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Consumer
Debt
Does this sound
like anyone? My family and I have always lead a full life, enjoying
vacations, dinners out, and new cars. While many of these items
have been paid for by credit cards, we've never felt uncomfortable
with our level of indebtedness. However, things have been slowing
down at work lately, and I suddenly realized that I would be in
big trouble if I lost my job. We are just paying the minimum on
our credit cards and I'm starting to feel like we're in way over
our heads. What should our next step be?
The answer
is. You are definitely not alone. Even with the economy pumping
at full-speed, American consumers are borrowing at a record pace
and installment debt (more than $1 trillion of it) has never been
higher. But no matter how much you owe, a sound debt-reduction
plan can help you reduce your debt burden and get you on the road
to financial recovery. Here are a few tips that can get you started
towards good financial health:
Cut up your
credit cards. This may be your first and most important step on
the road to financial recovery. You may want to keep a couple
of cards for emergencies but, to keep yourself from incurring
more debt, consider using a "debit" card tied to your checking
account.
Target high-rate
debt with the lowest balance first. Paying down the highest-rate
debt first will make the most of your debt-reduction plan. Get
out a piece of paper and list all of your debt, beginning with
the debt with the highest rate on the top. Focus on applying as
much money as possible to those debts, starting at the top of
the list and working your way down. When you pay off the debt
that you selected to pay first, roll that payment over to the
next debt that you have selected to concentrate on next. Follow
this procedure though out the debt reduction process until all
is paid off. Then continue paying this amount into a savings program
to buy the item you want for cash.
Consider
refinancing. With mortgage rates hovering at 30-year lows, there's
no better time to refinance your higher rate mortgage. The general
rule of thumb for deciding whether or not to refinance concludes
that if you'll recover the refinancing costs (usually 3-5% of
the loan amount) within 3 or 4 years and you plan to stay in your
home for at least one year after that, its probably worth it to
refinance. And with no-fee loans, refinancing makes sense as long
as the new interest rate (usually higher than the best available
rate) is lower than the one on your existing loan.
Consolidate
your debt. Combining several high-interest loans into one with
a lower rate can save you thousands of dollars each year. For
homeowners, home equity loans are your best bet as the interest
paid is generally tax-deductible. Also, there's help out there
for those old student loans: some governmental and private lenders
have low-rate consolidation options available.
Ask your
lenders to lower your rate. With the widespread availability of
ultra low-rate credit cards, lenders are more willing than ever
to lower your interest rate rather than lose you as a customer.
If you have a high-rate credit card, call the lender and ask for
the same rate offered by their lower-rate competitor. If the lender
refuses to lower your rate, go ahead and take advantage of their
competitor's balance transfer special. And don't forget your mortgage
lender: the last thing they want to do is write off a large home
loan. In hardship cases (e.g. job loss, disability), many mortgage
lenders will suspend interest charges if you convince them that
doing so will allow you to resume your regular payment schedule
sooner.
Don't be
afraid to ask for help. If you don't feel that you can devise
an effective debt-reduction plan on your own, consider calling
a professional. CPAs and professional financial planners are in
a position to consider your total financial situation but also
consider nonprofit companies such as Consumer Credit Counseling
Service (800-388-2227) that provide a low cost (but effective)
alternative. Their experienced counselors will help you prepare
a budget you can live with and also help negotiate with your lenders.
Getting out
of debt is never as easy as getting into debt. You are entitled
to a free copy of your credit report annually. The three major
providers of your credit report are Equifax, TRW and Trans Union.
Contact them by letter to receive your free copy.
The information
presented is only of a general nature, may omit many details and
special rules and accordingly cannot be regarded as legal or tax
advice. Please contact me for more information on this subject
and how it pertains to your specific tax or financial situation.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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