Friday, December 16, 2011, AM | 3 Comments
Some economists say we will eventually see light at the other end of the tunnel, but not soon. The American consumer debt, according to Federal Reserve, is at an epic proportion, to the tune of more than $900 billion. That’s on the national level. What can we, as consumers, do to reduce debt in our own personal lives? That, in turn, will reduce debt on the national level.
We have a responsibility. We owe it to ourselves and our kids and grand kids to act responsibly and leave something to them when we depart this life. That something ought not be debt but something more meaningful and beneficial to them.
At a very minimum, we should reduce and eventually get rid ourselves of the huge consumer debt that we find ourselves in. Death has no timing.
I am 63 years old and I can only assume that I still have at least 20 more years to live. But that’s only an assumption. What if I get on the highway, get into an accident. If not fatal, I can be incapacitated for the rest of my assumed 20 years. Why, then, should I leave any debt that I have to my kids? Why should I get them involved in this?
As long as we are alive, and hopefully in good health, we all have to pledge to ourselves and our families. We will get out of debt while still living and leave something to our families that they can be proud of and they can build something on it.
The most important thing is to change our mindset – less spending, more saving. It sounds easy but unfortunately, for some it is not as simple as that.
The financial gurus identify four major consumer debts – Mortgage, Credit-Card Debt, Student Loans, Medical Debt – that, somehow, we have to find a way to reduce and eventually eliminate so that we can live life a little worry-free from debt.
How to reduce mortgage monthly payments
Mortgage is one of the four debts that has a fixed monthly amount we know about, even in an Adjustable Rate Mortgage (ARM). We have bought a dwelling, we know the interest rate, any mortgage insurance, property tax, etc. We know the monthly cash outflow.
Having said that, these are extremely tough times. A few years ago, you were able to pay up every month. Now you might be struggling hard to come up with the monthly mortgage.
Two big ways you can immediately tackle to reduce your monthly mortgage.
- If your mortgage payment is getting hard to afford, contact your lender to see if you can negotiate a better rate or lower monthly payments.
- If you are in real serious and desperate situation, see if your lender is participating in HOPE for Homeowners, a government-run program.
The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD’s Federal Housing Administration (FHA) .
How to reduce credit card debt
This type of debt is not fixed. It is, what is known as, revolving debt. A debt that does not have a fixed payment although repayment is usually a percentage of the outstanding balance and made at regular intervals. Interest rates on credit cards can run more than 25% for cardholders who are late with a payment or have a low credit score.
You can immediately reduce and eventually eliminate credit card debt by doing the following:
- Pay more than the minimum requirement every month.
- Prioritize and focus on paying off high-interest-rate cards first.
- Take advantage of 0% balance transfer offers or low introductory APRs. Just be sure to read the fine print.
- Currently, the average fee for a balance transfer is 3% or 4% of the transfer amount. According to statistics, the average credit card debt is close to $10,000. So the fee would be at least $300.
- Make sure you can pay off the balance before the introductory period expires and the high rates kick back in.
How to reduce student loan
This is almost a fixed debt. You have borrowed money at a fixed interest rate and now you pay a fixed amount every month.
According to the College Board, the average undergraduate student left school with more than $12,000 in debt during the 2006-07 academic year.
Like credit card debt, prioritize.
- Federal student loans issued before July 2006 and most private student loans – 2008 average 14% – tend to have higher interest rate. Both carry variable interest rates that can rise and fall each month. Pay them first.
- Some say to consolidate all your private loans. However, since consolidation loans currently carry variable interest rates, it would only make sense to do so if you have a good credit score.
- Wells Fargo and Student Loan Network are some of the lenders that offer private student loans.
How to reduce medical debt
This is not fixed but more or less a revolving debt.
- If you have insurance, make sure the company pays its share of expenses.
- Sometimes, the doctor or the hospital will use a certain code for the services rendered that the insurance company cannot identify. You have to do “shuttle diplomacy” between the hospital and insurer to clear up the issues so the company pays its share.
- Speak with your medical provider. To ensure they get paid, medical providers are often open to working out payment plans.
- Figure out how much you can afford to pay each month, then pitch that amount to the doctor’s billing department.
- Many hospitals have government funds to help patients who can’t afford their medical care, and independent nonprofits also provide financial assistance.
In a Nutshell
To reduce and eliminate any kind of debt, you have to make changes in your lifestyle. You have to change your mindset of free spending and less or no saving to less spending and more saving. Do it for yourself, your kids and your family.