March 8 2010|01.15 PM UTC

Angelica Nierras

Americans Are Dumping Debt. Want to Join Them?

Category: News, Personal FinanceTags: , ,

The latest figures are in: Americans are dumping debt. According to the Federal Reserve, personal credit card debt is on the decline. Their figures show Americans have paid off a whopping $101.2 billion in debt in the last 14 months. Our own figures here at BillShrink indicate this trend as well. Back in February 2009, 46% of our users noted that they paid off their credit card balance in full each month. Now a year later, nearly 59% of users report paying off their balance each month. Are we finally learning to live within our means?

If you’re still struggling under a mound of debt, we’ve got a couple tips for you.

Top Six Ways to Dump Your Debt Now:

1. Pay more than the minimum.

Paying only the minimum costs you big. Not only do you end up paying more in finance charges and accumulated interest, you’re effectively signing up for years and years of debt. If you have a $5,000 credit card balance and a 14% APR, it will take you more than 20 years to pay it off if you make only minimum payments. Depressing, right? Thankfully, card issuers are now required under the CARD Act to make this explicit for you so you have a monthly reminder of the consequences of paying only the minimum. Look for the new statistics on your next statement.

2. Target your debts.

Say you’re carrying five balances on five different credit cards. Don’t try to pay them all off at once. That’s overwhelming. Instead, target them. Rank order your debts and work on eliminating them one by one. Pay only the minimum on the other four cards and get rid of your target balance ASAP. Pay one off, take the next one on, and pretty soon you’ll get five different debts down to only two, then one, then zero. How should you determine which balances go first? It’s up to you. Maybe you’re dedicated to eliminating the one with the highest interest rate. Or maybe you want to get rid of the smallest balance first. Whatever you do, however, save the toughest balance for last. You want some good solid “wins” under your belt to show you that you are capable of paying down debt. Leaving the biggest, baddest balance in the bunch for last will also really help you concentrate on putting all your extra money towards becoming debt-free.

3. Consolidate your debt.

This comes with some major caveats, which may be bunched together under the heading: “Do your own legwork.” Consult unbiased calculators like the one offered on MSN Money to help you determine if debt consolidation is the way to go. Don’t trust a third party to make your payments for you; if they ever pay late or default, you’re the one in trouble, not them. That being said, shifting your debts to one single loan with a regular monthly payment can be a financially sound decision. So where do you find a creditor who’s going to lend you the money to pay off all those debts? See our next point.

4. Borrow.

Do you own a house? Do you own a car? Do you participate in a 401(k)? Each of those is a source of cash. Home equity loans carry fairly low interest rates (somewhere in the high single digits these days), and the interest is tax-deductible. Car refinancing is another way to get a secured loan. Lastly, most 401(k) plans allow you to borrow up to 50% of the account’s value. The interest rates are only a point or two above prime, which is a far better deal than you’ll get from your credit card company. Plus the interest isn’t going to a bank, it’s going straight back to you. As with all of our suggestions, however, there are caveats. You must repay the loan within five years, and if you leave your employment before paying off the loan, the entire balance comes due immediately. For each of these borrowing options, read the fine print thoroughly to understand all possible consequences.

5. Last resort: renegotiate.

If you’ve really, truly done all you can, there’s still one more tactic to try: renegotiating. Creditors want their money, after all, and the last thing they want to see is you declare bankruptcy. Ipso facto, just the threat of bankruptcy will help you in your converstions. Pick up the phone and have a frank discussion. Maybe you can work out a new repayment schedule or a lower interest rate. It will not hurt to try, and you may just walk away with more favorable terms.

6. Drastically slash your spending.

If debt keeps piling up, sit down and really look at your bills. Are you going out to eat every day? Are you paying for a gym membership? Parking garage? Expensive birthday gifts? Cable? Can you adjust your cell phone plan? Put your newfound savings towards paying down that debt and embracing a financially sound future.

Do you carry debt? How are you trying to pay it off? Do you have any tips to share?

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{ 2 comments… read them below or add one }

Mike Ramsey March 8, 2010 at 10:24 pm

Those are all good tips. I’ve lost count of how many places I’ve read them, but the simple fact is they work if you follow them.

I especially like #5 – renegotiate. I’m always surprised at how many people think the credit card companies are the ones calling the shots. They are to a point, but consumers have more power than most people think.

Reply

Jeremy March 11, 2010 at 8:52 am

Ah! This is perfect! Thank you for putting to rest many
misconceptions I had read on this lately.

Reply

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