Wipe Out Your Debt
If you dread opening the mail and worry about how you'll afford your bills each month, you aren't alone. As of last year (June 2007), Americans owed $904 billion on revolving debts, a figure which doesn't include mortgage debt, car loans, student loans, etc.
If you're ready to eliminate your debt, it can be done - but you have to be serious about changing your ways and making the sacrifices required to get yourself out of the red. Here are five major steps that can get you on the road to healthy finances.
Step 1: Figure out Where You Stand.
You can't realistically expect to get out of debt if you don't know exactly how much debt you have. Luckily, learning the details of how much you owe is relatively easy; free; and can be completed online, over the phone or via mail. All you have to do is pull a copy of your credit report from each of the big three reporting bureaus (Experian, Equifax and TransUnion), which can be accomplished by
- Visiting www.annualcreditreport.com and following the appropriate steps;
- Calling 1-877-322-8228; or
- Filling out this form and mailing it to Annual Credit Report Request Service, P.O. Box 105283, Atlanta, GA, 30348-5283.
Once you have the numbers, review them carefully. People tend to underestimate how much they owe, so this may be tough, but it's necessary to know what you're facing.
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Step 2: Outline a Plan.
Your plan of action will depend on how far behind you are on payments and how much money you currently owe. Those with less debt or who are just beginning to realize they need to tone down the spending may be able to work out repayment strategies for themselves.
Those with delinquent accounts and those who cannot make even minimum payments each month may require the help of a professional credit counselor.
- Get a list of government-approved credit counseling agencies in your area from this government site.
- Research your options: many types of loans have programs for those in financial crisis (student loan deferment, mortgage help, etc.).
- Don't discount filing bankruptcy - in certain situations, it's the best way for consumers to get out of debt and receive a fresh financial start.
Part of your plan will be a new spending schedule, which is where Step 3 comes into play.
Step 3: Devise a Budget.
For detailed suggestions on developing a budget, visit the budgeting section of Total Bankruptcy. Basically, you're going to have to spend less money and/or earn more money to eliminate your debt. This may seem impossible - you may feel as if you're already spending as little as you can to get by.
But many people make the big/small mistake: they think that because their debts are big, the only way to get out of debt is to make big changes. But you'll probably be surprised to see how much money you can save by adjusting the way you spend small amounts. Here are common "small" expenses that add up quickly:
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"Small" Expense |
Big Savings |
Buying coffee or lunch every day. |
Brew coffee at home; pack a lunch. |
Paying for stuff you don't use/need. |
Eliminate fancy cable channels you don't watch, opt out of a gym membership you never use, turn off the lights when you leave a room. |
Forking over car insurance. |
Review your plan - you may be able to save money by adjusting your coverage or changing providers. |
Filling the gas tank. |
If you can bike, walk or take public transportation, you could save big money on gas and insurance. Or consider carpooling. |
Choosing name brands. |
Most generic foods are less expensive than name-brand versions and taste almost identical. |
When you review your monthly spending, you'll likely find lots of ways to whittle a few dollars from your costs - and after a while, those dollars will add up to serious savings.
Step 4: Pay off Your Debts.
Once you've limited your spending, it's time to funnel money toward eliminating your financial deficits. One effective method for getting out of debt is snowballing (hyperlink to this page in this upload), which involves paying off your highest-interest debts first while making only minimum payments on all other debts. Keep some tips in mind as you move back to the black.
- Make rent/mortgage your first priority. After making sure you can stay in your home, pay down your costliest loans one at a time (details on this are available on our page on snowballing, at the link above).
- Prioritize accounts that have been sent to collections. If unpaid, these can be particularly damaging to a credit score.
- Make some noise! Contact your creditors and negotiate with them. Let them know what you're doing and ask for a break on interest rates, extended payment periods, etc. Most creditors are willing to work out a deal, since they'd rather get paid something than nothing at all.
If you've cut back in every way you can and still can't manage to make payments on your debts, consider filing for bankruptcy. A bankruptcy lawyer can help you decide if this is the right choice for you during the free consultation you can get by contacting Total Bankruptcy.
Step 5: Rebuild Your Credit
Part of your financial recovery is establishing a healthy relationship with credit, which will be reflected in a strong credit report and improved credit score. Especially if you choose to file bankruptcy, you must not let your credit report go dormant (i.e. you need to give the reporting agencies something to report).
One of the most effective ways to rebuild your credit is to borrow money and repay it on time. This can be done through credit cards, a mortgage, a car loan, student loans, etc. Opening a savings account, too, allows potential creditors to see that you've developed financial responsibility and will be able to cover any debts you acquire.
For a more detailed look at how to strengthen your credit, visit our page on rebuilding credit.
Related Pages:
How to Boost Your Credit Rating
Debt Settlement Considerations
The Credit Card Spending Effect