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1. Americans are loaded with credit-card debt.
The average American household with at least one credit card has $8,523 in credit card debt, and the average interest rate is 15 percent, according to
CardWeb.com.
2. Some debt is good.
Borrowing for a home or college usually makes good sense. Just make sure you don't borrow more than you can afford to pay back, and shop around for the best rates.
3. Some debt is bad.
Don't use a credit card to pay for things you consume quickly, such as meals and vacations. There's no faster way to fall into debt. Instead, put aside some cash each month for these items so you can pay the bill in full. If there's something you really want but it's expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it's due and avoid interest charges.
4. Get a handle on your spending.
Most people spend thousands of dollars without much thought to what they're buying. Write down everything you spend for a month, cut back on things you don't need, and start saving the money left over or use it to reduce your debt more quickly.
5. Pay off your highest-rate debts first.
The key to getting out of debt efficiently is to first pay down the balances of loans or credit cards that charge the most interest, while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.
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6. Don't fall into the minimum trap.
If you just pay the minimum due on credit-card bills, you'll barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance and potentially you'll end up spending thousands of dollars more than the original amount you charged.
7. Watch where you borrow.
It may be convenient to borrow against your home or your 401(k) to payoff debt, but it can be dangerous. You could lose your home, or fall short of your investing goals at retirement. The penalties and taxes on a 401(k) withdrawal often can be over 30% of the total funds you take out.
8. Expect the unexpected.
Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don't have an emergency fund, a broken furnace or damaged car can seriously upset your finances.
9. Don't be so quick to pay down your mortgage.
Don't pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and the interest you pay is tax deductible. (If your mortgage has a high rate, consider refinancing.)
10. Get help as soon as you need it.
If you have more debt than you can manage, get help before your debt breaks your back. Try Consumer Credit Counseling.
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Pay your bills on time. Without question, this is the very best
way to create a positive credit report. This means all your bills,
including rent and utilities. Late rent and utility payments can be recorded
in your credit report and severely damage your credit history.
Don't bounce checks.
If you don't have money in your account to cover a check, don't write it. In some states, you can go to jail for writing bad checks, and bad check fees can amount to
$50 or more per check and often exceed the amount of the check.
Think long term.
Don't be impatient. It takes more than a month or two to establish and build a solid credit history. If you are rebuilding a positive credit history, it may take some time before lenders are willing to give you a second chance. During that time, your financial dealings will have to be as clean as a whistle.
Apply for a secured credit card.
With a secured credit card, you have to deposit a certain amount of cash into a savings account and pledge that amount as collateral against any balance you have on
your credit card.
Review your credit report at least once a year and correct any inaccurate
information it may contain.
While most information contained in credit reports is accurate, mistakes and and do crop up. An annual review will help to make sure you don't get turned down for credit because of an error on your report.
Avoid letting any account of yours be turned over to a collection agency.
Information about collection agency activities will stay on your credit report up to seven years. To avoid an account being turned over, make arrangements with those you owe before they feel they have no other choice. Most lenders are reasonable if you address the issue up front and they see you are being open and honest.
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Recognize that bankruptcy is a last resort rather than an easy way out of financial problems.
When it comes to accessing credit, there is nothing quite as damaging as a bankruptcy.
Avoid switching employers.
Lenders like stability in employment. Being with the same employer for five years or more is a real plus when it comes to considering a loan application.
Avoid moving from rental to rental.
Again, stability counts.
Set up a savings account as well as a checking account.
It's one thing to have a checking account. It is quite another to have some money in savings. Save something every paycheck, even if the amount is small.
Work hard to decrease your debt.
Lenders like to see a decline in total debt as well as consistent, on-time monthly payments.
Avoid co-signing or guaranteeing loans for others.
When you co-sign or guarantee a loan for someone, you are taking responsibility for repayment of the loan if that person defaults -- a dangerous thing to do no matter how good the borrowers intentions.
Avoid excessive inquiries into your credit report.
Don't give people permission to check into your credit bureau report. When you're shopping around for a car or other purchase, don't give your
social security or driver's license number to the salesperson. With that information, they can check your credit file. Too many inquiries can cause a lender to turn down an application.
- reprinted with permission from Credit When Credit is Due by Paul
Strassels.
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There are as many reasons that people overspend as there are budgets to help people get out of the debt overspending has caused.
Here are ten of the most common reasons.
1. Keeping up an image
Many people feel like if they fall below a certain image that the neighbors set, the neighborhood will think less of them. This is known as "keeping up with the Jones". The truth behind this is that the neighbors are thinking and feeling the same way.
2. Avoidance
When people spend too much for lunch out with friends, shopping, etc., it is easier to pay than to admit that they cannot afford to pay the bill for the whole table.
