How to Get Out of Debt
We are a nation of debt. Almost everyone has at one time borrowed money and then had to pay it back with interest. In our society, credit means everything and while credit cards and loans are extremely convenient and allow us to purchase all kinds of cool stuff, many people have trouble controlling their spending and are unable to pay off their debt. If you are in debt, then you are probably in a horrible situation with creditors constantly warning of the prospect of paying much more for services and credit cards because you are deemed a high credit risk. While debt is not an enviable position to be in, you can get out of debt, no matter how deep in the hole you are. Here are some tips.
Understand How Debt Works
You probably have heard the saying “there's no such thing as a free lunch” and it is true, everything you spend on your credit cards or with loans must be repaid PLUS interest. Most people don't realize that credit cards are loans. They are unsecured loans, but loans nonetheless. Most people think that if they have a few credit cards on them with a credit line of $5,000, then they in effect have $5,000. This is the wrong way to look at credit cards. Credit cards should only be used when you have the money to repay them and for emergency purchases only. You should not use a credit card because your checking account is depleted. Credit cards are very expensive tools that are used far too freely these days. Almost everything can be paid with a credit card, from meals at a fast food restaurant to gas for your car. In some situations when you purchase an item with a credit card and repay the interest for it over time, the actual cost of the item can be more than twice the amount of the original price. Why pay twice the amount for an item just for the convenience of using a credit card?
Unfortunately, the idea of responsible credit is not taught in schools often enough and sometimes not even discussed at home, but if you are planning on using credit it is extremely important to learn how credit cards, loans and interest work.
Strategies to Get Rid of Debt
If you find yourself in debt, there are a few strategies that can help you get out of the hole. They include:
Pay off Your Credit Cards by Paying more than the Minimum Payment
The credit cards have a way of fooling consumers – they request a specific payment. It is usually a very low manageable payment, sometimes as low as 3% or less of the entire amount you owe. Most people don't put any thought into this amount and pay exactly what the credit cards ask for. The problem is that only paying the minimum payment may turn a debt of $5,000 into over $10,000 by the time you pay off the principle and interest. Credit cards are a business and you must understand that they are in the business of making money. If you want to pay off your debt quickly and without paying more than is necessary you must pay an amount each month that is much higher than the minimum payment. An amount to strive for is to pay off at least 10% of your balance each month. This way, in about a year's time you will be able to pay off the entire balance (with interest).
Transfer Your Balance from a High Interest Credit Card to a Lower Interest Credit Card
You probably receive about three or four credit card applications in the mail each month and many of them have extremely enticing offers. Some offer free balance transfers and a lower interest for a limited time (usually 6 months to one year). If you have a large balance on one credit card and are paying high interest fees, you can easily transfer your balance to another credit card and pay a lower interest rate or no interest for the specified period. This strategy can easily save you several hundred dollars or more each year.
Use Your Savings to Pay off Debt
While it sounds like financial suicide, you can actually save lots of money by paying off your high interest credit cards with your savings. You don't have to use all your savings, just enough to make a dent. For instance, if you are paying 22% interest on a credit card and your money in your savings account is only making 3% interest you can actually save 19% by paying off your credit cards with your savings. Obviously this strategy is not for everyone, but if you are adamant about paying off debt, this strategy is definitely a winner.
Consolidate your Credit Cards
Another effective strategy for getting out of debt is to take out a debt consolidation loan. You might be thinking to yourself why take out another loan if I am trying to get out of debt? A debt consolidation loan is used to consolidate several high interest loans into one single loan making it easier to pay off debt. Debt consolidation loans usually have interest rates far lower than credit cards. For instance, you can find debt consolidation loans at the rate from 9% to 12%, much lower than 16%, 18% and 22% that many credit cards ask you to pay. In addition, you only have to manage one payment and there is a set term to pay off the loan. For instance, you can take out a 4-year debt consolidation loan for $10,000; the monthly payment will stay the same, as will the interest rate.
Once you consolidate your old credit cards it is wise to cancel them as well. If you pay off all your balances with a debt consolidation loan and then go back to your old ways, you will now be in a deeper hole than you were before.
Renegotiate with Credit Card Companies
Another strategy that can help one get out of debt is to renegotiate with credit card companies. While some credit card companies will immediately dismiss your attempts to renegotiate terms such as interest rates, the overall balance and the minimum payments, if they see that you are between a rock and a hard place they may make some concessions. Many times credit cards companies will give you some leeway when they realize that you can no longer afford to pay them and might go bankrupt. They consider that they are better off trying to get as much as they can than nothing at all.
File for Bankruptcy
Finally, if you are extremely debt ridden and have no recourse to pay off your debt you can find legal protection through the bankruptcy laws. Bankruptcy should not be looked at as shameful. In fact, many people who go bankrupt are hard working individuals that have become injured, severely ill or have lost their job. If you find yourself in this predicament, with the help of the bankruptcy laws you can get a fresh start and release yourself from many financial obligations. It should be noted that your credit rating will suffer for about 10 years- the length of time that a bankruptcy is visible on your credit report.
If you are thinking about going bankrupt, it is wise to talk to a lawyer or financial adviser to understand all that this protection entails.
