Getting Out of Debt: Seven Steps Toward Success

[Mar 12, 2009.]

 

As household net worth plunged by approximately 18% in 2008, Market Watch notes that consumer spending fell by 4.1 percent, the steepest decline since 1980. If you want to get out of consumer debt, here are some tips for setting up a debt management plan, finding extra cash for paying off debt, and dealing with lenders and credit counseling agencies. 

• Know Who and How Much is Owed: Make a list of creditors, balances owed, annual percentage rates (APR's), and minimum monthly payments. Include all credit cards, and any unsecured consumer loans.


• Crunching the Numbers: Calculate the total amount of household take-home pay. Next, add up the total amount of living expenses Subtract living expenses from take home pay. Use what's left for paying off debts. If there isn't enough to make minimum payments, review household expenses and make adjustments. The National Foundation for Credit Counseling (NFCC) provides referrals to counselors authorized to negotiate settlements with credit card companies.


• Prioritize Bill Paying: Arrange your list of accounts owed with the highest APR (annual percentage rate) to the lowest. The APR is the annual percentage rate of all finance charges associated with each account. The APR is printed on each billing statement. Financial expert Suze Orman recommends paying more than the minimum on your highest APR account, and paying the minimum on the other accounts. When the highest APR debt is paid off, take the monthly amount paid toward that debt, and apply it to the next debt. Repeat the process until your credit card debt is paid off.


• Finding Funds: Part time work, tax refunds, and holding garage sales can all provide extra money for paying off debt. Another way to raise extra cash is to use money formerly spent on fast food, the coffee place, or buying lunch (instead of taking it) for paying debts. It's amazing how fast "found" money can add up.


• Contacting Lenders: Credit card finance charges prolong the process of repaying debt. For accounts in good standing, it's a good idea to contact lenders and ask for a lower rate. If they refuse, transfer balances to another account that has a lower APR.


• Homeowner Resources: Ask about refinancing or mortgage loan modification programs. For homeowners with significant home equity, a home equity line of credit or cash-out refinance may provide funds for paying off credit card debt.


• Debt Management Help: A large amount of debt can seem insurmountable. Consulting a non-profit credit counseling service can help by negotiating with creditors. The Federal Trade Commission has documented cases of fraud involving  debt management providers; it's important to check credentials and references when shopping for  debt management assistance.

Getting out of debt isn't often fast or easy, but it does provide peace of mind.

 

About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.