Getting out of Debt - Fixing Credit Problems

The average American who keeps a credit card balance owes something like $7000 on their cards. At 18% interest, that's $1260 a year in interest alone, or about $100 per month. Most people fail to recognize that it is often the little expenses that really add up over time - $4 at Starbucks each day, lunch out 3 days a week, dinner out here and there, just put in on the card. The first step to reducing debt is to make every expense visible. Pay in cash for everything for a month and see what it does for you. Take the credit cards out of your purse or wallet, take out $200 cash for the week (or whatever your budget is each week for groceries, entertainment, etc). and that is all you can spend - are you sure you want to spend $75 for dinner our on Friday with your girlfriend? $6 for that lousy magazine? You'll quickly find yourself making better financial decisions, and you will limit your spending automatically. If you asked most people to account for where their money went in any month, about 10-30% on monthly spending is usually hard to account for due to all these little miscellaneous bills.

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Even though you don't use the credit cards for a while, be sure to keep those accounts open, as longstanding credit improves your credit score (FICO). Of course you still have to pay off those existing balances. One tip is to call your credit card companies and tell them you intend to move your balance to another card offer you got in the mail, offering lower rates and fees - unless you are a terrible customer and terrible credit risk, most companies will oblige you and offer to lower your rates and/or drop annual card fees. While they love making 22% interest off you, they are also happy to make 15% or 12%. You can't get guaranteed returns like that from stocks and bonds! Of course if you really can transfer balances to new cards at zero percent interest - do it. Just make sure the ongoing terms and rates after the initial period are comparable to what you had before or better. If you don't already have a printed monthly budget, with income and expenses all spelled out, make one. Seeing it on paper and making it part of your monthly planning process will help you stick to your goals. Start with simple goals, like $100 less per month on entertainment spending, and $150 extra payment to the credit card company each month -- then increase those numbers by 10% every few months and see if you can meet your goals. One easy way to improve your debt situation is by getting a second job - most people like their leisure time and can't imagine working two jobs, but the truth is that an extra $800 per month from bartending, selling things on EBay, or mowing lawns on the weekends and evenings can pay off even a big credit card balance in less than a year.

Reducing Credit Card Debt

When it comes to reducing credit card debt, there are few simple rules to keep in mind. First, always send your payments in before the due date - missing even a single payment by even a day can tack on higher penalty interest rates and late fees. Many people find that they owe more in penalties and interest payments that they do for their actual credit card purchases - don't get yourself into a situation like that. Secondly, PAY MORE THAN THE MINIMUM. Paying only the minimum amount due may not even cover the monthly interest expense, meaning you never pay down the card, and you will possibly be making payments forever. Thirdly, take advantage of cards that offer zero percent financing for a year on transferred balances - move high interest rate balances there and then pay them off within the year, saving all that interest expense. Also, pay off the cards with the highest rates first - this seems like a no brainer, but a lot of people don't look that closely at their statements and instead work on the smallest or largest balance first, regardless of the interest rate.

Fixing Credit Card Debt

Getting into credit card debt is easy - getting out of trouble is not so simple. Some options are debt consolidation, credit counseling, stricter budgeting, getting a second job, and in some extreme cases, personal bankruptcy. Bills that arise out of an emergency situation like medical or hospital bills are one of the key contributors to financial problems - events like that just aren't budgeted for, and most people don't have tens of thousands of dollars lying around for bills like that. If you find yourself unable to keep up with your creditors, your first step is to call them, explain your situation, and try to establish a more lenient payment plan. Most creditors will work with their customers - their goal is to get paid, even if it takes a little longer to do so. Once your account goes into collection, your relationship and prior payment history with your creditor goes out the window and you will not be able to make any deals. Bill collectors may be bad news, but they are required by law to follow certain rules, like not calling past certain hours, not bothering you at work if requested not to do so, not being allowed to lie or make false statements, etc. So know your rights and stand up for them if need be. Credit counselors can also help you get back on your feet by establishing a monthly payment schedule, sometimes consolidating your debts into a single new loan that is easier to manage, and often at lower interest rates than most credit card debt. If you decide to do debt consolidation via a home equity loan, be aware that home equity loans and second mortgages are not just free money - you are using your home as collateral, and could be forced to give up your home through a foreclosure process if you can't make your future payments. Keep in mind that all missed payments, late payments, etc. will remain on your credit report and affect your credit score for 7 years.

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