Resources
Information Articles:
Getting Out of Debt
Developing and Using a Wise Borrowing Strategy
Does Debt Consolidation Make Sense?
Reducing Your Debt Burdens
Reducing Your Debt Burdens
Most individuals have debt of one kind or another. It may be a home mortgage, a credit card, a student loan, an auto loan or some other form of loan. Using debt as part of an overall financial strategy can be a good thing. Debt becomes a bad thing when you have too much of it, have the wrong kinds or when its presence causes undue anxiety or bad behavior. Here are some ideas to help you make sure you are controlling your debt and not the other way around:
Set priorities for using debt. Borrow money for things that provide long-term and lasting value. Borrowing for college costs is probably good. Charging another extravagant vacation on your credit card is probably not a good use of debt.
Use the best type of borrowing. Whether it is choosing a credit card or a home mortgage, be sure the terms match up with your goals and how you manage your finances. If you pay every credit card bill in full and do not incur any finance charges, it may be OK to have a card that has a high interest rate (you avoid it with timely payments) but offers rewards for use (like miles or money back) or has no annual fee. On the other hand, if you carry over balances and pay finance charges, the interest rate you pay becomes more important.
If you are considering a mortgage, the type you choose (fixed or adjustable) will affect the interest rate. Choose one that matches you behavior. If you plan to sell your house soon, you may want an Adjustable Rate Mortgage (ARM) with a lower interest rate. If you plan to stay in the home or cannot afford any increase in payments if interest rates rise, consider a long-term fixed rate mortgage.
Eliminate high cost borrowing. If your existing debt has a high interest rate, get rid of that form of debt. Determine if you can convert it to another type of debt with a lower rate. If you are paying interest on your credit card balances, find a card that offers a lower rate, but watch out for "teaser" rates. If you have equity in your home, you may be able to use a home equity loan to consolidate all your debts at a lower rate.
Pay down your debt. This can be a difficult step for many. Incurring interest charges you cannot afford or you do not want is not a good use of your money. Find ways to pay down what you owe. Pay more than the minimum due on credit cards. Do not buy that piece of clothing you really do not need or take a fancy trip when a visit with family would be just as enjoyable. Ultimately, paying down debt takes discipline and sacrifice.
What if you cannot pay your bills? This is when you should get help. First, stop incurring more debt - quit using or destroy your credit cards. Then, work with your creditors. You may be able to work out a payment schedule. Explain your situation and that you want to pay what you owe. They may be able to help. If not, at least you have tried.
Do not bounce checks. In some states, it is a worse offense to write a bad check than it is to not pay your debt. In addition, you may be charged for the bad check. It looks very bad to a creditor if your check bounces.
Getting professional help. There are several organizations available that help individuals when all else fails. The Consumer Credit Counseling Service is one of those agencies. They can help you create a plan to work your way out of debt. Look in your phone book for a local office. Their service is free and has helped thousands. Be very wary of organizations that offer to fix your credit rating or want you to pay them a fee to get you out of debt easily. If their "pitch" sounds too good to be true, it probably is too good to be true.
Getting Out of Debt
For many, using credit is a normal part of handling their finances. For others, using credit can lead to uncontrolled spending, anxiety, unpleasantness or even bankruptcy. If you want (or need) to reduce your debt, here are some ideas that may help.
Develop An Overall Debt Strategy
Borrow money for things that provide long-term and lasting value. Borrowing for college costs is probably good while charging another extravagant vacation on your credit card is probably not a good use of debt.
Credit Cards
Decide on a credit card strategy. Remember that every time you charge something on a credit card, you will have to pay for it. Don’t charge things you can’t afford. Try to pay your entire balance each month to avoid finances and be sure to make the payments promptly to avoid any late payment fees.
Choose a credit card that offers the right combination of fees, rates and benefits. If you pay every credit card bill in full and don't incur any finance charges, it may be OK to have a card that has a high interest rate but offers rewards for use (like airline miles or money back) or has no annual fee. If you carry over balances and pay finance charges, the interest rate becomes more important.
If credit cards are too tempting, get rid of them. Using checks or a debit card can eliminate the risk of buying things when you don’t have money in your account to pay for them. Cash works too.
Mortgages
If considering a mortgage for a new home purchase, first identify the type of mortgage that matches you behavior. If you plan to sell your house soon, you may want an Adjustable Rate Mortgage (ARM) with a lower interest rate. If you plan to stay in the home or can't afford any increase in payments if interest rates rise, consider a long-term fixed rate mortgage.
Monitor the market. If interest rates fall, you may want to consider refinancing your mortgage to get a lower rate. You may also wish to consider switching to a shorter-term mortgage. Depending on how the numbers work, you may be able to keep your monthly payments about the same and switch from a 30-year mortgage to a 15-year mortgage. You will be debt free much sooner.
Examine the Rates
Eliminate high cost borrowing. Determine if you can convert high interest rate debt to another type with lower rates. If you are paying high interest rates on credit card balances, find a card with a lower rate, but watch out for "teaser" rates and penalty pricing. If you have equity in your home, consider a home equity loan to consolidate all your debts at a lower rate.
Getting Help
What if you can't pay your bills? This is when you should get help. First, stop incurring more debt - quit using or destroy your credit cards. Then, contact your creditors to work out a payment schedule. Explain your situation and that you want to pay what you owe. They may be able to help. If not, at least you have tried.
Don't bounce checks. In some states, it is a worse offense to write a bad check than it is to not pay your debt. In addition, you may be charged for the bad check. It looks very bad to a creditor if your check bounces.
