Your heart skips a beat… you feel faint… panic sets in… In your hands is yet another bill, another overdraft notice, or another letter from a creditor demanding payment.
Anyone who has ever found themselves with growing debt knows that out-of-control feeling. In 2005, low- to middle-income 18- to 34-year-olds reported an average credit card debt of $8,182. Add another $20,000 in average student loan debt and much of our generation is seriously in the hole. For far too many of us, money feels like the enemy and we are financially lost.
Lucky for you, there’s a route that will get you back on the right road and headed toward money mastery. You’re going to have to go through some tough terrain, but with some focus and determination, you can get out of debt.
Is debt a friend or foe? Most Americans consider debt to be the worst kind of adversary, but there is actually something called “good debt.” Financial experts consider debt that creates value, such as student loans, mortgages, and business loans, to be good debt. Although you owe money, you have the chance to increase your wealth over the long term.
On the flip side, experts consider “bad debt” to be the purchasing of items on credit that are disposable or that depreciate in value. Items such as furniture, clothing, groceries, and cars are considered bad debt if you don’t pay them off soon after purchasing – yes, even cars. The value of most cars never increases.
The first step to reducing debt is to determine exactly what you hope to achieve with better money management. Do you want to answer the phone without worrying if it’s another angry creditor? Do you want to buy a house? Do you want to stop wasting money on late or overdraft fees? Whatever it is, write it down. Put a copy in your wallet, tape one to your fridge, and keep one in your car. Remind yourself of your goal to keep from getting sidetracked.
It’s time to pull over and find out exactly where you are. Gather up all of your account statements and bills, toss some popcorn in the microwave, and get comfortable. You need to make a list of what you owe. Include details like the current interest rate and balance for each debt. Don’t panic if your list is daunting. You now know where you are and this gives you the power to get where you want to go.
The next step is to prioritize your debts and develop a repayment plan. Some experts suggest paying off debt with the highest interest rate first, while others suggest starting with debts that are the easiest to pay down. Do some research, talk to a financial professional, and make a plan that fits your needs best.
• Put the cards away. Credit card debt can be difficult enough to pay off without consistently adding to the bill. Be careful opening or closing credit card accounts as this could affect your credit score.
• Pay on time. According to Consumer Action, the average credit card late fee was $27.46 in 2005. Avoid wasting your hard-earned money and prevent dings to your credit score by paying your bills on time.
• Pay more than the minimum due. The higher the balance you leave on your credit card each month, the more you pay in interest. Pay down your balance as quickly as you can.
• Use the Internet. Many financial institutions offer free online account services, like automatic bill pay. Not only can this simplify your finances, it can also help you avoid late fees.
• Negotiate with creditors. It won’t hurt to call and ask credit card companies to lower your interest rates. Even a few percentage points lower can save you a lot of money. (Hint: Try using the following point as a negotiating tactic.)
• Transfer credit card balances. If your credit card company won’t lower your high-interest rate, consider transferring that balance to a card with a better rate. Factor in any fees and watch out for interest rates that start low, but jump higher in a few months.
• Consider consolidating. Consolidating is when debt is converted into one payment with one interest rate. You can consolidate some student loans, credit card balances, as well as other types of debt. Be incredibly thorough, factor in all of the variables, and talk to an unbiased financial professional.
• Save smart. An emergency stash with three to six months of living expenses is always a good idea, but when it comes to more serious saving and investing, be wary. The interest you would accumulate often doesn’t even touch the amount of interest you will be paying on high-interest debt.
The next step is to write down your monthly expenses. You might be spending more than you make, which could be why your credit card bills give you panic attacks. You will probably have to adjust your spending habits. Start with things you can really live without. If you have serious debt, you may have to cut out even more, like car payments, cable bills, or cell phone minutes. Take a deep breath. Look at your original goal and remind yourself why you’re doing this.
Keep track of your progress with a notebook, software tool, or online program. In case you get the urge to take a detour, don’t forget to look at how far you’ve come. It just might keep you from turning back. Continue learning how to manage debt properly, so you don’t end up in (bad) debt again!