10 Strategies to Become Debt Free
Copyright 2006 By Lynnette Khalfani
Millions of Americans struggle with credit card debt and other bills every month. Many people live paycheck to paycheck and feel hopeless about their situation. But there are some basic strategies you can take to become debt free and achieve financial freedom.
Here are 10 fool-proof ways to eliminate debt:
1. Put everything you owe in writing.
Create a written list or a spreadsheet of each credit card you owe. For some people, this step will be a big eye-opener. You may find out that you have way more debt than you thought. For others, putting all your obligations in black and white will be a relief: you'll discover things aren't as bad as you'd imagined. Either way, having everything in writing gives you a realistic look at where you stand, and let's you start a plan of attack to pay off your debts.
To jumpstart your efforts, go to www.themoneycoach.net and download a free form called "I Debticate Myself to Being Debt-Free." This pre-printed form allows you to fill in the names, addresses and phone numbers of your creditors, the interest rates on your cards, the balances and minimum required payments. Use the form to tally up all your debts and decide which bills to knock out first.
2. Call up your creditors and negotiate.
Many consumers don't realize that they can call up their creditors and ask for lower interest rates, or request that annual fees be waived. Credit card companies will often lower your rate on the spot simply because they don't want to lose your business.
It's a competitive market.
The Consumer Federation of America says credit card companies send out about five billion credit card offers annually. Credit card issuers know that customers will switch cards if their interest rate is too high. So using your list of bills you created in the previous step, call up each creditor and start negotiating. Knock down the interest rate on several cards to 12% or less and you'll save a lot of money and have lower monthly payments.
3. Switch credit cards if necessary.
If a creditor refuses to lower a sky-high interest rate, consider transferring your balance to a new credit card with a lower rate, especially if you've been paying your bills on time. But switching cards is part art, part science. Don't open a slew of credit cards.
Too many inquiries and applying for too much credit can hurt your FICO credit score. And don't close out the old account. Keep it open because having a longer credit history improves your credit score. Get your credit reports and FICO score online instantly at www.myfico.com.
4.
Pay more than the minimum amount due.
Don't fall into the minimum payment trap. Minimum payments in the short run really mean maximum payments in the long run. To avoid paying exorbitant amounts of interest and having credit card debt for life, you must pay more the minimum balance due. If possible, try to pay 2 to 3 times the minimum payment.
5.
Give yourself an instant raise at work.
For those of you who routinely receive tax refunds, instead of giving the government an interest-free loan, get your money now. Go to your HR office at work and adjust your W-4 withholdings so that your employer takes less money out of your paycheck. This way, you'll have more money coming in every pay period, and you can use that extra money to knock down your debts.
6.
Start building up your cash cushion.
Ideally, you should have three months' expenses set aside for emergencies ? like job loss, disability or divorce. For example, if your bills are $3,000 a month, you should have a $9,000 cash cushion. You obviously won't accumulate that over night. Just go ahead and start saving a little bit of money each month.
Consider that money "off limits."
7. Get financial help.
Consider getting educational credit counseling or retaining a financial planner to help you strategize about the best ways to improve your finances. Hiring financial help isn't just for the rich, and it doesn't have to be that expensive. Visit the Financial Planning Association (http://www.fpanet.org) or call them toll-free at (800) 647-6340 for a certified financial planner in your neighborhood.
You can also receive one-on-one financial help or group coaching by visiting http://www.themoneycoach.net.
8. Pay your bills ahead of their due dates.
Banks are shortening the grace periods on credit cards. Instead of a full month, you now have 20 to 25 days after receiving a bill to pay it. So it behooves you to get your payments in on time. Don't stress yourself by trying to time your payments to arrive on the creditor's doorstep precisely on the due date.
There's too much risk of something going wrong. A better strategy: plan to pay your bills a week before their due dates. This way, you avoid accidentally sending in a payment late, and getting hit with a late fee. Also, you won't be hurt by the "universal default" clause that lets one creditor raise your interest rate if you've been later on another, totally separate bill.
9.
Use windfalls properly.
Some people struggling to get out of debt are fortunate enough to come into cash windfalls that could be used to pay off credit card bills. Windfalls include: a tax refund check, an inheritance, proceeds from a lawsuit, an insurance payout, money from a legal settlement, an annual bonus ? any lump sum of money beyond your regular paycheck or normal income. Unfortunately, too many people waste lump sums of money on spending sprees of all kinds. If you receive a large cash windfall, don't blow the money. Use those funds to eliminate credit card debt.
10. Cut spending and apply savings to your debt.
Consider this area a unique challenge. Get creative about your finances. Look at ways you can save money by shopping around or by modifying some of your spending habits. Come up with a list of at least five things you can do to curb your spending.
Also think about major categories of spending where you can reduce your costs. For example, if you pay a monthly car note, consider refinancing your auto loan in order to save yourself money. Go to http://www.capitaloneauto.com, the country's largest online auto lender, to save money on your monthly vehicle payments. Also visit http://www.lowermybills.com, which helps you save money in 18 categories of household bills, ranging from home equity loans to auto insurance to long-distance telephone service. Best of all, it's a free service that does comparison shopping for you.
Whatever cost savings you achieve ? whether from clipping coupons or canceling unnecessary magazine subscriptions ? make sure you apply that "extra" money to your debts.
Use these strategies starting today and become debt free faster than you ever imagined
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