Get professional help if you need it. There are several non-profit organizations, such as Consumer Credit Counseling, that help individuals when all else fails. They can help you create a plan to work your way out of debt. Look in your phone book for a local office. Their service is free and has helped thousands. Be very wary of organizations that offer to fix your credit rating or want you to pay a fee to get you out of debt easily.
Does Debt Consolidation Make Sense?
If you are like most Americans, your mail box is filled with offers for credit cards, mortgage refinancing and home equity loans. Many of those offers stress the benefits of moving existing balances to the new lenders. While that may sound appealing, especially if the new loan offers an attractive initial interest rate, it is important to consider all the factors associated with debt consolidation.
Debt Consolidation is Debt Management, Not Debt Elimination
Moving all your outstanding loan balances to one lender will not reduce the amount you owe. You must ultimately pay off the loan and pay interest until the loan is repaid. Your goal should be using debt wisely. Consider the following steps:
Paying Down Your Credit Card Debt
Even if you have not borrowed the maximum allowed for your credit card, paying down your balance should be one of your top priorities.
- Pay more than the minimum on your credit card balance. Interest rates charged on most credit cards are usually much higher than those found on other loans.
- Making your credit card payment as soon as you get the statement will help reduce the interest you are charged.
- Minimize your credit card usage for a period. Along with not subjecting higher balances to interest, using cash may help you identify ways to spend less.
Evaluating the Real Estate Based Alternatives
Start by reviewing the interest rates on your existing debts. Credit cards and unsecured personal loans usually have higher interest rates than other forms of secured debt like a mortgage, home equity loan or an auto loan. If you find that your rate on a home equity line of credit is less than the rates on credit cards, other personal loans or auto loans, utilizing borrowing through that line of credit may save you money.
Then evaluate your borrowing capacity available through a mortgage or a home equity loan. Borrowing through a shorter-term home equity loan will probably lower your interest rate, but most home equity loans have variable interest rates. If you have a great deal of high interest rate debt, increasing the size of your fixed rate mortgage with a refinancing (even if you end up with a slightly higher mortgage rate than what you currently have) may result in lower overall interest costs. The interest you pay on your mortgage or home equity loan is also tax deductible if you itemize your deductions.
Final Words
- Discuss your situation with your financial institution. They will be able to explain the alternatives and may offer you a special program because of your existing relationship.
- Evaluating these real estate based alternatives can get a bit complicated, so you may want to discuss them with a financial professional.
- Use common sense. Remember that borrowing money means you have to repay it. If your borrowing is too high, take immediate steps to reduce it. Every dollar of debt reduction will translate into less interest you have to pay.
- Get professional help if you need it. There are many organizations that help consumers when all else fails. The Consumer Credit Counseling Service is one you may want to consider. Look in the phone book for a local office. Their service is free and they have helped thousands. Be very wary of any organization that wants you to pay a fee for their services or that promise an easy solution to your situation. If their message sounds too good to be true, it probably is too good to be true.
Developing and Using a Wise Borrowing Strategy
The sensible use of debt should be part of any sound financial strategy. Debt can enable you to enjoy things that otherwise are beyond your current reach. Borrowing can also have its ugly side. Too much, too expensive or the wrong kinds of debt can make life miserable.
The Basics
Borrowing costs money. That is not necessarily bad. It just means that when you pay it back, you have to pay more than you borrowed. The components of a good debt strategy are quite simple:
- Choose when to borrow and what to borrow for carefully.
- Find the best interest rate and terms, based on your needs and wants.
- Live up to your repayment responsibilities.
- Periodically review your debt. Refinancing your mortgage or an auto loan may save you money.
The Importance of a Good Credit Record
A good credit record does more than just make future credit approval easier to get. Most lenders use your credit record to determine credit limits and what rates to charge. A good credit record will save you money. A program enables you to get a free credit report once a year so you can know your own credit record. You can request your free report at the website – www.annualcreditreport.com. Otherwise you can order a report from one of the three large credit reporting agencies.
| Order Your Credit Report |
| Equifax | (800) 997-2493 |
| Experian | (888) 397-3742 |
| TransUnion | (800) 888-4213 |
Common Sense Borrowing Habits
- Choose when to borrow and what to borrow for carefully.
- Find the best interest rate and terms, based on your needs and wants.
- Live up to your repayment responsibilities.
- Periodically review your debt. Refinancing your mortgage or an auto loan may save you money.
Getting Help If Needed
Take action immediately if your borrowing is getting out of control. If credit cards are the problem, stop using them or even cut them up. Contact lenders to develop a workable repayment plan. A qualified credit counselor can help.
Consider All the Terms
Comparing credit cards can be confusing. You have to consider interest rates, fees and associated benefits. The right card for you should reflect how you use it. If you pay the full balance monthly, the interest rate is of little concern. Focus on any annual fee and benefits such as airline miles or cash back features. If you carry over balances, the interest rate should be a top concern.
The "right mortgage" for you should balance interest rate, length, and down payment requirements that fit your situation. Adjustable rate mortgages usually have lower rates, but your payments may increase. Long-term mortgages usually lock in a higher rate. If you expect to stay in your current home only a few years, an adjustable rate mortgage may be best. If an increase in monthly payments would be too painful, look at a fixed rate mortgage or an adjustable one with rate adjustment limits.
Consider All the Terms
- College educations
- Housing
- True necessities
- Autos
- Major Furniture purchases
- Vacations
- Expensive jewelry rarely worn
Summary
Being conservative in your use of borrowing can help you take control of your financial future. Borrowing for the right reasons and living up to your repayment responsibilities can make borrowing a useful financial tool.
