Get Organized –
1. Find a manila file folder and label it “debt reduction plan“. This folder will contain all of the information that you will need to succeed.
2. Use the telephone and online access to your credit accounts and find out your current balances, current interest rates, due dates for all loans / credit cards, telephone numbers for each creditor, and addresses where creditors accept payments. Bonus Tip: Use a spreadsheet program to organize the information about your creditors, so that you can have instant access, whenever your might need it. Print a copy of the spreadsheet and place it in your “debt reduction plan” folder. Keep the folder / spreadsheet in a secure place.
3. Find out how much money you have in non-retirement accounts. Check your checking accounts and savings accounts. Every available penny will have a purpose in your “debt reduction plan” – and you need to know how many pennies you have – and where those pennies are located.
4. Balance your checkbook(s). You need to know how much money you have, at all times, throughout the debt reduction process. Financial sloppiness dies…today.
5. Take a look at your credit report. You can visitfor a free copy or your credit report from each of the major credit reporting agencies. This report will remind you of any accounts about which you have forgotten.
6. Stop adding to your debt. Personally, I stopped using my credit card, and this became a permanent decision. You may feel free to go back to your credit card, but when getting out of debt, consider not using them and breaking those charge-everything, worry-about-everything, habits. If you must use a credit card, be sure it’s one without a balance, and one you can pay off at the end of each month.
Stay Current and Add a Cushion
1. This article is meant for those who are current with all of their creditors, and assumes that you are ready to start attacking your debt balances.
2. Create an easy to access emergency fund, to provide extra money, should you need it for unforeseen expenses. The small e-fun might mean the difference between paying cash – and having to use a credit card. I keep my emergency fund in my ING Direct savings account.
3. At every step in the debt reduction process, always stay current with minimum monthly payments. This is important. Stay current, avoid extra penalties and fees, and improve your relationship with creditors.
Create a Debt Reduction Plan
1. Using your list of creditors, consider which debt you want to attack first. If you are following a typical debt snowball (like I did), pick the creditor with the lowest balance, and put it first on the list. Put the next-lowest balance second, and so on.
2. Which ever way you choose to list your creditors, the same payment plan remains important. Pay minimums to all accounts, keeping them current, and then focus all extra payments on a single, top-of-your-list, creditor account. Once that account is zeroed-out, move on the next creditor on the list, and apply the payments that had been going to the first account to the second account. Thus, you see the reason this is called the “snowball” method. Throughout the entire process, the total amount allocated for debt reduction remains the same, and only the account-to-be-focused-on changes.
Make It Easy To Send Payments and Extra Payments
1. Sign up for free online bill pay from your bank. Add each of your creditors to the bill pay section and pre-schedule minimum monthly payments.
2. If you are unsure how your creditor (credit card company, automobile lender, ect.) handles extra payments, call them! Some require that you write “apply to principle” in the memo section of the check. There will be times when you will send one, two, even three extra payments – to the same creditor – in just one month. You’ll want to be sure how / when those extra payments will be processed. In most cases, most credit card companies will automatically add any extra payment, above minimum payment amount, towards principle reduction, but you might want to call, just to be on the safe side.
Spend Some Time Thinking About Interest Rates
1. The most important thing about any loan is the principle itself – the actually amount of money borrowed. The interest on the loan, however, is also very important. Run the number and consider moving a balance from one card to another, if it’s worth it. Frankly, for me, my plan was to be debt free in less than a year and I didn’t want to deal with the hassle of a balance transfer.
2. If you don’t want to go the credit card transfer route, you might check out loan consolidation information from Lending Club. I have heard good things about Lending Club and have accepted them as an affiliate partner.
You Are Ready To Attack Debt When:
- You are organized and know how much money you have and where it is
- You are current with all creditors
- You have established a small emergency fund
- You have written out your debt reduction plan, listing debts in order they are to be paid off
- You have an easy way to schedule and make payments and extra payments
- You have taken into account interest rates and consider methods for reducing them
- You are motivated, pumped up about reducing debt, and tired of gimmicks
Stay tuned, and we’ll move from “planning” towards “implementing the plan”. Until then – rock on!
Edit: Thanks for the link from the good folks over at Consumerist.