If your friends drop you because you cannot afford to buy them lunch, are they really friends?
3. The money is on its way
"I thought the check was in the mail." When some know they are getting money, they
spend it, only to learn the check is late or far less than hoped. Wait to
spend until you have the money in your hand.
4. Credit doesn't feel the same
Let's face it, plastic simply does not feel the same as good old-fashioned, paper cash. For this reason people use credit more often and tend to overspend more than they would if they had used cash instead.
5. Immediate gratification
When you can go into a store, see something you think you need now, then get credit in five minutes or less, you get this sense of accomplishment. After all, you get what you want now -- but think of how you are actually going to pay for it later, when the bill arrives. This is when you have your awakening of the additional bill.
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6. Lifestyle maintenance
After a person has lived a certain way for a while and suddenly they find themselves in a bad place financially, it is hard to give it up. The lifestyle they have become accustomed to, they feel, must be maintained, even if it means more debt.
7. Poor as a child
Some people who are poor as a child feel the need to spend everything they
can get their hands on as soon as they can. Perhaps there is a fear of
someone taking the money away if it is not spent right away. These people
must realize that once it is yours, it IS yours. It is okay to save it for a
rainy day.
8. Sense of power
Spending money actually makes many people feel more powerful. Whether it is handing over a wad of cash or out a gold card to charge money, the simple act of spending a large amount of money gives them a rush of false power.
9. Prove self worth
Spending $40 on a haircut, $120 on a designer dress, $30 on a new pair of shoes and maybe $75 on a facial every other week sounds outrageous to most people. However, for many people, it makes them feel like
they are someone. We are worthy, and a little splurge once in a while is good, although too much can be bad.
10. Just can't say "NO!"
This one the one that I have heard the most. Whether a child asking a parent for the newest fad toy or a spouse wanting the newest computer game, some people just cannot say "no!" Even if they cannot afford
to say "yes," they feel like a failure to some degree if the money is not there to meet the wants of the other person. No matter what, these people will make it happen, even if it becomes a dead end to bankruptcy court.
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Several items are worth noting. At first glance, each may appear completely distinct from the others. But taken together, a clear signal to indebted consumers can be seen. The first, and most pronounced, is the release of favorable economic news and inflation data. In short, despite the spike in oil prices, inflation came in below expectations, as measured by both the Consumer Price Index and the core-CPI. The core reading removes the effects of volatile energy and food prices, but the overall CPI does not.
Federal Reserve Board Chairman Alan Greenspan's testimony before Congress on April 17 raised concerns over the continued level of business and consumer spending. However, he also voiced confidence that the current low level of inflation removes the need to boost rates anytime soon. So the low-rate environment that has prevailed over the past 17 months is in no danger of coming to an immediate end.
Second, a report released recently by Banc One Investment Advisors reports that American Consumers have a higher debt burden now than at the end of prior recessions, and that this burden is the highest in 15 years. This isn't surprising, but instead validates the suspicions of many.
What is surprising is the third nugget of news, that the average tax refund so far is nearly $2,000. For many consumers, this combination of low interest rates, high debt, and a big tax refund should create a bright flashing signal:
Retire debt now!
Regardless of which side of the average refund you fall, one thing is the same. The refund represents the repayment of an interest-free loan granted to the U.S. Treasury for the past year. Yet at the same time, many of these consumers are carrying debt that doesn't come with the same fringe benefit.
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It only makes sense then, to use these sudden proceeds to remove a portion of this debt load. The timing has never been better, as interest rates on consumer loans ranging from mortgages to credit cards remain well below the levels seen one or two years ago.
Whether or not a borrower has taken advantage of low rates by refinancing or jockeying into another lower-rate loan product within the past 17 months, the mandatory step of becoming debt-free entails debt repayment. Those borrowers with variable-rate debt, such as that
found on credit cards or home equity lines of credit, will find that their efforts to pay down debt are more effective now when the rates are low. This effectiveness will diminish notably several months or one year from now when rates have begun their inevitable march higher.
Okay, so what about those who do not receive a tax refund? Scrimp. Save. Moonlight. Sell your junk on eBay. A good spring cleaning will no doubt produce a fair number of items that somebody else would gladly,
or foolishly, pay money to acquire. Investing a few hours to promote and hold a yard sale can yield a tidy sum to be earmarked for debt repayment.
A little sacrifice now, particularly when undertaken at the low point in the interest-rate cycle, can have lasting rewards in managing and repaying debt. Now is the time to employ a measure of financial discipline to make a dent in that debt load.
Greg McBride is a financial analyst for www.Bankrate.com.
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Tips for Managing Debt
