off the higher interest rate credit cards thereby securing otherwise unsecured debt.
All of these examples are valid and effective in eliminating debt within a short period of time reducing the overall cost in interest rates and fees given a certain set of variables. One thing to remember is that there is no "cookie-cutter" solution to debt. What works well for one may be a tragedy for another. Before making any decision it is best to err on the side of caution.
It goes without saying that the first step is to stop using credit. Cut up your cards, lock them in a drawer, forget that you even have them. For travel arrangements, rental agencies and hotels often require a credit card for reservations but when the time comes to pay the bill, I have yet to go anywhere that doesn't accept cash.
Know where you stand with your credit. This can be done by obtaining your credit reports from the three credit bureaus: Equifax, Experian and Trans Union. Not every creditor uses the same reporting bureau so it is important to obtain all three. Ordering is easy and free once every 12 months. For more information on how to obtain your free reports you may visit the FTC's website: http://www.ftc.gov/freereports . Once received, review each report and verify its accuracy.
The next step is crucial and often dismissed as unnecessary. Whereas some view it as unessential, it is the most vital step in becoming debt free regardless of your final solution (i.e. bankruptcy, self management, etc.). Simply put, establish a monthly budget.
By establishing a monthly budget you are looking at a snap shot of your spending on one page. Determine how much money is coming in from all sources and how much is going out. Itemize your mandatory expenses (rent/mortgage, utilities, etc.) and your discretionary expenses (entertainment, beverages, etc). Try to think of everything spent throughout the year: vacations, gifts given, school activities. These may be quarterly or semi-annual but it is important to pro-rate them into a monthly figure. Remember you won't have credit cards to use when these expenses come up so it will be essential to start saving monthly to cover them when they do. You don't have to be precise. Estimates are fine and if you forget something it is okay. You really just need to see where the money is going.
There are some great templates online to help you in establishing your budget. Remember this is a tool to help you determine your spending habits and not an excuse to place blame on yourself or another family member!
Once complete, subtract your expenses from your income. If you have a surplus and your expenses are as accurate as can be then you have nothing to worry about. If you are in the red (spending more than you earn), don't panic! Often a few simple cutbacks in spending can eliminate most of the shortage. For example bringing coffee from home instead of buying it on the way to work can save you bundles. Even if the cost is only three dollars a day that adds up to $720 per year!
If your expenses severely exceed your income and increasing your income is not an option then you should seek professional help and speak with a certified credit counselor. Choosing a non-profit agency will insure free counseling with no obligation to join a debt management program. They are better equipped at analyzing your budget and coming up with solutions that will best serve you. On the other hand, if you are able to get your shortage within reason without taking every avenue of enjoyment out of your life (you do need some amenities), then self-management may be a good solution for you.
Assuming your income is sufficient to self-manage your accounts, the next step you should take is to gather your most recent credit card statements. Organize them by interest rate over balance. Your priority will be to pay off the higher interest rate cards first. If you are in good standing with your creditor, call them and ask to lower your interest rate. The worst thing they will say is no so you have nothing to lose.
The majority of creditors ask for a very small percentage of your balance which barely covers the interest they charge you monthly. Since you have already analyzed your budget, you are in a better position to determine if you are able to pay more per month. If not, don't worry. You will still be able to get out of debt fast by following the next simple step.
Write down the amount you are able to pay monthly per credit card without putting a strain on your finances while still paying the minimum due. Pay this amount each and every month without fail! As the balance on your account decreases, the creditor will reduce your minimum monthly payment requirement. Do NOT reduce your monthly payment to them! Continue to pay the same amount each month until the balance is paid off. When your first creditor is paid off, use that money to increase the payment to another higher interest rate creditor. Continue until they are all down to zero.
(Ex: Assume you have four credit cards and are paying $25 per account totaling $100 per month. Within six months one credit card is paid in full. Increase payment to another creditor to $50 continuing the same $25 on the other two. Your total monthly payment is still $100 per month.)
This same concept can be used for installment loans in reducing the overall time for repayment. When paying extra on these accounts, it is imperative to specify where the additional money should go (principle).
Set backs will happen but the important thing to remember is not to lose hope. You can get out from under the debt. And when you do, continue to pay that monthly amountto yourself!