How to Get a Handle on Your Debt, and Erradicate It!

by Justin Weinger on August 24, 2012

Recently, I saw an advice on how to survive the tough times of economic uncertainty — to have no or very little debt. This advice, however, does not apply to the majority of American households that have an average of $15,000 in credit card balances in addition to mortgages and car loans. In this weak economy, consumers find it difficult to remain afloat financially. How can they get a handle on their debts and repay them sooner?

First step is to analyze the financial situation, income vs. expenses. Make a list of how much you earn and how you spend the money. Cut the expenses where you can, such as dining out or entertainment. When it comes to grocery shopping, use coupons and look for items on sale. You may save a couple of hundred dollars per month by making small lifestyle changes. Leave a small allowance for yourself and apply the rest towards your debt payments.

Some families are already living paycheck-to-paycheck without any room for adjustments. In this situation, you may want to look into other debt repayment options. Many 401k plans offer low- or no-interest loans. If you have enough funds in your retirement plan, consider taking a loan against it. Most likely, your monthly payments will be lower, and you will save money on interest. If you are over the age of 59 1/2, you can take a distribution from your 401k plan to repay the outstanding loan or credit card balances. You may have to pay taxes on your withdrawal, so plan accordingly.

If your credit card’s interest rate is over 12 percent, you can look into repaying the balance with a title loan when you own your vehicle free and clear. A title loan is just like a car loan. When you use your vehicle as a collateral, the loan rate can be as low as 2.99 percent. Depending on the year of the vehicle, lenders may give you up to its full book value.

What about “zero percent” balance transfer offers? Unless you plan to repay the balance in full within the allowed time, it is not recommended to take advantage of them. In many cases, the interest rate will be high after the promotion ends. Also, credit card companies may charge fees and accrued interest if you miss a payment or pay late during the promotional time. Read the fine print and the terms to avoid any surprises before transferring balances.

Also, many people are now purchasing payment protection insurance as a safeguard towards paying down their debt.  The protection is in case of death for the breadwinner of the household, or in case you are laid off from your job for an extended period of time.  However, collecting the money is often much more difficult than you would expect.  In fact, you can reclaim payment protection insurance if necessary, which can then ironically be used to pay down current debt even further.

Finally, once the credit card balances start to decrease, make sure you don’t get into more debt. The key is to control your spending. Build up some savings for emergencies to avoid using a credit card. When you get a handle on your debt, tough economic times will not make a big impact on your finances.

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