Debt Reduction

No Debt For You…!

I thought that I would list the most �prominent� methods for getting out of debt. Each method assumes that you are paying �consumer� debt: credit cards, automobiles, home equity loans, personal loans, etc. The home mortgage is placed into a separate �debt� category, and is not paid-off until after all other debts have been paid. (If you wish, you can treat your mortgage just like any other debt, and use any of the following methods to pay it off early)

1. Debt Consolidation: The basic idea is to take all of your debt accounts, and move the balance of these accounts into one account, typically a 2nd Mortgage on your home. Also, there are those who use a single credit card (usually offering a low interest rate), and �surf� their balances onto this single card.

Advantages: All of your debt is in �one� place. There are no worries about paying several small minimums for several accounts. The interest rate on a 2nd Mortgage is �usually� better than the interest rate for an auto or credit card loan.

DisAdvantages: Your home becomes collateral for ALL of your debt. There is a tendency, for most, when moving all of their debt onto a second mortgage, to engage in the exact same behavior that created the debt in the first place, and to continue to use credit cards to accumulate new debt.

2. Interest Rate Quest: The idea here is to �surf� your credit card and automobile debt balances from low interest rate card to low interest rate card, thus moving the debt around and avoiding most (in some cases, all) interest payments. This usually involves 1, 2, or even more �zero� percent credit card offers.

Advantages: Little to no interest is paid. Large amounts of �money� is available, with very low minimums.

DisAdvantages: If you are late with a payment, or forget to move a balance before an �intro-rate� period is over, WATCH OUT! Customers who forget to carefully monitor their balance transfer rules and regulations can get zapped with terribly high interest rates and fees. Also, when most of your effort goes into moving balances around, and avoiding interest, very little principal is paid back, and debt can just �hang� around for long, long periods of time.

3. High-Low Rate Pay-off: The most popular method involves listing your debts, highest interest rate FIRST, down to your lowest interest rate. Pay minimums on every single debt, and pay as much as you can on the HIGHEST INTEREST RATE.

Advantage: This method makes great �mathematical� sense. Because you are paying most of you attention to the debt with the highest rate, the more you pay, the more you save.

DisAdvantages: This method can become tiresome. Why? For many people, the debt with the highest rate never seems to go away, and because they get tired of paying and paying and seeing very limited results, they give up and quit trying. While this method makes �great� mathematical sense, it can grow old quickly for anyone looking for a quick financial victory.

4. Snow-Ball or Line-Up, and Knock-Down: This method, made popular by Dave Ramsey, involves listing debts, lowest BALANCE first, highest BALANCE last. Pay minimums on every single debt, and pay as much as you can on the LOWEST BALANCE.

Advantages: Wow, this is pretty obvious. As you pay extra towards your lowest balance, you will quickly see results. Much like a diet program, those first few pounds really make a world of difference. People like to believe that they are �doing� something, and watching those first, few small balances go away provides great motivation to keep going. By the time you are ready to attack the bigger balances, you are in a motivated, progressive state of mind.

DisAdvantages: The math. Sometimes paying everything extra you have towards a 6 percent loan, while you have 22 percent loan hanging over your head seems crazy. It really comes down to desire. How are you motivated?

5. My Plan: Okay, here is what I did to get out of debt. I took ideas from all 4 plans. First, I listed all of my debts. Then, I moved all of my credit card debts onto one card, at zero percent interest. I then had two car payments, one at 5 percent, the other at 8 percent. I then listed my debts, by balance, lowest to highest. I paid minimums on all the debts, and POURED extra money towards my lowest balance. I actually paid the 5 percent car off before the 8 percent, because it had a lower balance, and I wanted the feedback of getting rid of one entire �bill�. I think that the over-all key is this. Focus, get a good rate, have a plan, pay all of your minimums, and begin to attack your debt, either highest rate or lowest balance.

(One last note: Some try to pay their minimums on all accounts, and then pay-off all of their accounts at the same time, just paying a little bit extra each month. While this will work, I have found that most people abandon this method rather quickly, for lack of �see-able� progress. It is the laser-lock focus on one particular account that creates the intensity needed to destroy debt.)