Good article on managing debt

Debt Management - 5 Principles to help you get your debt under control!


Debt consolidation and refinancing have become thriving industries in America these days. American personal debt is at the highest rate we've seen. It's hard to get credit these days, so managing your debt, and your credit score are more inportant that ever.

BusinessWeek says that total household debt in the US was more than 100% of our disposable annual income last year. The average person has more than $8000 in credit card debt.

The bottom line is that our personal debt is growing at an alarming rate. You can now charge your fast food meals at many restaurants, paying interest for years on something you consumed in one sitting. Many people have taken steps to address their debt problems, including consolidating debt to lower interest rate cards, or to home equity loans, or at worst case the dreaded "B" word, Bankruptcy.

5 Principles of Debt Management

1. Create an accurate assessment of your debt situation.
Make a list, chart or whatever you're most comfortable with, of all your debts. Be sure and include the amounts, interest rates, and expiration dates (especially on any no-interest for ## days type loans). Be sure and note any old accounts that you've got "laying around", such as that department store credit account that you opened to get the 15% discount.

You can now get a free credit report online. You should make sure that you've got a credit report and FICO score from each of the 3 national credit bureaus: Experian, Equifax, and TransUnion. The FTC advises monitoring your CREDIT REPORT activity ON ALL 3 BUREAUS. Under a new Federal law, you have the right to receive a free copy of your credit report once every 12 months from each of the three nationwide consumer reporting companies. AnnualCreditReport.com allows you to request a free credit file disclosure (ie. Credit Report) once every 12 months from each of the nationwide consumer credit reporting companies. This free credit report won't include your credit score, but it does give you a consolidated list of your debts, a record of requests for your credit history, and a summary of your rights under the Fair Credit Reporting Act.

Once you've gotten your free credit report, you also need to get your Credit Score. You can get your Credit Score, along with daily 3 bureau credit monitoring and other great services from FreeCreditScore.com.

2. Make a budget and stick to it!
Making a budget helps keep from increasing your debt, while you're trying to pay it down. Be specific and detailed in your budgeting. Except for emergencies, you should only be spending what is accounted for in your budget. Some people have found it helpful to keep a 30 day log of their spending. Carry a little notebook, or some index cards with you, and write down everything you spend each day. You'll probably be amazed at how much money you spend on things you want, and don't really need. The smallest things, such as that $3 cup of coffee every day, can slowly eat away at your finances. This will help keep you from getting further in debt. Your budget should define how much money you'll send to each of your creditors monthly and how much you need for bills, and how much is left for discretionary spending. Try limiting your discretionary spending to things you can buy with "pocket cash". This may be hardest thing you've ever done, but you won't get further in debt if you only spend what you have.

3. Pay off the debts one by one.
Maintain minimum payments to the rest of the debts, but pick the debt with the highest interest rate, and send extra payments to pay it off. There is a proven psychological benefit to being able to take a debt off of your list.

You should also consider replacing your credit cards with prepaid debit cards. Prepaid debit cards give you the same functionality as a credit card, but you can only spend as much as you have in the account that backs up the debit card.

4. Consider debt consolidation or debt restructuring and possibly refinancing your home mortgage.
Lower your credit card debt by 70% by consolidating. With interest rates down, it also may be time to refinance your home mortgage loan and cut your monthly payment. You can get free mortgage loan quotes at LowCostLending. When you refinance, make sure closing costs and other fees don't outweigh the savings in your monthly payment. Another option is to get a Home Equity Loan. Home equity loans are good because they allow you to deduct the interest on your income taxes. Remember though, new credit is not a license to incur new or more debts. Once you've transferred a balance by consolidating, or refinancing, don't add more charges to the old account. If you've got a lot of open accounts, you may want to close some of them, but you shouldn't necessarily always cancel the old account. Having a good payment history with a few existing accounts can be better for your credit record than many canceled and new accounts.

5. If necessary, get help.
You may choose a credit counseling service, or debt counseling and debt help service to help with each step of your debt solution. Credit counselors can add accountability to your debt solution, and also serve as a source of encouragement. They are used to dealing with people with bad credit or poor credit, and can help you create a custom debt solution. They can suggest money lenders that might be more willing to make a loan to someone with a lower credit rating. Once you start reducing your debts without incurring new ones, you'll start to see your credit score rise.

By following these simple principles, you should be able to get your debt under control, reduce it, and eventfully eliminate it. If managing your debt doesn't make it go away as fast as you'd like, you could always consider getting a new job or part time job to generate more income with which you could pay down your bills faster.