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By Rob Sallay
As vice president of the American Credit Foundation, a nonprofit organization
that helps individuals and families manage their debt, Mike Peterson knows
firsthand how financial problems can wreak havoc in one’s life. Each day,
counselors at the Midvale, Utah-based foundation help desperate clients dig
themselves out from under piles of unpaid bills, stern notices from
collection agencies and ominous foreclosure threats.
So, exactly what does it take to get—and stay—out of debt?
Here are 7 secrets that will help set you on the right path.
1. Cut Back on Credit Cards
Banks love to send offers for new credit cards to consumers, and mailboxes
overflow with low-interest—even no-interest—“unbeatable deals.”
This doesn’t mean you should apply for them and risk running up large bills.
“Ideally, one should have no more than two or three credit cards,” Peterson
says. “I would recommend a Visa or MasterCard, followed by an American
Express card. Having two or three different cards will allow you more
flexibility when utilizing credit, as some companies do not accept one or the
other.”
2. Understand the Consequences of Breaking Rule #1
Even if you have excellent credit and zero debt, applying for too many credit
cards can damage your credit rating.
“Generally, inquiries for new credit can affect your credit report for up to
two years,” Peterson says. “Having too many credit cards—whether carrying
balances or just high amounts of available credit—can negatively impact your
credit score. Banks will look at your credit based on what you currently owe
and also what ability you have to immediately incur additional debt.”
3. Stop the Spending
To minimize or avoid debt, monitor your monthly expenses—and halt spending
when your budget starts to get tight.
“An additional reason to limit the number of credit cards you have is to
prevent the possibility of not being able to keep track of all of the
expenses you have incurred, which may make it difficult or impossible to pay
them off each month,” Peterson says.
If you reach that point, he has one simple rule: “No more charging.”
“Commit now to discontinue the use of credit cards,” he says. “In fact, cut up
the cards you have, call the companies, and close the accounts. If you must
have a credit card for work, try a debit card. These are widely accepted, and
the funds are pulled directly from your checking account.”
Don’t apply for another credit card until you can pay off all balances due and
be 100% debt-free.
4. Pay More Than You Owe
Once you fully understand the monthly minimums you owe on each debt, add 5% or
10% to your total payment, if possible.
“The addition is not mandatory,” Peterson says, “but it will dramatically
improve the success of your debt-reduction program.”
5. Stay the Course
Continue to pay 5% to 10% more on each debt until all debts are completely
paid off. Even if your minimum payment requirements decrease as your debt
diminishes, keep making the same payment, Peterson urges.
“And if one credit card is finally paid off, make the same total payment each
month,” he says. “Just apply the extra funds to one of the other debts.”
6. Do the Math
Before you dig in your heels and say, “I just can’t do this,” it’s worthwhile
to see how Peterson’s advice plays out in real dollars.
“If you owe $2,000 on a credit card with a 21% interest rate, and you make
only the minimum payment each month, you will owe on this account for
approximately 19 years—and pay a total of $6,725.64 in principal and
interest,” he says. “The steps I’ve already discussed will help you pay off
the debt in a fraction of the time. The emotional commitment to make this
plan work may not be all that easy, but using this program—even without the
additional 5% or 10%—will allow you to pay off the debt in about 8.5 years,
and you will save approximately $2,387 in interest.”
7. Turn the Tables—and Start Earning Money
If you pay off your $2,000 debt in 8.5 years (versus 19 years of minimum
payments), you will have 10.5 years to place that monthly minimum payment in
an interest-bearing bank account, retirement account or other investment.
“Interest is a magical tool,” Peterson says. “Creditors use it to their
advantage all the time. It can also work in your favor if properly
implemented into the right program. If the steps mentioned above are taken,
it won`t be long before interest is working for you, instead of against you.”
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Australian Debt Reduction offers all Australian consumers free debt
consultations to assist them in getting back on top of their debt. They
explain debt consolidation in simple terms and if you have over $4,000 in
debt there are methods available to the Australian public you may not have
heard of to help limit the amount of interest paid and rapidly reduce your
debt. Visit Australian Debt Reduction at http://www.australian-debt-reduction.
com.au or contact them directly on 1300 306 272
Rob Sallay
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