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Get Out of Debt

Posted by: Staff Writer | May 22,2008

Ways to Go About Getting out of Debt 

Most everyone is in some form of debt.  Whether it’s students facing student loan and credit card debt, or a family facing mortgage payments, everyone has to contend with debt in some way.  What are the best ways to get out of debt?  It can be a slow process, but it’s something that should be on everyone’s mind.  

1.    The first thing that everyone should do is set a budget.  Go through your daily spending, down to the penny.  Calculate every magazine and every cup of coffee.  Creating a financial spreadsheet is a good idea.  List columns of necessary expenses and unnecessary expenses.  Cut out as many items from the latter list as possible.  
2.    Make another spreadsheet of your current debt.  List these debts by highest interest rate firsts and lowest interest rate last
3.    Now, use the money saved from cutting out the financial slack to pay off your debt.  Start with the highest interest rate first, as this will cost you the most in the long run.  The majority of the time, this means paying off credit cards first – even cards with a low APR will have a higher interest rate than other types of loans.  Obviously this doesn’t mean defaulting on low interest loans, but weighting your payments above the minimum for those debts with high interest.  $100 or more above the minimum is recommended, but try and pay whatever you can afford.
4.    Keep your debt spending at an absolute minimum while trying to tackle your current debt.  Ideally, you shouldn’t use your credit cards at all.  You can even go so far as put a freeze on your credit accounts.  This will ensure that you won’t access the credit and it can also protect against idenity theft.     

The Importance of Balance Transfers

This could be added to the list above but it needs some increased elaboration.  Balance transfers can help significantly with step #3.  Here are the steps to best transfer a balance to a new credit card:

1.    Look for a balance transfer with an extended introdocutory APR: 0% APR for twelve months.  
2.    Also, make sure that the long-term APR is also low – after the introductory rate has expired.  Don’t be fooled by a great introductory offer because this can sometimes mean that the long-term interest rate is higher.  
3.    Very important: don’t use the balance transfer card for purchases.  The APR on purchases is going to be higher than the balance transfer rate.  A balance transfer card should only be used to pay off the balance transfer with a 0% APR.
4.    Keep in mind that you will likely not be able to transfer an entire balance to a new balance transfer card.  So if you have $12,000 in debt on one card, you may only be able to transfer $4000 at most onto a new card.  If you’re being very aggressive about paying off your balance, you can split the transfer over three different credit cards.  This could hurt your credit rating short-term by opening up too much credit at once, but long term it will save you money and improve your credit rating by eliminating your debt to limit ratio.  Finally, if you open up more than one card at once, it’s important to exercise rule #3.  Adding new debt to a slate of cards could really get you into trouble. 

Using Savings for Debt

Many consumers may be loath to raiding their savings account to pay off debt.  This is the wrong way of looking at things.  A sizable debt with a high interest is going to cut into your long-term savings regardless.  Interest is lost money – it goes into a creditor’s pocket without paying off the loan.  By paying off your debt sooner rather than later, you can cut down on the money you will lose due to interest payments.  Over years, this can amount to many thousands of dollars.  

Now, this doesn’t mean raiding your savings entirely.  Part of setting up your budget as listed above is determining how much you can afford to pay above the minimum for debt payments while still being able to sustain your normal quality of life.  This means having some money left over for an emergency fund, college fund, investments, or other important expenditures.  Certainly, this is a tough balance but you should not raid your savings entirely.  Taking some money out of savings to pay off debt is advisable. 

Rebuild Your Credit

If you’re severely in debt, you may not even be able to apply for new credit – or if you do, it will be with a very high interest rate.  The ability to secure new credit is enormously important for your financial well being.  By eliminating your curent debt and improving your credit rating, you can rebuild your credit standing and be ensured new credit in the future.  

If you’re really struggling with being approved for new loans or managing your current debt loan, you’re going to have to look into some more aggressive debt payment strategies.  There are three major debt payment options.  Normally, these options are only for those borrowers who face increased problems with debt, though they can be utilized by people with lesser debt problems as well.  The three options at your disposl are:

1.    Debt Consolidation
2.    Debt Settlement
3.    Debt Counseling

Debt Consolidation

Debt consolidation is the process of combining loans into one major payment.  This is normally done through a major debt consolidation loan – such as a home equity consolidation loan – in which debts are paid off using funds from the loan.  Ideally, the new loan will have a lower interest rate than all of the loans combined together, but even having just one loan to pay off will reduce the likelihood of defaulting on a handful of different loans.  It can also elevate a credit rating because it enhances your level of credit by wiping clear all of your current credit accounts.  

Another form of consolidation involves combining debts into one lump debt payment – such as combining different types of student loans.  This is a bit more difficult than a debt consolidation loan, as not all loans can be combined in this fashion.  In either case, it will help you get out of debt sooner rather than later by reducing interest payments.

Debt Settlement

Even debt consolidation is not available to everyone – most likely if you don’t own a home with sifficient equity or you are not able to secure a loan otherwise.  In this case, debt settlement is a good option.  Debt settlement is a process of negotiation in which the the debt settlement service either reduces the amount of debt you owe, reduces the interest rate, or both.  The advantage is that your debt will be much lower, but the drawback is that debt settlement plans need to be paid off in one lump sum, rather than over time.  

Sometimes debt settlement can be paid off in installments, but there are two potential issues.  First, debt settlement installment plans will freeze your current credit accounts, meaning that you won’t have any access to avaialble credit.  Secondly, this can have a negative impact on your credit rating.  This is seen as a type of last resort option. 

Debt Counseling

Debt counseling is not neceassily different from debt settlement, as the counselor will act as the negotiator with your creditors.  It’s important to meet with an established and reputable debt counselor, as some debt negotiations may not be recognized as legitimate.  For example, a debt counselor may negotiate for your monthly payments to be lower, but when you pay this lower fee it still registers as a default.  In effect, the debt counselor has accomplished nothing.  By no means does this account for all debt counseling oppportunities, but it’s important to be careful.  

In other cases, a debt counselor may not necessarily negotitate with creditors and instead act as a personal debt expert.  In this case he or she will go over the steps to elimiate debt and help outline the best debt repayment plan avaialble.  

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