Living with debt is a lot like managing your weight. For most consumers, it happens for the best of reasons, like buying a home or paying for college. And sometimes it happens for the worst of reasons, like getting laid off from your job, or a serious illness. Add on a series of excesses – big and small – and all of a sudden, you’re carrying more than you can pay off.
Like too much weight, too much debt limits life’s options – your financial future, peace of mind, relationships … you name it. And like losing weight, undoing debt damage isn’t a cake walk… or something you can do quickly.
Fortunately there’s better options than having to file chapter 7 or 13 bankruptcy.
Here are 12-steps to help you get out of debt fast(er).
#1. Stress, but don’t over-stress.
Hopefully, you don’t have to cut back on your spending to such an extent that it hurts. In fact, penny pinching just a few dollars a month can make a huge difference.
For example, let’s say that you owe $10,000 on a credit card. If you only send in the required payments, it could take you 50 years to pay it off – at a total cost of $33,447. if you squirrel away a measly quarter per day, and send in the $7.50 that accumulates every month on top of your minimum payment, you’ll save $5,970 and 20 years of payments!
(make sure to send in your required payment as well!)
Important: Don’t put yourself on a “starvation diet,” or you may quit. But do earmark all the money you penny pinch to pay down your debts.
Chances are, there are lots of painless ways you can cut back a wee bit. The more you send in, the more you’ll save.
For example, if you send in an additional $100 a month on this $10,000 bill, you’ll save $18,237 and over 43 years of payments. You can start by simply pooling the pocket change that every member of the family has every day.
#2. Set a weekly and monthly budget.
After you’ve savored the victory of “penny pinching,” most personal finance experts will tell you to get more serious about paring expenses by creating a written spending plan. Most people hate the dreaded word “budget” , even if it is exactly what they need.
Important: If the idea of creating a budget makes you dizzy, don’t do it – and don’t let it derail your debt-defying resolution.
Hopefully, seeing the benefits of penny pinching will motivate you to think about how much could you save if you:
- Bring your own lunch to work or school
- Cut back on the lattes
- Find people to carpool with
- Got videos/DVDs for free at the library instead of renting them
- Skipped new purchases when you can easily make do with something you already own
- Comparison shopped(a few calls could save you hundreds on the exact same home or auto insurance policy you have now)
#3. Know Your Spending Habits.
There’s more to think about when you develop your own debt-free diet than just saving the most money. If you’d feel better knowing the roof over your head is actually yours, start by pre-paying as much as you can on your mortgage. You won’t save as much at 6%, but peace of mind is worth a lot, too. And chances are you owe a lot more on your home loan than you do on a credit card. At least I sure hope that’s true!
If immediate gratification will help keep you motivated, you can pay off credit card debt with another credit card that has a lower annual interest rate – preferably one that is 0% APR for the first year.
For example, say you have a $150,000, 30-year mortgage at 6%. If you pre-pay $25 with every mortgage payment, you’ll save $14,606. $100 a month will save you $45,586 and $200 a month will save you $71,062!
Or maybe you want to do both – pay down your mortgage and your credit cards at the same time. Great! Go for it! Do whatever is most likely to help you keep your personal debt resolution. The most important thing is to develop your own unique debt-busting plan. While you’ll save the most money by paying your most expensive debts first, the strategy you develop has to be one you believe in enough to stick with over the long haul.
Nobody’s perfect. Life will get in the way of your plans from time to time. You may overspend, or financial emergencies may appear out of nowhere. When setbacks happen, feel free to complain for a day. Then get yourself back on the debt reduction track as soon as you can.
#4. Negotiate for lower fees.
Get your credit card issuers to do some of the heavy lifting by lowering the interest rate and removing annual fees. Call customer service for your cards, and say your version of:
“You’re charging me a $50 annual fee, plus 18.4% interest. I’m seeing a lot of cards advertised with much lower rates and no annual fees. Will you please waive my fee and lower my interest rate?”
If you’ve been paying your bills on time, the answer will probably be “Yes!” You don’t have anything to lose, and you will not gain anything by not asking. Lenders realize that it is harder to get a new customer than it is to keep an old one. Still, you may need to assert yourself a little by asking for a supervisor.
You want to move as much of your debt as possible to lower rate cards, so also ask about balance transfers. Be sure to find out if there’d be any fees and what the interest rate would be.
#5. Keep the credit cards at home!
Studies show that people tend to spend more when they can put their purchases on plastic. Does that sound like you? If so, send your credit cards away for a nice, long vacation — perhaps into a locked desk drawer. If the temptation is too great, freeze them in a block of ice.
There are only a few true emergencies in your day-to-day life that necessitate your carrying a credit card “just in case.” You’ll be amazed – and delighted – by how much impulse buying you avoid if you can’t say, “Charge it.” Again, use all the money you save to pay down your debts.
#6. Request a free credit report.
You can get a free credit report each year from all three of the major credit reporting agencies.
When your credit report arrives, take a hard look — but don’t be surprised by what you see. In almost eight out of ten reports, there’s some type of error. A quarter of reports include errors that are so serious that you can be denied credit. So the first thing to do is look for mistakes.
