How to Erase Credit Card Debt: (while still living your life*)
Getting stuck in debt is stressful, emotionally draining, and can really take the enjoyment out of day to day life. Most people don’t have a clue how to start fixing their finances, but if you take a slow step by step approach, you can really accomplish alot. There are a great number of businesses that offer debt relief, but quite a few of these “amazing” offers, turn out to be like a mirage in the desert and will leave you thirsty for honest, unbiased debt help.
Above we’ve created a “how to erase debt” mindmap that you can refer to if you are unsure where to start to get rid of your debt. “Click Here for the Full Size“
So, lets go over some ways you can: 1) cut spending, 2) make extra money, 3) negotiate your debt, 4) get yourself organized and prepared to erase your debts.
Organize Your Debt
The first thing you should do is 1) calculate all of your debts, 2) your monthly expenses, 3) and your monthly income.
An accurate picture of your finances is needed so you will know where you can cut back and which debts you need to tackle first. You can use a spreadsheet program like excel (for windows) or numbers (for mac) to neatly print these calculations out. The good thing about using excel is that it usually comes free on most PC’s (you might already own it). You might also want to try out a service called mint.com, which is a free online personal finance software that allows you to budget and manage your money with an easy to use interface. Mint is advertiser supported, so they won’t try and upsell you after you do a free sign up. Another good budgeting software you might want to investigate is called Quicken. They offer a free trial version that is missing important features, but if you choose to purchase this software it costs around $50.
Cutting Spending
After your debt and expenses are neatly laid out in a spreadsheet, you can see where the weak spots are and start trimming the fat like a butcher. Find out if you spend too much on things like entertainment, housing, or on insurance. These are 3 things that you can budget back quite a bit, if you put a little work into it.
You can save money on groceries by buying in bulk. Stores like sam’s club or costco offer huge saving if you can plan your monthly meals ahead and purchase large quantities. You can also clip coupons for extra reductions.
Auto insurance is a fiercely competitive industry and the major players will slash prices to compete. If you call around and get some free quotes (play one company against each other for the best result) you can usually get a better rate than you’re currently paying. Just make sure you are only cutting price, not coverage you may need.
Another “cost of living” that can make up the bulk of our monthly expenses, is housing. Many people will absolutely dread doing this, but you can really reduce your monthly expenses if you live somewhere cheaper. If you own a house, you can choose to rent it out, while you move into a less expensive apartment. If you are renting and stuck in a lease, you can get someone to sublet and find somewhere cheaper to live. No one wants to give up where they call home. But, your bills come first, so try and put your pride aside, and lower your expenses.
Boosting Income
If you want to get that debt paid back at record pace, you might consider supplementing your income with an estate sale, recycling, working overtime hours, a night job, or (if your desperate) by borrowing money from relatives. A friend of mine swears that his pizza delivery night job, is the easiest money he’s ever made (and he gets tips!).
You might also want to look into doing freelance online work, like article writing, or data entry. Check out a site called freelancer.com. They have plenty of work for people with decent writing skills. Computer skills are an extra bonus and if you can do web design, programming, or graphic design, you can make pretty good money. If you can make a little bit extra (even a couple hundred dollars) every month you should apply it all directly towards your debt. If you commit every single cent of this extra cash towards your balance, things can really start moving.
Negotiate or Reduce Your Bills
If you want to negotiate the interest, balance, or repayment of your bills you have a few options.
You can choose to “do it yourself“, work with a qualified credit counselor, or a hire a debt settlement company. Many debtors can get alot accomplished just by making phone calls to their credit card companies and other creditors. When you call up your credit card company they will refer you to a department set up specifically to do these type of negotiations. One simple thing you can do is call and ask for a lower interest rate. Many people can get an interest rate reductions the very 1st time they call. You can also ask for things like payment extensions, or even a reduction of the balance. Things like balance reduction are obviously tougher to get,but aren’t out of the realm of possibility. If you are barely making ends meet from month to month, LET THEM KNOW! Credit card companies WILL compromise in order to keep you from going bankrupt. The closer bankruptcy is on the horizon, the more they will bend over backwards to help you.
