The lastest episode of the No Credit Needed Podcast goes hand-in-hand with the last two posts here are the No Credit Needed Blog. If you are reading the How To Get Out Of Debt Series, I think that you will be very interested in the latest episode of the podcast. Please check it out. Thanks.
You now have a sheet of paper with your list of debt accounts. Re-order your list so that you have your accounts listed lowest balance to highest balance. Nest, write down your monthly minimum payment for each account. Add your minimums together. This is your total monthly minimum payment amount for all of you debt. This is a very important number to know. Why? Because, no matter what happens during the month, it is vital that you make your minimum payments on all credit accounts. Missing even one payment can cause your interest rates to soar, and even being just a few days late with a payment can cause harm to your credit and add fees and penalties to your accounts. You always need to make the minimum payments for every account. (Please note: This information is for those who have enough money to pay their bills and get out of debt. If you are in a situation where you are unable to make your minimum payments, and/or you are facing a bankruptcy or foreclosing, PLEASE seek the advice of an actual personal finance expert. I’m just a dude at a computer, and I write to folks who have the money to pay-off their debts but who do not know where to begin or the process to follow. If you are highly in debt and facing financial crisis, please seek professional advice and help.)
At the conclusion of step 2, you should now have a chart that looks something like this:
|Debt Reduction Master Sheet|
|ABC Charge Card||$500.00||11.99%||$25.00|
|XYZ Charge Card||$1,000.00||12.05%||$50.00|
|Zippe Auto Loan||$3,000.00||13.99%||$300.00|
|Yippe Auto Loan||$12,000.00||0.00%||$500.00|
Now you know the exact nature of the battle that is before you. You have taken all of your debts, and you have “combined” them into one master debt, without actually consolidating your loans. You did this without benefit of a so-called debt consolidation company. You know your balances, your rates, your minimums, and your monthly totals. Now, you are ready to attack, attack, attack, attack.
Pitfalls for stage 2:
1. Concern over interest rates. Again, you are going to work on your rates, but that comes in the next few steps. You have to crawl before you can walk.
2. Wow, I pay that much a month towards debt! Yes, I know, it can be shocking to see just how much of your income goes towards paying for stuff that you’ve already used or used up.
3. This is too complicated. Hmmm… So far all we’ve done is to put on paper the actual nature of your debt situation. If you think this is tough, wait until you actually have to start making the payments!
I have decided to create a comprehensive, step by step plan for getting out of debt. Please note: I will assume that before you begin your debt reduction, you have saved at least 1000 dollars in an emergency fund and that you have decided to stop adding to your debt load. On to…
On a piece of paper, list every single debt account that you have, including those with zero balances. This list should include credit cards, personal loans, home equity loans, and auto loans. (You may include or exclude your home’s first mortgage.) Next to each account, write down your current balance. Then, write down the interest rate for each account, next to that accounts balance. Add the account balances. You should now have a list that looks something like this:
|Debt Reduction Master Sheet|
|ABC Charge Card||$500.00||11.99%|
|XYZ Charge Card||$1,000.00||12.05%|
|Yippe Auto Loan||$12,000.00||0.00%|
|Zippe Auto Loan||$3,000.00||13.99%|
You now have a clearer understanding of your current debt situation. You have now removed the doubt and fear associated with your debt, and you can now begin to focus your attention on getting rid of you debt.
Pitfalls associated with step 1:
1. Poor record keeping. To understand your total debt situation, you must have accurate, up-to-date information about each of your credit accounts. Sources for this information include your credit card company, your auto loan company, your bank, and any other various lending organizations that you do business with.
2. Difficulty in understanding what your “balance” truly is. Simply call your lender and ask for the PAY-OFF amount. This will give you a really nice “ball-park” figure to work with. You do not have to be super-specific here, but you do want to know what your balance is within a range of a few dollars. This is especially true for automobile loans. Call your auto lender and ask them for your pay-off amount. They will be glad to help you. You can then enter this amount into your chart. (When you receive your next monthly statement from your automobile lender, you will then have an even more accurate balance number to use. Simply plug that number into your chart.)
3. Fear of interest rates. Do not be afraid of your interest rates. In the next few steps, you will work to reduce and/or eliminate interest costs. For this step, simply list your balances and your current rates. This information is very, very important.
