Sunday, February 1, 2009

Credit Debt Tips

Credit is a necessary evil in today's society. Without it, you can not make high end purchases, that is, unless you have a suitcase full of cash on standby. Most people do not have this option, and so, they become roped into debt by credit company's who promise the sun and the moon. But what these credit company's do not advertise is the fact that by the time you have finished paying them off, you will have paid for your big purchase at two or three times its original cost.

Eventually, everyone finds themselves at the crossroads of credit debt. It takes a big hunk out of each paycheck, which makes a debtor rely on them more and more. This vicious cycle must stop! Here's a few ways that I have learned over the years to free oneself from credit debt:

1. If you are new to the credit world, it is best to start and stay small. If you must obtain a credit card, be sure to only own one. If you are trying to build your credit, you should only make purchases on this card that you already have cash to pay for. Build your credit by making small purchases that you pay off every month. But beware, credit card companies like to reward you on your excellent paying history by giving you a bigger credit line to hang yourself with. If this should happen, call the credit card company and ask them to reduce your credit spending limit to no more than $500. I know that does not sound like much but it is enough money to help you out if you should have an emergency and low enough to keep you out of serious financial crisis.

2. Already in serious credit debt? If you have a job, do not fear! There are several strategies that can be taken to steadily reduce your debt. These are no magical formulas that will instantly make your debt disappear overnight. It most likely took you several years to create the debt problem and it might take several years to get out of it. Here are some ideas:

Snowball Effect: After truthfully accessing your credit debt, on a piece of paper write down each debt from lowest to highest. The lowest debt owed will be the first debt to attack. Pay the minimum on all your bills on time. Once you have paid off your lowest bill in full, take the money you were paying on that bill and add it to the payment on your next lowest owed debt. Once you have paid that debt, take the payments from your first two debts and pay your third lowest debt.

Do you see what is happening? Your payments are becoming larger with each debt you pay off. Which will lead to a faster pay off on your largest bill. I like this plan because it meets the debtor right where they are and doesn't ask them to pay more than what they are already paying to begin with.

Interest Snowball: This technique is just like the Snowball effect except with a little twist. Instead of focusing on paying off each debt based on how much is owed, it takes into account how much interest is being paid out. It is a simple calculation that may save you more money in the long run than the Snowball effect by itself.

Here's how: Divide the balance that is owed on the debt by minimum payment required each month. You will come up with a decimal number. Write this number beside each debt. When you have done this for each debt, put the decimal number you came up with in highest to lowest numerical order. The highest number is the debt you are paying the most interest on. The decimal numbers is the number of months it would take to pay off the balance of the debt if only the minimum payments were submitted every month.

Once it has been established which debt has the highest interest, attack it just like in the snowball effect. Once the highest interest has been paid off, roll that payment money onto the next highest interest debt; and so on and so forth. This is probably the better of the two snowball effects because it is possible to pay off an interest snowball faster. By paying off higher interest debts first, you eliminate paying more interest by paying over a shorter period.

Cold Turkey: This plan separates the men from the boys. Not everyone can do this, but it is the fastest way to pay your debt off. The times of living like a prince are over (for now) and it is time to come back to reality and realize you’re just a pauper. This means that if you are spending money on anything other than basic necessary living expenses, for a short time, you will have to stop. No more Netflixs. No more Starbucks. No more name brand clothes. No more dining out.

If you really take a look at what your spending on life itself, you will see that you waste a lot of your money's potential. So cut out your luxuries and put that money on your debt. You will be surprised how fast your debt disappears if you sincerely make this financial effort. But like I said, it isn't for everyone.

3. Finally, stay out of debt by ridding your life of the things that made you stumble into debt in the first place.

-Cut up those evil credit cards.

-If you really want that nice house then save like a mad man and avoid paying interest.

-When you pay your car off, pretend you never paid it off and throw your car payments in a savings account towards your next car. When your car stops working, you can walk up to the car dealership and lay down cash. They hate that, but it will be a sweet victory for you.

-Or just save for a rainy day. Who knows what the future holds for you on the financial front.

-Lastly, pay cash for everything. Make a deal with yourself that if you do not have the cash then you really do not need to make the purchase. If you really want it, it will be far more valuable to you if you have to wait and save the money for it.

I wish you all financial debt freedom.