Haphazard repayment—the minimum on this card, an extra $100 on that one— progresses so slowly that you’ll get discouraged. After a few months, you might give up. What you need is a total debt repayment plan, and here it is:
1. List each of your loans: how much you owe (most people don’t know), how much you’re paying every month, and any fees. Total it up.
2. Restructure your debt to reduce the interest cost. You might apply for a card that offers zero interest on transferred balances for the next 12 months (most cards charge a 3 percent balance transfer fee; look for an offer with no fee or a fee capped at $50 or $75). Use that grace period to pay off the debt. Just be sure that once the zero-rate period passes, your new card will carry the same, or a lower, interest rate than you’re being charged now.
Alternatively, consolidate your consumer loans on a low-rate credit union loan or home equity line of credit. This works only if you’ve brought your spend¬ing under control. If not, you’ll run up the debt on your credit cards all over again, giving you double the consumer debt you had before. Compulsive spend¬ers should not consolidate their loans. It just digs them into a deeper hole. If you borrow anyway, draw up a plan to repay the debt in three to five years.
If mortgage interest rates have dropped, consider refinancing the mortgage and taking a large enough loan to repay your consumer debt. Important: use the money you’re saving on interest costs to make extra mortgage payments, to reduce the total amount you owe! Otherwise you’re merely stretching out the cost of your sweaters, iPods, and gas grills over 30 years—not a good strategy at all.
It doesn’t hurt to ask your current lender to lower your interest rate—saying that otherwise you’ll give up the card. It’s a long shot, but sometimes you might catch a break.
1. Make one-shot reductions in your loan balances. You might run a yard sale and use all the proceeds to pay off debt. Or sell off a few shares of stock you inherited. Or use your savings, if you have any. It’s smarter to chop debt than to hoard a low-rate savings account. (But keep on adding to your retirement account because those contributions lower your tax.)
2. Increase your monthly debt reduction budget, even if it’s only by a small amount. Small amounts make an enormous difference. Say that you owe $8,000 at 18 percent interest, on which you’re paying the bare minimum: 2.5 percent of the balance each month. You start out at $200 a month and pay a little less money in each subsequent month (that’s because you’re paying 2.5 percent of a declining balance). On this schedule, it will take 30 years to get out of debt!
Now let’s say that you pay a fixed $200 each month. That will get you out of debt in just over five years, saving an enormous $7,306.34 in interest. If you added just $50 a month—paying $250 each time—you’d be debt free in less than four years and save $8,634.87 in interest. (A lot of people find these calculations, and others like them, too astonishing to be true. But they are true. Honest. Check it at Bankrate.com’s calculator called “The True Cost of Paying the Minimum.”)
1. Keep on paying the same amount each month, even though your loan balance goes down. The faster you pay off principal, the more interest you save and the faster your total debt declines. Once you’ve erased the highest-rate loan, start on the next highest—still paying the same fixed amount (or more!)
2. Pay the monthly minimums on your lower-rate loans while putting the rest of your available money toward the highest-rate loan. The size of the loan doesn’t matter, only the size of the interest rate. The faster you knock off high-rate debt, the faster your burden will decline.
3. Work your way down the list, debt by debt. To keep yourself motivated, you have to take satisfaction from the process. Post your payment schedule on the refrigerator and check each one off. Or give yourself a quarterly reward for staying on the wagon.
4. If you wiped out your credit card debt by taking a home equity loan, don’t imagine that you’re home free. You’ve just transferred your debt from one piece of paper to another. Pay off your new home equity loan on the same schedule you’d have used to pay off your credit cards (use the Bankrate.com calculator to figure it out). You’ll be out of debt even faster because this loan carries a lower interest rate.
5. Don’t pay big bucks to get rid of debt. Tons of “debt elimination” ser-vices lure you by Web, mail, and phone. They’re costly (just another debt) and may not do the job. For most of us, repaying loans doesn’t require expert advice, just a simple, methodical program like the one outlined above. If you can’t repay all your debts, set up a program through a dependable consumer credit counsel¬ing agency (page 288 ).From MAKING THE MOST OF YOUR MONEY NOW by Jane Bryant Quinn. Copyright © 1991, 1997, 2009 by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc.