Dealing With Personal Debt

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Americans are drowning in debt. It's a growing problem, made worse by the aggressive marketing of credit cards. If you find yourself struggling to pay your bills each month, you might want to take some counsel from Personal Finance Adviser Ray Martin on The Saturday Early Show.

A certain amount of debt is not bad overall. So how do you know what you are in trouble?

Signs of over-extension might include:

  • Having a certain amount of credit-card balance is not negative. Some debt is necessary to reach goals. But most experts recommend that debt payments (including car payments and credit cards) eat up no more than 10 to 15 percent of income. More than that could spell trouble.

  • If you can only afford the minimum payments each month, you're on the edge. If you have to hope and pray that your deposit gets to the bank to cover your checks, and especially if you're using the cash advance on a credit card to pay other cards or for routine living expenses, you could be headed for trouble.
How can you get control of credit card debt?

  • Stop charging. Stop using the cards, or use only one card and attack the others with higher interest rates.

  • Look at interest rate. Size up bills by interest rates rather than the amount of the balance. The amount you owe doesn't really matter when you're paying an enormous amount of interest. Try to pay the highest interest-rate ones first. Muster all the funds available and get the debt out of your life. If you are unable to pay off a large balance, switch to a credit card with a low annual percentage rate (APR). For a modest fee, Bankcard Holders of America (703-389-5445) and RAM Research Corp. (800-344-7714) will send you a list of low-rate cards.

  • Reduce fees. You can reduce credit-card fees, which may add up to more than $100 a year, by getting rid of all but one or two cards, and by avoiding late payment and over-the-credit limit fees.

  • Keep a money journal. People will save 20 percent just writing down where their money goes, because they will start cutting back. After tracking their spending, people can better decide how much they can afford to pay toward credit-card debt. Experts point out that just $50 more a month can make a big difference.

  • Pay more than the minimum. The difference is remarkable. According to Consumer Credit Counseling Services, paying the $60 minimum payment on a $3,000 credit-card balance would take eight years to pay off and cost a person a whopping $2,780 in interest. By paying an additional $50 a month, the debt would be paid off in three years and they would be spared $1,800 in interest charges.
Another option is to consolidate your bills. It usually involves the transfer of credit card and other debt balances from multiple accounts with relatively hig interest rates to one account with a lower rate of interest. How can you do that?

  • Use a credit card. Do you have several credit cards with interest rates around 20 percent and is the total amount of your card balances is under approximately $10,000? If you have fairly good credit, you may be a candidate to consolidate your loans from multiple cards to one card with a much lower interest rate. It may be tempting to obtain a card with attractive introductory rates of only a few percent. However, you must consider how long the low rate is offered and what the revised rate is after the introductory period. You may be better off with a card having a higher rate that will be constant.

  • Home owners with equity: If you own your home and you believe you can sell the home for more than the underlying mortgage plus selling costs, you have home equity. Options to consolidate your loans by taking advantage of this equity in your home include a Home Equity Loan, Equity Line, Home Refinancing, or a Home Mortgage. You can then use the money to pay down other debts and the loan has the standard tax benefits.
    • Home Equity Loan (secured): You can obtain a loan on the equity in your home, called a Home Equity Loan or second mortgage, without the need to refinance your entire home loan. The rates and costs of Home Equity Loans are usually more attractive than most credit cards or other unsecured lines of credit.

    • Equity Line (secured): An Equity Line is similar to a credit line, except it is secured by Home Equity, for example. Instead of drawing one lump sum amount with a Home Equity Loan, an Equity Line allows you to borrow against your equity for smaller amounts, usually at lower rates than an unsecured credit line.

    • Home Refinancing (secured): Obtaining a first mortgage by refinancing your home usually provides a lower interest rate than a second mortgage or Home Equity Loan, and the mortgage term can be longer, resulting in lower monthly payments. However, it can be more costly to refinance a home than to obtain a second mortgage.

    • Home Mortgage (secured): If you do not currently have a mortgage on your home, or if you plan to buy a new home, you can obtain a first mortgage on your home, which provides better rates and terms than other alternatives. Obtain rates and information about Home Mortgages.
A few more tips:

  • Get help. A non-profit organization such as Consumer Credit Counseling Service can help organize your bills to make them more manageable.

  • Communicate with your creditors. Don't wait until you get in trouble. Before you miss a payment, give them a call and let them know you need help and why. Don't make arrangements you won't be able to keep. Tell creditors what you can really do, not what you think they want you to say.

  • Identify the cash drains and plug them up. This may mean closing a business or losing an income property.

  • Don't become emotionally attached to any asset. Re-evaluate all of your possessions and don't be afraid to give them up. Should you be driving that Lexus or would you be better off in an Escort for a while? Maybe necessity dictates moving to a smaller house or a less affluent neighborhood.

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  • Andrew Lindenauer

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