One of the most difficult things to admit in life is that you, financially, bit off more than you can chew. You may be struggling to make monthly payments, and it’s a concern many of us have faced at one time or another. If you’re feeling overwhelmed with debt, there are a number of measures you can take before it’s too late.
First, conduct a “check-up” of your monthly household budget. Take time to write down ALL of your monthly expenditures, then compare those to your monthly take home income. Be honest with yourself when doing this, it is the only way to see EXACTLY where you stand. If your expenses are close to, or even exceed your monthly income, then you’ll need to take action!
At this point, you need to stop adding to the debt. This means you may need to become a “cash-only spender.” And, you’ll need to refrain from charging purchases to your credit cards. If you don’t have the cash to pay for it, don’t even consider buying it! This takes discipline, but it is tried and true. It WILL work!
After completing your monthly budget on paper, take a long, hard look at what expenses you can reduce or even eliminate. Do you really need to eat out four nights a week? Is it necessary to take a long, get-away weekend once a month? Re-evaluate your optional spending. Simple things can help to reduce spending. For example, eating breakfast at home, packing your lunch, bringing your own snacks to work, and pouring homemade coffee into a to-go mug. By not stopping at restaurants and convenience stores, you can save up to $100 per week! Multiply that by four weeks in a month, and you could save up to $400 per month! It all adds up very, very quickly.
Okay, so you’ve cut back your expenses and figure you’ll have some “extra” money each month. So, how can the “extra” money benefit you?
- Use that “extra” money to pay more than the monthly minimum on your credit cards. Paying the minimum prolongs the pain of being in debt. And, you’ll be paying a lot of interest in the process.
- Focus on paying the credit card with the highest interest rate with your “extra” money. You will be amazed at how much interest you can save by knocking down the balance on a high rate credit card.
- If you are the type of person who needs to see quick results or instant gratification, focus on paying off smaller balance credit cards. You can do this by paying off credit cards one at a time with your “extra” money. That way, you see immediate progress and feel a sense of accomplishment as you payoff smaller balances. Then, once you’ve paid off the smaller balance cards, use your “extra” monthly savings to pay toward the larger ones.
Maybe these measures aren’t quite enough. If you’re further in debt and need to continue to reduce spending, here are some battle-tested measures that are certain to help:
- Transfer credit cards with high interest rates to those with lower rates. If you have a card with a rate of 9.99%, and 3 others with rates ranging from 12% to 25%, look into transferring as many credit cards as you can to the low rate card. Just be cautious of the fine print. Some credit card companies can charge very large fees to transfer a balance to their card.
- If the transfer fees are too costly to justify the transfer, consider applying for a card with either a low or no introductory rate and little to no transfer fees. Believe it or not, for those with good credit, there are cards out there offering anywhere from 12 to 21 months at 0%. Even for balance transfers! During the interest-free period, buckle down and pay as much as you can, since it all goes toward the principal balance.
- Apply for a debt consolidation loan to combine several credit card payments into one more manageable monthly payment. It’s likely you’ll receive a lower rate than what your credit cards charge. A 10 to 12% loan rate is much better than a 22% credit card rate. Plus, a loan forces you to make a specified monthly payment to PAYOFF the debt, rather than a minimum payment on a credit card that just prolongs it!
If your credit has taken some hits, and you don’t qualify for a 0% or low rate credit card, or even a debt consolidation loan, there are several other options to consider, depending upon your circumstances:
- Use the equity in your home – With a home equity loan you can consolidate other debt, including debt from credit cards. Interest is significantly lower, possibly around 4 to 5% versus 18 to 25%! This is due to the fact that you are securing the loan with your home – always remember that! This option also allows you to extend the term, to make the monthly payment more affordable. Plus, for most people, the interest paid is tax-deductible.
- Borrow against the cash value of your life insurance policy – This option provides a significantly lower rate than what you would pay on a credit card.
- Borrow from your 401K – If your plan allows this, most do. You can typically borrow up to 50% of the vested value, or $50K, whichever is less. Not only does this alternative carry a low rate, the interest you pay goes back to you rather than a credit card company!
So, when you’re at the point where none of these are viable options, you can attempt to re-negotiate terms with your creditors to lower rates and monthly payments. Creditors are often willing to work with borrowers who are struggling, especially when the debt is unsecured, as it is with a credit card. The creditor will take the stance that “something is better than nothing,” especially if they fear a customer may be stretched too thin, and is considering bankruptcy.
Should you still be in distress, you can also retain the services of a credit counseling agency. The agency will negotiate with creditors on your behalf. You send a lump sum payment to the agency each month, and they divide it amongst your creditors. When considering this, do your homework. Find an agency that is reputable as well as non-profit. Also, be aware that in most cases, even though you’re making (partial) payments to your creditors, this can adversely affect your credit rating. But, it’s definitely viewed in a more favorable light than a last resort alternative, Bankruptcy.
As a last resort, consult a reputable bankruptcy attorney to consider whether to file for bankruptcy. If you’ve exhausted all other options, this may be your only way out of debt. When making this decision, keep in mind that your ability to obtain credit will be diminished for approximately 10 years. You will still be able to obtain credit during this time, but you may pay much higher interest rates.
So there you have it! There are many ways to address and correct personal financial burdens. Having issues with your finances is not easy to admit, but it can save you in the long run. Always remember to take care of your “financial health” just as you do your physical, mental, and emotional health!
Mark Kappeler is an expert of consumer lending and serves as a Vice President of Retail Lending at NexTier Bank. Follow @nextierbank on Twitter for more financial services advice and updates.