So, that is it. Step 1 is complete. You have an accurate summary of your current debt situation. I hope you feel better, and I hope that you are excited about getting out of debt.
3 personal things to consider after completing this step:
1. Stop feeling guilty. Yes, you owe some money. Yes, you feel lousy about it. But, hey, you are doing something about it.
2. Stop the blame-game. Again, feeling bad about your situation will not accomplish anything. You need to get mad. Not mad at yourself, but mad at your debt. Focus your energy towards positive decision making, and not towards feeling sorry for yourself.
3. Get ready. You are going on the greatest journey of your life… The Journey Towards Financial Freedom and Hope! You are going to be debt free!
(Insert Tony Robbins smile here… bling, bling)
Surf your credit card balances from higher rate cards to lower rate cards.
YES! BUT, only if you intend to pay-off those surfed balances, and only if you plan to NEVER EVER use those higher rate cards again. DO NOT surf a balance to “card B” and then continue to use “card A”. Why? B/c you will end up with balances on BOTH cards.
Pay-off higher-rate cards or lower-balance cards? THIS is a tricky one. IF you are current with all of your debts, and you can make all of your minimum payments without being late, AND you do not mind having multiple credit accounts open, then by all means, pay off the higher-rate card. (This is the mathematical answer!) BUT, if you are behind, if you are struggling to make minimums, AND you like to see your credit accounts go bye bye faster, THEN you need to pay-off your lower-balance cards first. (This is the “I like to see those lower-balance cards go bye-bye because I get excited when I see them go… answer). There are tons of pf blogs and sites out there with calculators and mathematical answers aplenty. I ask you this question. Are they debt free? Well, I am, and I did it the second way, lowest balance FIRST. Why? I liked to see those credit accounts go bye-bye!
Use the equity in your home to pay-off credit cards? NO, NO, NO, NO, NO!!!!! Why? Because, if you do not change your behavior patterns, you will end up with a HELOC AND brand new credit card debt. PLEASE LISTEN TO ME! Do not use your home as a “bank”. You have to live there! Do you really want to use the home that your kids sleep in to finance that stupid pick-up truck in the back-yard? Get a backbone, find some discipline, and PAY your debts. Don’t just move them around and continue to add to them.
Use a credit card b/c you get rewards points and rebates? Nope. I know, I know, this goes against the grain of all of the “I’m responsible with my money” guys and gals out there. Sorry. No debt allowed. Not even temporary, I-promise-I-pay-it-off-every-month debt. Sure you do. And what about when YOU get sick, and YOU forget to send in your payment? Oh, that not enough? How about this? What about this? Your bank makes an “error” and your “on time” payment does not go through. No, that will never happen. The big nice bank just loves you. (Note, credit card companies do not “like” customers who make their payments on time and only use cc for rewards and rebates. I’m not saying that they have incentive to smack you around… but…) Be a big boy. Use cash.
Get out of debt? Yes, by all means. If you have hit upon my little corner of the blogosphere, then you are obviously interested in personal finance matters. Now, you will read a lot about interest rates, bank deals, saving money, retirement, and investing. But, do you know what the ONLY absolutely guaranteed “return” on you money is. DEBT RE-Payment. That’s right. For every dollar you pay towards your debt, you are absolutely guaranteed that it is going to do what you expect it to do. It is going to increase your networth by decreasing your liabilities. (You will be worth more because you owe less.) Dollar for dollar, guaranteed. Your investments could tank, your savings account rate could change, heck, the US gov’t could go bankrupt…BUT, when you pay-off your debt, you are getting a guaranteed return on your money. You are putting it to good use. And this is just the FINANCIAL side of the personal finance equation. Do you realize how AWESOME you are going to feel when you are debt free? How proud of yourself you are going to be? When you look into the mirror above your sink at night, you will be staring into the eyes of someone who OWNS their stuff. Do I want you to think about saving and investing and real estate and all of the other things that make up personal finance? Of course. BUT FIRST! I want you to free yourself from the anchor that is holding your back. DEBT.
If you like what you read hear, please consider checking out my podcast at No Credit Needed Podcast and joining us at the No Credit Needed Network. (The Network is a group of like minded bloggers who focus on getting out of debt and saving money.)