Friday, April 1, 2011, AM | 1 Comment
Before the credit crunch started, many people had large sums of debt on their credit cards to the tune of $10,000 and up. Some still do. Some credit gurus will tell you that it was OK to have carried that kind of debt before the market meltdown, but I don’t think it ever was okay. It should never be.
Credit-card companies are jacking up rates and fees, making it easier to fall deeper and deeper in the hole. During a recession, nobody’s job is safe, from a senior executive down to the assembly worker. Most of us feel increasingly vulnerable. Debt becomes even more scary when you lose your job.
Unfortunately, even if you are determined to be more disciplined, paying off your debt can be just as slow and frustrating as trying to work off those irritating extra pounds. But most people still use credit cards for travel, gas and other needs.
You watch commercials on TV. You listen to ads on the radio and see ads in newspapers and magazines. They all tell you to call them and “lose debt quick.” Just be careful and be wary of them. Here are a few points to remember and think about:
The balance-transfer method
Transferring your accumulated credit-card debt to a new card with a 0% or very low interest rate can give you a clean slate. If you have good credit score, you might qualify for the limited offers now available.
Transferring your balance typically includes a 3% fee, or $300 added to a $10,000 debt. In addition, the 0% rates usually last for a short time. That means you could be paying stiff interest again fairly soon. Be sure to read the terms carefully to avoid getting burned; making a late payment, for instance, may mean an immediate end to the 0% rate.
This “debt diet” may offer good savings from your current interest rate. Some people are currently paying as much as 32% in interest charges. The transfer could be good for you as long as you don’t accumulate any more debt. That means no more charge on your credit card. Stop spending. Period.
If you do need to make new charges, you should do it on a separate card that you pay in full every month so that you don’t add to your debt burden.
The home-equity line of credit plan
You can pay off your debt more quickly with a much lower interest rate by using a home-equity line of credit – and get a tax deduction in the process. For this to work, you have to have enough equity in your home and a good credit record, to qualify for the current rate, about 5%. You can use your favorite search engine to look for current rate.
Some banks’ minimum line of credit is $25,000. It might be more than what you likely need. Most banks will ask for just a small payment each month, so the interest charges will accumulate. You will have to figure out a payment that eliminates your current debt as quickly as possible; if you take your time, you could easily end up paying off your credit-card balance for years to come if not decades.
Paying debt with your retirement money
Using your 401(k) and your IRA account to reduce your debt is probably the worst you can do to your financial health. True, you can borrow against your savings and pay yourself back. But today, you would be cashing out on beaten-down investments.
Those funds could miss the market’s eventual upturn. Worse, if you lose your job, you would have to repay the loan right away, or pay income taxes and a 10% penalty on any amount you borrowed.
Reduce your 401(k) contribution
This is a less invasive option. You could reduce your debt with the extra money you get in your paycheck. You should keep contributing at least enough to receive the company match.
The family and friends strategy
By asking a parent, sibling or other family members and friends to make you a loan. You can make a deal with them. Let’s say their money is in saving accounts earning 4% to 5%. They can “deposit” the money with you. You could give them a higher interest than they are getting now.
Ask your credit card company to reduce your interest rate
Many banks will accommodate you, especially if you always pay some amount, at least the minimum, on your bill in time.
Trim your expenses
Trim expenses and increase your payments will help you get rid of debt. These days, energy prices are quite a ways lower than the summer peak. For a 15 gallon tank, I am saving more than $30 and drive just the same. You could put the extra money saved toward your credit card debt.
You could save perhaps $10 every week from your normal expenses and pay over $40 towards your debt every month.
In a Nutshell
Many financial planners will tell you to pay off the highest-interest-rate debt first or you may want to pay off some smaller debt first so that you can see some progress. Whatever works for you.
Listen. You gotta try something to reduce your debt. It’s your mindset more than anything else that will change your situation for the better. You must set your mind to it, starting today – now – to begin paying off your debt.Facebook.com/doable.finance