Dealing with Your Personal Debt
Dealing with Your Personal Debt
2008 was not a good year for banks and credit card issuers. Bad loans and a turbulent economy created financial trouble that was passed along to consumers. For many cardholders, even those with good credit, this meant interest rate increases and credit limit decreases.
"These problems won't magically solve themselves with the start of a new year. We expect the rate and credit limit issues to continue to be problems for cardholders, especially as issuers are forced to deal with implementing the regulations that were just approved by the Federal Reserve," says Bill Hardekopf, CEO of LowCards.com. "The only way to protect yourself against higher rates and lower limits is to pay off your credit card debt."
Here are some consumer tips to reducing your personal debt in 2009:
1. Realize that paying off debt won't be easy, but it is one of the best commitments you can make to yourself and your family. Debt is a growing burden that causes anxiety and stresses in relationships. 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.
2. Start by taking a look at how much you owe. It is easy to just pay the minimum balance for each loan without looking at the total amount due and how long it will take to pay it off, but this "ignoring reality" philosophy will chain you to your debt for a very long time. Collect each 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. This debt summary may be overwhelming, so prioritize which bills to pay first. If money is short and you can't pay all of your monthly bills, 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. Payments on unsecured loans, such as most credit cards, 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. Start with your lender to ask for a lower rate. Then shop around for a mortgage or credit card with 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. Loan defaults and foreclosures are a costly and growing problem for banks. In the past year, they have become more helpful and open to working out payment plans to keep you paying something toward your debt.
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. Continue to pay the minimum on your other cards until the card with the highest rate is paid off, then focus your effort on the card next in line. Don't close all cards that you pay off. Keep your oldest cards open and occasionally use them to buy a magazine--just pay it off each month. This will help improve your credit score.
6. Pay more than your minimum payment. Your minimum payment is usually only 2-3% of your balance. At this rate, it will take you many years to pay off your debt. Pick your card to pay off and try to double the 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 113 months to pay and cost $1,974 in interest.
7. Check into transferring your balance to a lower rate card. If your rate is above 10%, it could pay off to transfer the balance for that card to one that offers 0% for 12 months for balance transfers. If you get 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. Be aware that credit limits are shrinking and you may receive a smaller credit limit for your balance transfer. Only use this card for paying down your balance, not additional purchases.
The terms of balance transfers aren't as generous as they used to be. Some cards now base the length of the intro period on your credit score. Most cards charge a balance transfer fee of 3% with no maximum. The amount you save on interest payments needs to more than offset the fee.
8. 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 your APR is 15%, ask yourself if the purchase is worth paying an additional 15% in interest per year. If you use cash, you will not only save money on interest, but also reduce the amount you spend. According to a Dun & Bradstreet report, shoppers spend 12% to 18% less when using cash.
9. Pay your bills on time, every time. Credit card issuers are looking for reasons to raise your rate, and one late payment will probably translate into a rate increase, not only with the credit card, but other creditors as well.
10. 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.
11. The good news. If you build a history of paying your bills on time every time, and start paying down your debt, not only will your debt decrease, but your credit score will increase. As your credit score increases, contact your issuers to ask for lower rates.
2008 was not a good year for banks and credit card issuers. Bad loans and a turbulent economy created financial trouble that was passed along to consumers. For many cardholders, even those with good credit, this meant interest rate increases and credit limit decreases.
"These problems won't magically solve themselves with the start of a new year. We expect the rate and credit limit issues to continue to be problems for cardholders, especially as issuers are forced to deal with implementing the regulations that were just approved by the Federal Reserve," says Bill Hardekopf, CEO of LowCards.com. "The only way to protect yourself against higher rates and lower limits is to pay off your credit card debt."
Here are some consumer tips to reducing your personal debt in 2009:
1. Realize that paying off debt won't be easy, but it is one of the best commitments you can make to yourself and your family. Debt is a growing burden that causes anxiety and stresses in relationships. 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.
2. Start by taking a look at how much you owe. It is easy to just pay the minimum balance for each loan without looking at the total amount due and how long it will take to pay it off, but this "ignoring reality" philosophy will chain you to your debt for a very long time. Collect each 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. This debt summary may be overwhelming, so prioritize which bills to pay first. If money is short and you can't pay all of your monthly bills, 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. Payments on unsecured loans, such as most credit cards, 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. Start with your lender to ask for a lower rate. Then shop around for a mortgage or credit card with 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. Loan defaults and foreclosures are a costly and growing problem for banks. In the past year, they have become more helpful and open to working out payment plans to keep you paying something toward your debt.
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. Continue to pay the minimum on your other cards until the card with the highest rate is paid off, then focus your effort on the card next in line. Don't close all cards that you pay off. Keep your oldest cards open and occasionally use them to buy a magazine--just pay it off each month. This will help improve your credit score.
6. Pay more than your minimum payment. Your minimum payment is usually only 2-3% of your balance. At this rate, it will take you many years to pay off your debt. Pick your card to pay off and try to double the 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 113 months to pay and cost $1,974 in interest.
7. Check into transferring your balance to a lower rate card. If your rate is above 10%, it could pay off to transfer the balance for that card to one that offers 0% for 12 months for balance transfers. If you get 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. Be aware that credit limits are shrinking and you may receive a smaller credit limit for your balance transfer. Only use this card for paying down your balance, not additional purchases.
The terms of balance transfers aren't as generous as they used to be. Some cards now base the length of the intro period on your credit score. Most cards charge a balance transfer fee of 3% with no maximum. The amount you save on interest payments needs to more than offset the fee.
8. 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 your APR is 15%, ask yourself if the purchase is worth paying an additional 15% in interest per year. If you use cash, you will not only save money on interest, but also reduce the amount you spend. According to a Dun & Bradstreet report, shoppers spend 12% to 18% less when using cash.
9. Pay your bills on time, every time. Credit card issuers are looking for reasons to raise your rate, and one late payment will probably translate into a rate increase, not only with the credit card, but other creditors as well.
10. 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.
11. The good news. If you build a history of paying your bills on time every time, and start paying down your debt, not only will your debt decrease, but your credit score will increase. As your credit score increases, contact your issuers to ask for lower rates.
