How Do You Get Out of Debt?
In Shakespear's "Hamlet," Polonius tells his son, Laertes: "Neither a borrower nor a lender be." It's sound advice that most Americans don't heed. Christine Romans, CNN Money correspondent and author of "Smart Is the New Rich" notes that "Nearly 37 percent of Americans carry more than $10,000 in non-mortgage debt." If this sounds like you, don't despair; with a solid plan and a commitment to change, you can get out of debt.
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Stop Spending Today
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This sounds like obvious advice, but when you see that new pair of shoes, or crave another $6 latte, it's all too easy to tell yourself that you'll start being fiscally responsible tomorrow. If you're using your credit card to fund that purchase, you're just adding to your debt. Christine Romans says, "If you can't afford it, put it down. Don't put it on a credit card." If you have cash to spend, use it to pay down debt.
Save Money in Interest Charges
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One approach to reducing credit card or installment loan debt is to choose the account with the highest interest rate and pay it off first. The benefit of this plan is that more of your money ends up going toward debt and less goes to interest charges. However, if the account has a high balance, it could take you several months (or years) to pay off the account, and it may seem as if you're not making much progress toward getting out of debt.
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Start Small for Instant Gratification
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Another approach is to choose the account with the smallest balance and pay it off first. Then, take the amount you previously paid on that account each month and add it to the next-highest account. This approach has an emotional benefit because you'll see positive results quickly. A small success can give you the motivation to continue your debt reduction plan.
The drawback to quickly paying off a smaller account is that you may be tempted to use the credit again once it is available. For this approach to work best, it's important to apply that previous payment to the next-highest account; otherwise you won't be reducing your debt as quickly as you could.
Student Loans
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If you're on a 20-year repayment plan, switch to a 10-year plan if you can afford it; you'll save in interest charges. David Bach, author of "Debt Free for Life," gives an example of two students, each owing $25,000. The student on a 10-year plan will pay $9,524.14 in interest; the student with a 20-year plan will pay $20,801.70 in interest.
Look into loan forgiveness plans. Some plans offer loan forgiveness if you work for the federal government in certain sectors for 10 years and make 120 student loan payments. Some states offer programs as well.
Nonprofit Credit Counseling
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These agencies can give you advice, help you create a budget and may be able to set up a debt-management plan. Credit counselors can negotiate with creditors to lower your interest rates and stop them from charging fees such as over-the-limit and membership fees. Some counseling services have fees, but they should be nominal.
Beware of Debt-Settlement Companies
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These companies offer to negotiate a settlement with each of your creditors. They take a single payment from you every month, and pay each creditor out of that money, minus their fees. Many of these companies fail to make payments on time, or simply take your money and don't make payments at all. Christine Romans writes, "The Government Accountability Office says its undercover investigation of these companies found scams galore---fraudulent, deceptive and abusive practices that pose a serious risk to consumers." Contact individual creditors yourself and ask to negotiate your balance or interest rate.
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References
- Photo Credit three credit cards image by Aleksandr Ugorenkov from Fotolia.com
