To get rid of your debt, you have to learn new habits, above all else. If you don't, you'll probably end up right back in the hole no matter what you do. Start saving up and paying cash for things. Wait a couple days before buying something, to see if it was just a temporary desire. Do what you have to do to change your habits (including reading the NLP chapter again, perhaps). But if you have the debt, how do you get rid of it?
Budget For Debt Reduction
Set aside 10% or as much as you can of every paycheck to start paying down your debt. Again, this will only work if you aren't borrowing more at the same time. Pay your debts before you do anything else.
Be Careful Refinancing Homes To Consolidate Loans
It may seem smart to reduce the rate on all that credit card debt to 7% by paying it off with a home mortgage refinance loan. When your credit card and loan payments add up to $900 every month, why not just get a loan that will pay all of these debts off and have a nice easy payment of say, $300? There are two reasons why this may be a bad idea.
Reason 1
Treating symptoms while ignoring causes creates more problems. Rarely is the cause of excessive debt just unforeseeable circumstances. Usually it is at least partly because you buy too many things on credit. In other words, it is due to bad financial habits.
Now what happens when you combine all that debt? Do you have less debt? No. Maybe you get a lower interest rate on average, but you still owe all the money, right? Your consolidated debt is just easier to pay, because it is in
one lower payment stretched out over a longer period. What else becomes easier now? Adding more debt.
This is exactly what many people do. They get their $900 of various
payments rolled into a loan with a $300 payment, and now they have excess income. Time to buy some things on credit! Debt consolidation can be a way to postpone reckoning with the real problem - bad financial habits.
Postponing dealing with debt makes it much worse, of course. Reason 2
Lower interest can cost more. It may seem like you are saving money on interest with some consolidation loans, but this isn't always true. The
problem is that you are converting short-term debt into long term debt. The longer you take to pay off the money owed, the more you pay in interest. An example: If you owed $6,000 on a credit card, with 18% annual interest, it would take a payment of $176.26 per month to pay it off in four years. You would pay a total of $2460 in interest. Suppose, in order to get the best interest rate and easiest terms, you rolled the debt into your 30-year
mortgage on your home (many people do this). If it was a 7% loan, it would add only $39.92 to the payment. That's easier than $176, and a much lower interest rate, but how much total interest will you pay over the years? $8371 - that's more than the original debt!
Of course there are debt consolidation loans that are not for 30 years, but you get the point. Even with a 15-year, 7% loan, which would costs $53.93 per month, you would pay at least 50% more in interest than with the 18% 4-year payoff. Converting short-term debt into long term debt can cost you a lot more in interest.
Try hard to make those payments and get rid of that debt sooner. You'll be glad you did. Of course, it may be impossible to make those payments. That happens, but for a reason. At least work as hard on changing your habits as you do on getting that consolidation loan. Then apply your debt-reduction budget to prepaying the mortgage loan.
Get The Balance Reduced
If you're in a truly tough situation, let creditors know with a letter explaining the situation. Ask them if they'll accept 30% or 50% of the balance as payment in full, if you can raise the cash before filing
bankruptcy. They know they'll get nothing if you file. I have seen more than one person eliminate a large chunk of their debt in this way.
If a lawyer or "representative" writes the letter for you, the creditors may pay more attention. Be sure it mentions that you may be filing bankruptcy. Of course, you won't have to if this strategy works. Below is an example of a basic letter for this purpose.
From: (your name and address)
To: (credit department, company name) Dear sirs,
I am facing a very bad financial situation. (briefly explain here if you lost a job, had hours reduced at work, or had uninsured medical expanses, etc., and keep this to a couple sentences.) As a result it seems I will not be able to pay my debts in full, and I will likely be filing for bankruptcy soon.
However, I would like to do my best to pay as much as possible before that happens.
I've sold things and brought together what little money I have left. As a result I can pay part of the total debt to those creditors who are willing to accept this as payment in full. If all accept, I am able to pay about 50% (or whatever you can pay). Those who refuse can certainly wait to see what is left at the time of bankruptcy, but it may be nothing.
My Offer
I've been advised that since some will likely refuse, the money I have left can be split fewer ways. With that in mind, I will find a way to pay 70% (or whatever you think you can afford) of the debt that I owe you, if you will return a copy of this letter agreeing to this as the total payment for what I owe. An agreement can be found below.
I can send the money by the end of the month. If I do not receive a reply within two weeks I'll assume you do not want to be included among the creditors I am paying prior to my probable bankruptcy filing. Thank you for your consideration.
Sincerely,
(your name and address) Agreement:
Regarding the debt owed by (your name) to (company name): (details of the debt, account number, possibly the current balance), (company name) agrees to accept (put the dollar amount you can pay - 70% of the amount owed in this example), as payment in full, if paid by (date - you might let them fill in this).
Today's Date: _______________
Signature: _______________________ (company name)
Of course, you would modify this letter for personal debts or other
circumstances. A lawyer may write a more formal letter. The basic idea is to let the creditor know that your remaining funds will be divided among those who agree, and they will be "left out" if they don't. likely getting nothing at bankruptcy. This type of letter has been very effective for many, sometimes getting most creditors to accept less than 50 cents-on-the-dollar.
The Absolute Quickest Way To Pay Down Credit Card Debt
If you have much credit card debt, you probably want to pay it off as quickly as you can. Before outlining how, we'll assume you have taken the first step - you stopped creating more debt and changed your ways.
Hopefully you also understand that paying off credit card balances with a consolidation loan or rolling it into a mortgage isn't paying it off. It may
make things worse. You see, paying on the debt for many more years usually means paying much more, not less.
Now it is time to learn how to be rid of that credit card debt fast. First, you have to understand that not all debt is the same, which, of course, you know. Some of your cards have a higher interest rate than others. How do you use this fact, though, to pay off the total debt in the most efficient way?
Budget money to pay down those balances. Don't have it? Find it! If you order pizza every week, for example, it may cost $60 or $80 per month. If you’re serious about getting those debts paid, you may have to eat $4 frozen pizzas for now. Do what you have to do, and determine how much you can apply toward the debt each month.
For an example, let's suppose you can budget $300 per month to pay your credit card balances. We'll also assume that you have four credit cards, and to keep it simple we'll say the minimum payment on each is $45. Now, you could just divide your $300 budget four ways, and pay $75 on each card every month. This, however, is the wrong way.
You should pay the minimum payment on all the cards but one, and apply the rest of the budget to that card. Which card? The one with the highest interest rate, of course. $45 toward each of the other three cards leaves $165 to apply toward the one with the highest interest. Continue in this way until this card debt is paid in full. This is how you pay the least in total interest charges.
Once the card is paid off, do you have an extra $165 to spend every month? Not if your serious about paying off your debts! Maintain the $300 budget and pay the minimums on the lower interest cards, and the rest on the one with the highest interest rate. You'll have $210 per month to pay on that one now, so things will start to get done more quickly.
Just continue this process in the same way. In the end, you'll be paying $300 every month on your last credit card, and the balance will be paid off
quickly. If you have the opportunity to transfer balances to lower-interest cards during this time, do it - but keep paying that $300 per month, and keep allocating it first to the highest rate cards. This is the fastest way to pay off that credit card debt.