Here are seven steps you can take to get your debt under control:
Step No. 1: Make a list of what you owe. This first
step may be the hardest part of dealing with your debt. Put all your bills in a
pile. Then list your debts in order, starting with the largest balance first.
Next to the amount, list the minimum monthly payment, and the interest rate
you’re paying on that card. Now you know where you stand.
Step No. 2: Prioritize your repayments. If you have one or two small
balances, you might want to apply extra money to pay them off, while continuing
to pay the minimums on the cards with larger balances. Or you might want to pay
off the card with the highest interest rate first.
When you’ve paid off the smaller balances, attack the larger ones. Here’s a
trick that can save you years of interest charges. Simply double the minimum
monthly payment -- and don’t charge another penny. That should get you out of
debt in less than three years.
You can also use the debt
evaluation tool at MSN Money. It will help you evaluate your situation and
prioritize your payments.
Step No. 3: Eliminate credit cards and don’t roll over balances. When
you pay off a card, notify the company that you want to close the account.
Don’t just stick the card back in your wallet where it will tempt you again.
And don’t roll balances from card to card. This is a tempting way to make
yourself believe that you’re doing something about your debt problem, if only
by lowering the interest rate you’re paying. Switching from card to card has
drawbacks. Every time you get a new card, you’re generating an outstanding
open credit line that will appear on your credit report. Other lenders may be
unwilling to let you keep rolling balances. And when those tempting introductory
rates expire, you could be stuck with huge balances on high rate cards.
Step No. 4: Get a copy of your credit report and credit score -- and study
both carefully. Your credit report is simply a compilation of your
bill-paying history. Don’t hide from the truth. There may be some errors on
your credit report that you’ll want to correct by contacting merchants. And if
you do make progress toward paying down your balances, you’ll want to make
sure they’re correctly reported.
You’re entitled to a free copy of your credit report if you’ve been turned
down for a loan or a credit card. And there are many Web sites that offer a
report for under $10 -- or even for free, if
you sign up for a credit monitoring service that you might not need.
Your credit score is a different, more complex evaluation of your
creditworthiness. Your credit score doesn’t just report your payment history;
it uses a formula that assigns a weigh to factors such as bill repayment habits,
percent of available credit used, and even your employment history. This credit
score is used in almost every mortgage decision, and may be used in one form or
another when pricing life or homeowner's insurance or car loans.
The most frequently used version of the credit score is the FICO score created
by Fair Isaac & Co., the company that pioneered the concept of scoring. A
FICO score ranges between 300 and 850. About 39% of the population scores above
750 -- and a score below that level is a warning signal.
Some aspects of your credit report are beyond your immediate control. They’re
calculations based on the length of time you’ve had the same accounts open.
But other factors in your credit score that weigh heavily are your timely
bill-paying habits and the percentage of your credit limit that you are using on
each card.
You can get a copy of your Equifax credit report and your FICO score at
myFICO.com or you can click
here on MSN Money. The cost is $12.95 -- and it includes online access so
you can track any changes in your credit report.
And by 2005 you should be able to get credit reports for free. The Fair and
Accurate Credit Transactions Act, signed into law by Congress in Dec. 2003,
gives every American the right to a free credit report every year from each of
the three major credit bureaus: Equifax, Experian and TransUnion. But it will
take a while for the government to write the exact regulations for the freebies
and more months for the companies to comply.
Step No. 5: Make a spending plan. Now’s the time to change your
free-spending ways. To do that, track the money that’s coming in and going
out. Fortunately, there are easy ways to do that. One thing worth spending money
on is personal finance software such as Microsoft Money and Quicken. Both
programs let you track all your check writing by category and make monthly
comparisons of your actual spending to the amount you’ve budgeted.
Use a debit card instead of your credit card. Then, when you download your bank
transactions into your Quicken or Money program, all of your debit transactions
will be included, and can be easily categorized. (If you’re not paying bills
online, you’ll need to keep the receipts and enter them into your checkbook
and your budget plan.) Your bank ATM card is a debit card if it carries the Visa
or MasterCard logo. You won’t earn points for your purchases, but you won’t
run up bills that have to be paid at the end of the month. You can only use the
card if you have money in your account!
Step No. 6: Be careful about the equity in your home. In the past few
years, Americans have withdrawn billions of dollars worth of equity in their
homes. The ads and commercials are tempting, because the rates on home equity
loans are typically lower than the rates charged on outstanding credit card
balances. And the interest on a home equity loan may be deductible.
But there are dangers in home equity loans. Frequently, the money is used to pay
down credit cards, which are then charged up again. The banking industry has a
term for it: reloading.
Be very careful about digging into this last reserve. Yes, home values have been
rising 5% to 6% a year in recent years, according to data from the National
Association of Realtors. But there’s no guarantee that home prices will
continue to rise at the current pace. And if you have future problems that
require cash, you’ll have no place to turn. Instead, you’re putting your
house on the line.
Step No. 7: Get help. Sometimes credit problems are easily attacked once
you’ve faced up to them. But for some people, the problem of overspending is a
psychological one. Spending can become a habit that’s as difficult to kick as
alcohol, drugs or gambling. And then there are those who are over their head in
debt because of circumstances they truly could not avoid: medical bills or
divorce or loss of a job.
In those cases, it’s wise to seek help from professionals. The only problem is
that there are so many advertisements for “credit counseling” that you
can’t be sure whether they’re rip-offs. I’d suggest you stick with one of
the national, non-profit credit counseling services such as Consumer Credit
Counseling Services.
Many people are afraid that just one visit will be reported to the credit
bureaus and make their problems even worse. That’s not the case. You can talk
with a credit counselor on a private basis. Only if you enter their debt
repayment program, where they contact your creditors and arrange for lower
payments or interest rates, does this relationship appear on your credit report.
Another excellent source of advice and assistance is Myvesta, formerly Debt
Counselors of America, a nonprofit financial crisis center. Myvesta
offers individualized counseling, a debt management service, advice on
avoiding bankruptcy and foreclosure, and even counseling for families buried in
debt. This is another source you can trust completely. Of course, all the
counseling and advice in the world is useless without your own personal
determination to deal with your debt.
The bottom line
If you’ve taken these seven steps, you should be able to work your way out of
debt and toward a brighter future. It will take time and lots of
self-discipline. It’s worth the effort.