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Week 4: How to Get Out of Personal Debt…For Good!

By: , dated January 23rd, 2013
Week 4 of Personal Finance Resolution is here! We’ve seen great response to this newsletter so far, and this week we are highlighting one of the most requested topics in personal finance: debt reduction.If you’ve missed one or more of our previous issues, don’t worry! Check out weeks 1-3 below:

Week 1: Assessing Your Current Financial Health

Week 2: Setting Up a Budget

Week 3: Establishing Financial Goals

Personal Finance Resolution is now over 100,000 participants…help your friends to learn personal finance with you!

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Now on to the topic for Week 4:
Reducing Your Debt

This week’s Activities for Success:

1. Tell 3 friends or family members about this week’s issue

2. Complete the Debt Reduction Calculator

3. Make a “debt reduction plan”

This Week’s Helpful Articles:

How to Avoid or Escape Credit Card Debt

8 Credit Card Myths You Need to Know

The Pros and Cons of Leasing vs. Buying a Vehicle

Let’s talk a little bit about debt. Unless you live on a deserted island or in a remote jungle, you will most likely have some sort of debt over the course of your life. Having debt isn’t necessarily a bad thing, but it must be managed properly.

There are two main types of debt: secured and unsecured.

1. Secured debt is guaranteed by an asset that acts as collateral and includes things like mortgages and auto loans.

2. Unsecured debt is where you agree to repay your lender without an asset being used as collateral. Unsecured debt can include revolving debt (like credit cards) and installment debt (like student loans and medical bills).

Having the right kind of debt and making all of your payments on time can actually be a good thing. Student loans, auto loans, home mortgages, etc. can all help you build a strong credit score over time. These are the types of debt that you shouldn’t shy away from, provided of course that it makes sense to take out these loans and you can meet the monthly payment requirements.

The type of debt that should give you nightmares is revolving credit card debt. If you don’t have any, or pay yours off at the end of each month, then we applaud you. However, if you’re like 81% of Americans, you have at least some revolving debt. This debt has a very high APR (Annual Percentage Rate) and can take years to pay back if just making minimum payments. Before we go any further, take a few moments to complete the Debt Reduction Calculator below:

 

After completing this calculator, you should have an idea of how long and what monthly payments it will take to eliminate your credit card debt. If all of this seems a little overwhelming, don’t panic. It’s now time for us to help you make your “debt reduction plan”.Step 1: Write down all of the debts that you currently have, including credit cards, loans, medical bills, etc.Step 2: Separate your fixed loan payments (mortgages, auto loans, student loans, etc.) from your revolving debts (credit cards).Step 3: Take your credit cards out of your wallet/purse, or leave just one for emergencies… increasing your monthly credit card payment will do nothing if you continue to spend!Step 4: Contact your credit card company and ask them to reduce your APR. This will not always work, but an estimated 40% of credit card providers will lower their customers’ rates if they are in good standing.Step 5: If you haven’t done so already, calculate how much money you have left over after paying your bills each month using the budget calculator.

Step 6: Using the money that you have left over from Step 5, put as much as you can toward paying off your credit card debt. Paying off credit card debt should come ahead of putting money into retirement funds/ saving accounts. If you didn’t have any left over money in Step 5 or if you want to give your debt reduction plan a boost, begin looking for ways to reduce your monthly spending (which we’ll cover next week).

One debt reduction strategy you can try is to pay only the minimum due on all of your cards except the most expensive one (based on APR). For the most expensive card, you should put in all the money you can to pay down that balance. Once you have completely paid off the most expensive card, move to the second most expensive card and repeat the process.

Step 7: Once you have completely paid down your revolving debt, you can start to work on your fixed loan payments. You can use the same aggressive “pay as much as you can” strategy, or try to pay an additional 10% each month to your mortgage, student or auto loans. This will lead to a reduction in total interest over the life of the loan and save you money!

Step 8: If you don’t have the ability to pay off your credit card debt, visit the American Fair Credit Councilto find help getting out of debt. Both are non-profit agencies and can help you to work with creditors and educate yourself further on how to get out of debt.For more information on reducing credit card debt, check out our article

“How to Avoid or Escape Credit Card Debt”. Remember, getting out of or reducing your debt is not an easy thing to do, but is very important in having a healthy financial life. Give yourself a pat on the back for reaching Week 4 of Personal Finance Resolution!

This week’s Activities for Success:

1. Tell 3 friends or family members about this week’s issue

2. Complete the Debt Reduction Calculator

3. Make a “debt reduction plan”

 

Terms Used in this Issue:

Annual Percentage Rate

credit score

debt

unsecured debt

 

Stay tuned for next week’s issue, which will cover Reducing Your Spending.

 

This article was brought to you by the InvestorGuide Staff Writers and Editors.

Copyrighted by InvestorGuide.com. All rights reserved.

3 Responses to “Week 4: How to Get Out of Personal Debt…For Good!”

  1. Button Eyes says:

    also worth mentioning, if you do find yourself getting behind, missing payments or filing for BK make sure you get your credit fixed. Get all the negative stuff off your credit. Probably best to hire a credit repair company. but make sure you hire a reputable one. I have heard about Lexington Law being one of the best out there. Business ove 20 years. Don’t want to go with a fly by the night firm, its not worth it. 

  2. Jack paulson says:

    good advice Buttoneyes. I actually googled them. Lexington Law has helped clear more more than 2,500,000 wrong credit results from people’s reports. One of the most reputable ones out there.  Lexington’s website has a lot of information to help folks eliminate debt and even lower their mortgage rate.

  3. Robert McMahon says:

    I have used Financial Education Services and it has worked wonderfully and is far less expensive than Lexington. When people do this they can begin to invest and save which is how we can create wealth. Adding income streams is important as well.
    Turning around the county one debt free house at a time.

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