Can You Get Out of Debt?

Next to weight loss, it's likely the most common New Year's Resolution. And that is getting out of debt.  In the past two years, the economy has prompted many to take that resolution a lot more seriously, especially in view of the credit card debt some folks had been carrying.  Bill Hardekopf from LowCards.com says "being motivated is a good start, but to be successful,you must also have a plan to pay off your bills."

Here are Bill's ten tips for consumers to reduce personal debt in the New Year:

1. Know how much you owe.

Collect each of your bills with outstanding debts including all credit cards, mortgage, student loans, auto loans, personal loans, and bank loans. Create a list of all the creditors with monthly payment amount, balance, interest rate, and credit limit for each. Verify the payment due dates and the status of the account.

2. Prioritize which bills to pay first.

If you can't pay off all of your monthly bills, first pay the bills that are a necessity for health, shelter, basic groceries, and basic transportation. Then, pay the secured loans such as your car loan. Payments on unsecured loans, such as most credit cards, should come last in these critical situations.

3. Obtain a free copy of your credit report and review it.

It may contain an error that is creating a lower credit score that is leading to higher interest rates on your loans. If correcting the error results in a higher credit score, contact your creditors to make sure they know about your improved score.

4. Contact your creditors to negotiate lower rates.

The less money you pay in interest, the more money you have to pay off your bills. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be willing to work out a payment plan, lower your rate, or lower your monthly payment. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. If you request a lower interest rate and get turned down, politely ask to speak to the supervisor and ask again. Document all conversations, including whom you spoke with, and the date, time, and the results.

5. Pay more than your minimum payment.

Your minimum payment is usually only 2%-5% of your balance. At this rate, it will take many years to pay off your debt. In fact, your credit card bill now shows exactly how long it will take. You may be surprised about how much you will pay in interest payments by paying just the minimum payment each month.

6. If you have multiple credit cards with outstanding balances, focus on paying off the card with the highest interest rate first.

Continue to pay the minimum on your other cards until the card with the highest rate is paid off, then focus your effort on the card with the next highest interest rate. Keep your oldest credit card accounts open and occasionally use them to buy a magazine or a movie ticket--just pay it off each month. This may
help improve your credit score.

7. Check into transferring your balance to a card with a lower interest rate.

If your rate is above 15%, it could pay to transfer the balance for that card to one that offers 0% APR for at least 12 months for balance transfers. Citi Platinum Select currently offers a 0% rate for up to 24 months. To take full advantage of this 0% interest, pay as much as you can above the monthly minimum. Only use this card for the balance transfer, not additional purchases. Pay attention to the balance transfer fee. At the beginning of 2009, the industry standard for a balance transfer fee  was 3%; now several issuers have increased that fee to 4%.

8. If you have a credit card balance, stop using it for anything other than necessities.

If you use cash, you will not only save money on interest, but also reduce the amount you spend. According to a Dun & Bradstreet report, shoppers spend 12% to 18% less when using cash. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothes, entertainment and things that are long gone.

9. Pay your bills on time, every month.

Late payments can drag down your credit score. If you are 30 days late on your credit card payment, you could lose 60 to 110 points, depending on your credit score. The higher your credit score, the more points you may lose.

10. Take advantage of help provided by your bank and credit card issuer. Sign up for online payment alerts that notify you when a payment is due. Most banks offer this service for free. It can also notify you when your account has dropped below a designated balance. Some cards like Citi, MasterCard provide in Control that gives cardholders the ability to set spending controls and receive real-time information about their account.
It can help set up budgets for particular types of spending and manage exactly where, when, how, and for what types of purchases their credit cards may be used.

Paying down your debt will take time but there are many benefits, according to Hardekopf . He says as you pay dow your balance, your debt will decrease and your credit score will increase. As your credit score increases, contact your issuers to ask for lower rates.


Credit Counseling:

If your debt is severe and you can't take these steps on your own, it may be time for a debt counselor. Use caution in finding a certified counselor whose priority is reducing your debt, not collecting your fees. The National Foundation of Credit Counselors (www.NFCC.org) can help you locate a credit counselor in your area.

A credit counselor can offer advice on managing your money and help you develop a personalized plan. You can also enroll in a debt management plan where you pay the credit counselor a monthly payment to your credit counseling agency which will distribute the funds to your creditors. The credit counselor may be able to negotiate with creditors to reduce fees andinterest rates on your credit cards. Compare the fees of credit counselors.
Credit counseling and debt management plans should not cost thousands ofdollars. According to the NFCC, it should cost about $50 to set up the plan and a $25-$35 monthly fee.


Bankruptcy:

Bankruptcy should only be an option if payment of your bills is impossible.There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13.

Chapter 7 is the simplest and fastest form of bankruptcy but also the more severe alternative. It requires you to surrender all assets to the state tohelp repay the debt. Exempt property varies by state but may include itemssuch as limited values of your equity in a home, car, or truck, basichousehold furnishings and work-related tools, and social security payments.

If you file Chapter 13, you may keep your property and other assets. You must pay off all or part of your debts over three to five years with a court-approved repayment plan. Chapter 13 is available only to individuals with regular income whose debts do not exceed prescribed limits.

Both types of bankruptcy may get rid of debts where creditors have no specific rights to property and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Bankruptcyusually does not discharge child support, alimony, fines, taxes, and somestudent loan obligations. Bankruptcy can remain on your credit report for up
to ten years. However, if you are responsible with credit, its effect on your credit score can start to diminish the day your case is closed.