HOW TO REDUCE DEBTS IN BAD TIMES

HOW TO REDUCE DEBTS IN BAD TIMES
Not all debt is bad. But it’s well known that debt can be a financial drug that is highly addictive. Yet banks mail tens of millions of unsolicited credit cards to American households every year, effectively putting free samples of this potential
narcotic into the hands of nearly everyone except the homeless. Mortgage companies make millions of unsolicited phone calls offering their “low-rate” mortgages. And even the Federal Reserve chairman himself, in testimony before Congress, urged Americans to spend and borrow more. The consequences are mind-boggling: The most personal bankruptcies in history. Countless divorces attributed to, or aggravated by, debt troubles. Many suicides. And that’s in relatively good times! In bad times, it’s worse. If your debt is already feeling burdensome, any loss in income that you may suffer can push you over the brink. And even if you feel your debt is currently manageable, a decline in the economy can suddenly make any debts loom far larger. Deflation (falling prices and incomes) can be especially painful: It makes all debts much harder to pay. If bad times or deflation strike your household, you may find yourself making only minimum payments on your credit card. You may notice that the balance of your checking account is running low—or running down completely—before the end of each month, and you’re drawing into savings to cover the shortfall. You could find yourself filling out applications for extra loans (more debt!) or borrowing from your retirement fund or life insurance policy. Act quickly to prevent these problems. If they are already happening, act even more quickly!If you have significant debts right now, you could be sleepwalking toward bankruptcy.Is bankruptcy an easy way out? No. It can be a lot tougher than you think. And if bankruptcy reform laws are enacted, tougher still. So if there ever was a time to eliminate your debt, this is it. Follow these steps:
Step 1: Declare your own personal war on debt. If debt has the potential to disrupt your life and cause your family serious grief, we assure you it is not your friend.
Focus your mental energy on reducing it.
Step 2: Attack your credit cards first. Get a pair of scissors. Put the scissors on your dining room table. Collect all credit cards in the household, including your own, your spouse’s, and those of anyone else for whom you’re financially responsible. Put them on the table too. Next, delight in that crisp “snip-snip-snip” sound as you cut them all in half. Enjoy the satisfaction of gathering them all together with one, clean sweeping motion of the hand. Watch with glee as they tumble neatly into the wastebasket.
Step 3: Attack your credit card statements next. Gather every last statement you have. If you don’t have all of them, don’t fret. You certainly will by the end of the
month. On the statement, find the annual percentage rate (APR). At the top of each statement, write down the APR in large numbers. Then, sort the statements with the largest APR at the top, the lowest at the bottom.
Step 4: Add up your minimum monthly payments. Let’s say it comes to $200. Isn’t it enough to just pay the minimum? No! Credit card companies deliberately require
very, very low minimum payments. Their agenda is to let you pile up as much debt as possible so they can earn as much interest as possible. How long would it take you to
pay off a credit card with minimum monthly payments alone? It’s a joke. Even with all your credit cards now in the trash, if you owe $2,000 on a 17 percent card, it could take you 24 years and cost you $979 in interest alone (on top of the $1,000 principal). So minimum payments are definitely not the way to go.
Step 5: Figure out how much you can pay over and above the total of all the minimum payments. Try to pay at least triple your minimum. So if your total is $200, that means your goal should be to squeeze at least another $600 out of your budget each month.
Step 6: Pay off the worst ones first! Use 100 percent of the extra $600 to pay off the credit card with the highest interest rate. If two or more cards have the same or
almost the same interest rate, send the extra $600 to the one that has the highest balance.
Step 7: Consider using your savings to get out of debt. The rate you’re paying is probably close to 10 times higher than the rate you’re earning! Not exactly a good deal.
Step 8: Avoid new credit cards. Period. Once you’ve kicked the credit card habit, don’t go back. If you need the convenience of a card, get a debit card. But ask your
bank to give you a true, pure debit card—not one that comes with a built-in credit card feature. If new ones come in the mail, trash them immediately.
Step 9: Start paying down any other personal loans you may have. If you’ve been able to get along with $600 less per month in spending money until now, and if your
circumstances don’t change, you should be able to stick with it. Use it to pay down any other personal loans you may have.
Step 10: Pay down your mortgage. Most people don’t realize that all you have to do is to write a larger check than normal, put it in the business reply envelope, and
send it to the mortgage company. They will automatically deduct the extra amount from your principal. So, continuing with the earlier example, if your regular mortgage payment is $1,000, write the mortgage company a check for $1,600 every month. You’d be surprised how much more quickly your mortgage will be paid off.