Another option you can choose, is to work with a credit counselor. Most of these financial counseling companies work as non-profit organizations and can provide excellent services for little or no money. Accredited counselors can be extremely trustworthy because they don’t work based on commission. They can offer a wide range of financial advice on subjects like debt, housing, and credit problems. An expert in these fields can help you plan your climb out of debt. Credit counselors can offer a debt negotiation service called a debt management plan. This is a repayment plan setup between your counselor and your creditor. It involves the repayment of the debt into an escrow account set up by the credit counseling company. Money is take out of this account to repay your creditors over time. Debt management plans are a way to keep your creditors at ease, because your creditors work with you on the terms of the repayment. The cooperation between you and your creditors can help keep negative actions like lawsuits to a minimum.
The last way you can work to reduce your balance is through a process called debt settlement. Debt settlement companies offer large reductions in total debt, but can sometimes be risky financially and legally. These companies will advise you to completely stop payment to your creditors while you make payments to an escrow account every month. Once a significant amount of cash has built up in the account, your advisor will call your creditors and offer them a lump cash settlement. If it works it can lead to a large reduction of your balance (in the range of 20%-70%), but it is not guaranteed to work. It is very possible that you can spend years building up the funds in your escrow account, but your creditor will decline the settlement offer. There are also many fees associated with debt settlement, so even if you settle the case, you will often pay more than expected.
Prioritize Your Debts
It is important to prioritize and rank each debt, according to how expensive it is. A large debt with a low interest rate, isn’t necessarily as bad as a low balance credit card at 20% interest. Conquer the high-priced debt first, because you will save the most in the long-term. It would make the most financial sense to start with the highest interest debt (like credit cards which range from 10%-20% interest) first, because it is your “most expensive debt”. Or you can start with your smallest debt first and pay it off quick, just to get the ball rolling and give you a sense of momentum.
Some experts suggest going after “non-revolving debt” (credit card debt is considered “revolving” because more funds are added to the balance as you charge each month), because once it is paid off, your balance is closed. Once you start to see some progress on those balances, this whole debt issue will become easier to handle.
Get a Low Interest Loan to Pay Off Debt
If you have very high interest debt (like outstanding credit card bills), you may consider getting a low interest loan to pay it off quickly. Property owners have the ability to get home equity loans or credit lines at pretty low interest rates. You should only consider doing this if there is extremely low risk that you will default. It’s NOT smart to take on a loan that is secured to your home, to pay off your unsecured credit cards. You don’t want to be left with a home! But, money is very cheap to borrow right now, you can use this to your advantage to help spring you from the debt trap you’re stuck in. If you get a 4.25% interest home equity loan to pay off your 17.5% interest credit card, that might make good sense financially for you. (if you’re considering this, you might want to talk it over with a credit counselor)
If you can’t qualify for a home equity loan, or just don’t want to get a secured loan, you should look into an unsecured personal loan. You can check out peer to peer lending networks like prosper.com to get an unsecured loan. Here is a blog post about a woman’s experience borrowing from prosper.com to pay off credit card debt.
Balance Transfer to a Low Interest Credit Card
If high credit card interest rates are draining your bank accounts, you can call customer service and attempt to get your interest rates lowered. I recently read that this can work about 50% of the time and can be approved the same day you call. Your company might refuse to budge, and if they do, you might be able to do a balance transfer to a lower interest card.
There are 2 routes you can take with this:
If you plan to pay credit card debt off quickly (less than 6 months), you can move your it to a low interest 0% balance transfer promo card. These type of credit card cards will require no upfront fee to transfer your cash, and the interest rate will be very low to start with. But, with a promo card the extremely low interest rate will expire in about 6 months. It will adjust to a higher rate after the promo expires. NOTE: You will always have the ability to transfer to another promo card before this intro rate expires. (This can be tricky, make sure you know what you are doing if you try this method)
If this sounds a little too risky or you plan on holding this debt longer, may be able to find a “fixed interest rate” balance transfer card, with a small transfer fee. Fixed interest rates are ALWAYS better, but you’ve got to calculate how much you’ll save with the transfer fee added in. If you think you are going to HOLD ON to the debt a while, this might be the route you want to take.
Refinancing your Mortgage
Homeowners can bring down their monthly mortgage expenses while interest rates are so low. Right now it is possible to refi for under 5%. You can search rates on sites like Bankrate.com or get multiple quotes from a site like Lendingtree.
You should seek out FHA approved lenders, which can be found on the Housing and Urban Developments site at http://www.hud.gov/ll/code/llslcrit.cfm. These lenders must meet certain requirements and do not “tolerate fraudulent or predatory lending practices”
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