Debt Payment Do's & Don'ts

Debt is a major problem for most people in the United Sates. Revolving debt reached $876 billion in the US in 2006. Not only does this cause serious financial problems, but it is the number one cause for divorce as of 2004. The leading problem is revolving and credit card debt. To put this into a perspective that everyone can understand, if you have a credit card balance of $8000 and your interest rate is 18%, you will accumulate an estimated $1440 in interest annually. That's a total of $9440 a year, assuming that you pay off your credit card in a year, if not you are looking at a seriously long term debt. How do you get out of debt with unfavorable odds? It's simple to get out of debt, but it's not easy. Here are some do's and don'ts that may help you find your way out of the red.

The DO'S

1. MAKE A BUDGET: That's right I used the terrible "B" word! Nobody likes a budget, but budgets are the biggest key to financial freedom. First, find out what you are spending money in a month. If you use a computer for bookkeeping, this is easy as long as it's updated. If not, pull out your checkbook register and credit card statements and figure it out. Lump expenses in it categories, like auto, groceries, entertainment, saving, etc. Then figure out your income for the month, add it all together and then subtract your expenses. If you come up negative you have a problem! You have to look at this example month, is this an average month? Can you count on this type of income and expense to occur every month? You will have to adjust depending on the month. Make your budget something that you can live with, otherwise you won't be able to stick to it, and sticking to it is key.

2. ANALYZE YOUR DEBT: Is your debt good debt or bad? Good debt is mortgage payment and college loans, debt that has a value. Bad debt is credit card debt and revolving lines of credit. Figure out what your highest interest rate is, what has the highest balance, and what's your highest payment. Look at what needs to paid off first, the highest interest rates on the highest balances are going to cost you the most in the long run.

3. MAKE A PLAN: You must make a plan; plan for savings in case of an emergency, plan for the worst that can happen such as losing a job or being unable to work, plan on what debts you need to pay off first. How are you going to pay everything off? Review your debt analysis. What should you pay off first? How much will it cost you if something happens and you can no longer work? Make sure that you include a saving plan and an emergency plan, these plans may save you later. Part of your plan should include one extra payment a year to each debt, this makes a huge difference in your interest.

4. HIDE THOSE CARDS: If you are going to control your debt, stop adding to it! Hide your cards, pretend like they're not there, do whatever you need to do to not use them!

5. IMPROVE YOUR CREDIT AND DEAL WITH CURRENT CREDITORS: This is a key step. Look at your most recent credit card offers. Do they allow balance transfers, are their annual or origination fees, and what is the percentage rate? Look that them closely, the fine print is what always gets you. Is it a good deal for you to balance transfer on to a new card? Many card have a zero percent for a year deal, look at what the rate is after a year. If you think that you can pay it off in the time period allowed, go for it! This will not only save you a ton of money in the long run, but it will also improve your credit. Improving your credit is important, it opens a lot of doors with lower interest rates and other perks as well. If this isn't an option for you, then call your credit card company and tell them that you got this great offer in the mail with a lower interest rate and that if they can offer you a better interest rate that you are going to have to take up their offer. Make it sound like you don't want to leave them, especially if you have been with the same company for many years. Your old card will most likely end up with a lower interest rate, and if it doesn't, at least you tried. Look at consolidation loans if you have a large portion of debt, be careful with this however. Make sure that it's a lower interest rate than what you are already paying, also make sure that you can afford the payments. Most importantly, don't add more debt to yourself after choosing to go with a consolidation loan. You really will end up in a world of hurt!

The DON'TS

1. DON'T MAKE LATE PAYMENTS OR GO OVER YOUR LIMIT: Do yourself a favor and pay your debts on time! Not only does this look terrible on your credit, but it will also accumulate late fees and other charges, all of which you have to pay compounded interest on. The same goes for going over your limit.

2. DON'T PAY THE MINIMUM PAYMENT: Don't just pay the minimum amount. Always pay that least the minimum amount plus the interest for that month. If your interest is more than your minimum payment then you will be moving backwards instead of forwards.

3. DON'T BOUNCE CHECKS: Rubber checks are illegal, and depending on who you write them to, you could end up in quite a mess. Make sure that if you are writing checks that you have the money to cover them. Not only can you find yourself in court later, but you will have more fees than should be allowed from everywhere.

4. DON'T SPEND MORE THAN YOU CAN AFFORD: Think about your budget and stick to it!

5. DON'T FALL INTO SCAMS: Watch out for scams that state that they will help get you out of debt. There are some organizations that will, but they are all free. If you have to pay, then they aren't really going to help you. Same goes for the fix your credit scams.

6. NO PAYDAY LOANS: This is a bad idea! They have insane terms, and if you need a payday loan then you either need to improve your cash flow or your savings.

7. DON'T USE CREDIT CARDS WITH ANNUAL FEES OR ORIGINATION FEES: These cards usual have poor terms and the origination fees and annuals fees will max out the card right off the bat. Don't pay for the privilege of having the card. If you would like to stop receiving credit card offers in the mail, opt out of them.

8. DON'T GIVE UP: This is the most important don't! Getting out of debt takes a long time, but it's worth it in the long run. Stick with it and you won't be sorry!

GOOD LUCK!