Paper or Plastic?
There are a lot of gimmicks out there to help you get out of credit card debt and many of these are targeted toward military families. High debt loads can create tension in a family and even jeopardize a marriage and a family. One so-called financial expert advised compulsive shoppers to quit credit card spending by placing their credit cards in a bowl of water and freezing them! By the time the shop-a-holics thawed their card, they would have enough time to thoughtfully consider the purchase.
Well, you don’t have to put your card on ice to get out of debt. The best advice is to do some plastic surgery—and cut up those cards if you have too many or you spend too much. My husband and I did (well... um, that was after I froze them) and it helped us pay down $40,000 in consumer debt.
Face the Facts
The first step in becoming debt free is to assess your situation. Get a free copy of your credit report at www.annualcreditreport.com and use it, along with your records, to list the following:
- Creditors
- Balance on each account
- Minimum Payment
- Number of payments left
- Interest rate
- Due Dates
Debt Free Commitment
The next step is to commit to apply all extra monies toward your debt, including:
- Inheritance
- Income Tax Refund
- Bonus or Hazardous Duty Pay
- Insurance Dividend Refund
- Pay Raise
- Cash Gifts
- Any other unexpected additional income
Debt Consolidation
You may or may not take the third step, which is debt consolidation. It depends upon your unique situation. A red flag should go up if the company states they will take care of all your debt problems in “one, easy step.” Some of these companies build in a fee as part of monthly payments. For example, you could pay $60 for every $600 payment (the usual 10% fee they charge.) Plus, they may collect an additional 10% to 15% from the creditor when they pass along your payment—all these charges are tacked onto your consolidation loan.
To do this yourself, go to the MSN Money Debt Consolidator at www.moneycentral.com or www.crown.org and calculate credit card minimums and payments. Help is also found at your local Family Support Center or at the Consumer Credit Counseling Service® at www.nfcc.org, a non-profit debt counselor. The CCCS helps with debt consolidation, budgeting, and payment plans.
Debt Payment Tools
Terms—This is as easy as picking up the phone and calling the credit card company. Tell them you want to consolidate your loans through another lending institution, if they won’t lower the interest rate on their card. You'd be surprised at how many customer service representatives are authorized to lower the interest rates on the phone without having to call their supervisor. It's worth 10 minutes of your time to save several hundred to several thousand dollars!
Personal Loans—This is an option only for those who have undamaged credit and qualify for an unsecured loan. The interest rates could be in the low double digits, which isn't as low as some other options, but it’s usually less than the 20% plus interest you are paying the credit card company.
Home Equity Loan—This is sometimes called a HELOC, and it is an option that should be used with great restraint. For example, some families will take out an $8,000 home equity loan to pay off $5,000 of credit card debt and take a $3,000 vacation to Disneyland. This isn’t a good money move at all!
The primary advantage in a home equity loan is that it carries low interest rates and the interest paid is tax-deductible (check with your tax specialist yearly). Be aware that there is an origination fee from $75 to several hundred dollars, plus the cost of an appraisal and title insurance. The main drawback is the fact that you are leveraging equity in your home, which is a long-term investment in order to pay off consumer debt. In many cases, these debtors are right back in the same amount of credit card debt within two years of paying off their previous debts with a HELOC.
Pay More Than The Minimum—Pay the original minimum payment on each credit entry from our “Face the Facts” section above. By continuing to pay the original minimum (even when the required minimum becomes reduced), you pay on the principle; thus, you are saving on interest and paying the debt off early.
Pay the Least First or the Most First—It's best to organize your debt in one of two ways: 1) pay off the highest interest rate, or 2) the shortest pay-off time. If all the balances are close, then pay the one with the highest interest rate. However, if you have a much smaller note at a lower interest rate, it tends to serve as a morale booster to get it paid off. For example, if you have a card where you owe $1,500 at 20% and a $200 card at 15%, then go ahead and pay off the small debt first as a psychological boost. Then apply the previous payment amount to the next bill on your list—you’ll soon have that paid down, too!