#7. Find out how you score at the “Ratings Game.”
Lenders decide how risky we’ll be as borrowers based upon credit scores, which compare what people who pay their bills on time have in common with each other, and what people who don’t pay on time have in common. Depending upon our credit scores, we may be rejected outright, charged higher interest … or maybe approved for a great rate.
Even if you’re a model bill payer and you find no errors on your credit report, there may be problems lurking that will make it harder for you to consolidate debts at a lower rate.
For example, if you’re spending more than 36% of your gross income on credit card bills and installment loans, your application could be denied. Similarly, carrying a balance close to your credit limits — even if you’ve never gone up past 50% — makes potential lenders nervous. And naturally, a record of late payments and other delinquencies will hurt your chances for low cost credit. You can improve your credit score over time.
#8. Can you do a balance transfer?
A card with a zero percent introductory rate is possible, but may not be reachable.
In our example, if you’ve had some hard financial times in the past, and you can’t get your current card issuers to budge below 19.8%, it’s unlikely that you’ll be approved for a card at 6.9%. The key is finding your best deal, and then taking advantage of it by consolidating your debts so you get the lowest rate possible.
There’s a dizzying array of credit card choices out there, ranging from the card offers that arrive in your mailbox to those you see advertised online or on television.
Research lower interest credit cards for a balance transfer.
- If you belong to a credit union, your best card choice may be right there.
- Research credit cards by sorting them based upon different criteria – i.e. how good your credit has to be to get the card, what the introductory rates are, and so on.
- Compare credit cards online – filter for 0% APR for 12-18 months, free balance transfers, reward, or low interest cards.
Doing your research you can easily compare the interest rate APR, perks (such as discounts), balance transfer fees, and point rewards (i.e. frequent flier miles).
#9. Beware of bad debt consolidation companies.
If you’re a homeowner, someone may suggest that further mortgaging the roof over your head is a great way to get out of debt. While home equity loans can get you a much lower rate and perhaps some tax deductions, they can be very dangerous (especially if you’re in credit card debt!)
Some of the traps to avoid when signing on for home equity loans or lines of credit:
- The ease with which balances can be run up again in short order.
- The increased total interest costs that often come with stretching out the repayment term.
- Falling for one of those 125% home equity loans. You could really be in a jam if you have to move, if you lose your job, etc.
You may have more debt consolidation options than you realize.
For example — do you have money sitting in a savings account earning you next to nothing? You might be much better off using that money to pay down your debts, since credit card users regularly pay 5-6 times more on their cards than they earn on their savings accounts. Plus, they have to pay taxes on those savings!
Can you borrow from family or friends at a lower rate? Only consider this option if you know you’ll honor the debt! You might also want to consider borrowing against your 401(k), stocks, or life insurance policy.While you don’t want to totally rob your nest egg or leave your family in the lurch, you could cut your interest rate significantly.
In a true emergency (not for a meal out or a new sweater), you could always defrost a credit card!
Each consolidation option has pros and cons. Whatever you do, don’t pocket the extra savings. Send them along to help pay off your bills!
#10. Work with your creditors if you can’t afford the monthly payments.
If an unexpected problem puts you in a cash crunch – medical emergency, unemployment, etc. – be sure to let your creditors know. Most companies would much rather work out a revised payment schedule than turn your account over to a collection agency. Click here for step-by-step instructions.
The bigger the loan, the more important it is for you to face it head on.
Don’t risk having your home foreclosed or car repossessed because you’re too embarrassed to talk to your bank. Ditto for your student loans. Uncle Sam and private lenders have all sorts of options to help you avoid default and consolidate your student loans.
#11. If you’re in serious debt trouble… ask for help.
If the debt collectors are calling, take advantage of a confidential, debt consultation with one of our partners.
For help in budgeting or negotiating with credit card companies, you may want to consult a non-profit credit-counseling agency. Find a local affiliate of the National Foundation for Credit Counseling . And if you’d like ongoing support, consider joining Debtors Anonymous , which sponsors groups based upon the Alcoholics Anonymous 12-step program.
Even if you’re not in serious trouble, there’s a lot to be said for getting some support. A friend or relative can become your “money buddy,” who monitors your progress and helps you stay on track. You may want to talk to your minister about programs through your house of worship and/or join Debtor’s Anonymous.
You may also want to consider filing bankruptcy as a last-resort option. There’s a few types (or “Chapters”) to file, but Chapter 7 is the most popular. If this is something you need to explore, read our article on what you need to file bankruptcy.
#12. Look for ways to generate more income.
Can you work some extra hours or get a part time job? Do you have a skill that you could freelance or use to start a small side business? How about selling things you no longer want at flea markets, tag sales, or even on eBay? Earmark all your extra earnings toward reducing your debt. You’ll get out of the red much faster.
However you pursue your debt busting diet, get going! By investing as much as you can in lowering your debts, you’ll end up with the most money, the greatest peace-of-mind, and the largest number of options for how you spend your time — and your newfound wealth.
Remember to stick to it: Debt can be a stressful thing, and can be damaging long-term. It’s important to have your plan and a budget, and stick with it. Monetary discipline is the trick to getting out of debt fast.