No Government Bailout on Personal Debt
This week, the U.S. Treasury announced that it will rescue Fannie Mae and Freddie Mac. Analysts say that the government could assume trillions of dollars of debt. Also within the last week, the Federal Reserve released the latest Consumer Credit report that shows that consumer debt (credit cards and auto loans, not including mortgages) increased $4.6 billion to $2.59 trillion. While the government takeover of lending institutions may be needed to maintain economic order, regular citizens and taxpayers don’t get a government bailout for household debt to rescue their finances.
Consumers must face their own debt problems and take care of themselves because no one else will. If you are in debt, you may deny it, hide it, or simply not know what to do about it. The first step to getting out of debt is admitting that you have a debt problem. Then you make a plan to start paying down your debt.
Here are five signs that you have a debt problem:
1. You pay only the minimum amount on your bills.
2. You have at least one credit card that is at its limit.
3. You can’t afford to purchase an item with cash, so you use a credit card.
4. In the past year, you have paid a late fee or over the limit fee because you didn’t have the money to pay your bills.
5. You do not know how much debt you owe.
Here are ten suggestions for helping climb out of your personal debt:
1. Get a clear picture of your debt. Simply paying the minimum balance on each bill without knowing exactly how much you owe is easy. To get a clear picture of your debt, collect all of your bills with outstanding debts, including all credit cards, mortgages, 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, whether any bills are past due, and verify the payment due dates.
2. Prioritize the bills to pay first. If money is tight 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.
3. 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 lenders and ask for a lower rate. If that doesn’t work, shop around for a mortgage or credit card with a lower rate.
4. 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 if you keep making your interest payments and avoid bankruptcy and foreclosure.
5. If you have a high interest rate, transfer your balance to a card with a lower interest rate. If your rate is above 12%, transfer the balance for that card to one that offers 0% for 12 months for balance transfers. Getting 0% for 12 months is a great opportunity to pay down your balance. To take full advantage of this 0% interest, pay as much as you can over the monthly minimum. 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. If you have a card with a lower rate that is almost at its credit limit, you may want to start with this card. Reducing your debt/credit limit ratio helps your credit score. Get your balance down to 30% of your credit limit, and then focus on other cards that have balances close to their limits.
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, clothing, entertainment, and things that are long gone. If you use cash, you will not only save money on interest, but you will also reduce the amount you spend.
7. Pay more than the minimum amount for your loans, especially credit cards. Credit card issuers set the minimum payment at approximately 2% of your balance. This reduces the payment but makes paying off the balance almost impossible, so try to add at least $10 to your minimum payment. Look for areas where you can cut back on spending like entertainment, eating out or clothing. Use this money to accelerate your debt payments. Doubling or tripling your payment will help you pay off your debt much faster. The following example illustrates the benefits of paying more than your minimum balance. Assume that you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum amount 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 off and will cost you $1,579 in interest.
8. If you are surprised by your current rates, check your credit report. Your report 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. The bureau must respond to your claim within 30 days or remove the incorrect or unverifiable information. 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.
9. If you need more than three years to pay down most of your debt and if cutting expenses won’t realistically help you pay off your debt, contact a reputable debt counselor. The National Foundation of Credit Counseling (nfcc.org) is a good place to start.
10. Realize that it took time to get into debt and it will take you longer to pay off your debt. Do not get discouraged, no matter how little you pay off each month or how long it will take you to become debt free. Being debt-free is worth the effort.