New Year's Resolution: Avoid a Personal Debt Crisis in 2008
If there is one thing we learned from the mortgage crisis of 2007, it is that debt has consequences. If used incorrectly, debt can be painful for both the lender and the person with the loan. If you have debt, especially credit card debt, then you have the potential for a credit crisis. Here are some consumer tips to help reduce your debt in 2008.
1. If you have debt, realize that it took you a while to get into debt, and it will probably take you longer to get out. Do not get discouraged, no matter how much you can pay off or how long it takes. Being debt-free is worth the effort.
2. Get a clear picture of your debt. It is easy to simply pay the minimum balance on each bill without knowing exactly how much you owe. Collect all of your bills with outstanding debts including all credit cards, mortgage, student loans, auto loans, personal loans, and bank loans. Create a summary sheet that lists the creditor, monthly payment, balance, interest rate, and credit limit for each. List the status of each account, if any bills are past due, and verify the payment due dates.
3. Prioritize which bills to pay first. If money is short and you have to make choices about what to pay, first pay the bills that are a necessity for health, shelter, basic groceries, and basic transportation. Then pay the secured loans such as your car loan. Since credit cards are unsecured, they should come last.
4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. You can shop around for a mortgage or credit card with a lower rate, but start with your lender to ask
for a lower rate. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be able to help you work out a payment plan, lower your rate, or lower your monthly payment. It is better business for them to have you keep paying your debt and interest payments, and avoid bankruptcy and foreclosure.
If the first person you speak with can't help lower your rate or make adjustments to your account, ask to speak with a supervisor or someone who can. Persistence may be
necessary to find the person who can or will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. Document all conversations, including whom you spoke with, and the date, time, and the results.
5. If you have multiple credit cards with outstanding balances, focus on paying off the card with the highest interest rate first. If your rate is above 10%, transfer the balance for that card to one that offers 0% for 12 months for balance transfers. If you get the 0% for 12 months, this is a great opportunity to pay down your balance. To take full advantage of this 0% interest, pay as much as you can
above the monthly minimum.
You must be diligent about paying this on time. A late payment can immediately increase your rate to the default rate. Most cards charge a balance transfer fee of 3%; pick one that has a cap on the balance transfer fee. The amount you save on interest payments should more than offset the fee. Since the purchase APR may be higher, do not even put the card in your wallet; simply use it to pay off your
balance. Continue to pay the minimum on your other cards until the highest rate is paid off, then focus your effort on the card next in line.
6. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothes, entertainment and things that are long gone. If you use cash, you will not only save money on interest, but also reduce the amount you spend.
7. Pay more than the minimum payment for your loans, especially credit cards. Credit card issuers set the minimum payment at approximately 2% of your balance. This makes the payment smaller, but almost impossible to pay off the balance, so try to add at least $10 to your minimum payment. Here is an example of the benefits of paying more than your minimum balance: assume you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum payment of 2% each month, it will take 346 months to pay off the balance and will cost $7,696 in interest. If you
pay 5% of your balance each month, it will take 109 months to pay and cost $1,579 in interest.
8. If you are surprised by your current rates, check your credit report. It may contain an error that is creating a higher credit score and higher interest rates for you. If you find an error on your credit report, contact the credit bureau to report it. They must respond to your claim in thirty days or remove the information that is incorrect or can't be verified. You can make your dispute by mail, telephone, or online. If the corrected error results in a higher credit score, contact your creditors to make sure they know about your improved score, and ask for a lower interest rate.
1. If you have debt, realize that it took you a while to get into debt, and it will probably take you longer to get out. Do not get discouraged, no matter how much you can pay off or how long it takes. Being debt-free is worth the effort.
2. Get a clear picture of your debt. It is easy to simply pay the minimum balance on each bill without knowing exactly how much you owe. Collect all of your bills with outstanding debts including all credit cards, mortgage, student loans, auto loans, personal loans, and bank loans. Create a summary sheet that lists the creditor, monthly payment, balance, interest rate, and credit limit for each. List the status of each account, if any bills are past due, and verify the payment due dates.
3. Prioritize which bills to pay first. If money is short and you have to make choices about what to pay, first pay the bills that are a necessity for health, shelter, basic groceries, and basic transportation. Then pay the secured loans such as your car loan. Since credit cards are unsecured, they should come last.
4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. You can shop around for a mortgage or credit card with a lower rate, but start with your lender to ask
for a lower rate. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be able to help you work out a payment plan, lower your rate, or lower your monthly payment. It is better business for them to have you keep paying your debt and interest payments, and avoid bankruptcy and foreclosure.
If the first person you speak with can't help lower your rate or make adjustments to your account, ask to speak with a supervisor or someone who can. Persistence may be
necessary to find the person who can or will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. Document all conversations, including whom you spoke with, and the date, time, and the results.
5. If you have multiple credit cards with outstanding balances, focus on paying off the card with the highest interest rate first. If your rate is above 10%, transfer the balance for that card to one that offers 0% for 12 months for balance transfers. If you get the 0% for 12 months, this is a great opportunity to pay down your balance. To take full advantage of this 0% interest, pay as much as you can
above the monthly minimum.
You must be diligent about paying this on time. A late payment can immediately increase your rate to the default rate. Most cards charge a balance transfer fee of 3%; pick one that has a cap on the balance transfer fee. The amount you save on interest payments should more than offset the fee. Since the purchase APR may be higher, do not even put the card in your wallet; simply use it to pay off your
balance. Continue to pay the minimum on your other cards until the highest rate is paid off, then focus your effort on the card next in line.
6. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothes, entertainment and things that are long gone. If you use cash, you will not only save money on interest, but also reduce the amount you spend.
7. Pay more than the minimum payment for your loans, especially credit cards. Credit card issuers set the minimum payment at approximately 2% of your balance. This makes the payment smaller, but almost impossible to pay off the balance, so try to add at least $10 to your minimum payment. Here is an example of the benefits of paying more than your minimum balance: assume you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum payment of 2% each month, it will take 346 months to pay off the balance and will cost $7,696 in interest. If you
pay 5% of your balance each month, it will take 109 months to pay and cost $1,579 in interest.
8. If you are surprised by your current rates, check your credit report. It may contain an error that is creating a higher credit score and higher interest rates for you. If you find an error on your credit report, contact the credit bureau to report it. They must respond to your claim in thirty days or remove the information that is incorrect or can't be verified. You can make your dispute by mail, telephone, or online. If the corrected error results in a higher credit score, contact your creditors to make sure they know about your improved score, and ask for a lower interest rate.
Posted by Lynn at
6:44 PM
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