As the economy slowly improves, Americans are racking up
more debt. And experts say they often make big mistakes when trying to shed
that debt and get back into the black. Total outstanding revolving credit card
debt reached $873.1 billion at the end of June 2014, according to the latest
data from the Federal Reserve, up from $861.5 billion in the first quarter of
2014. Americans owe around $11.74 trillion in debt, up 5% from last year.
Here are 6 smarter and faster ways to pay off debt:
based on interest rates
For many consumers, it makes sense to concentrate on paying
off the credit card with the highest interest rate first, while making smaller
or even just required minimum payments on their other debt accounts. Do the
math to see how much will be ultimately paid on each card with interest. A
couple cleared $125,000 in debt over four years as they decided to pay off
the lowest dollar amount on each credit card first because it gave them a
greater sense of achievement.
Treat your debt plan
like a diet plan
Paying off debt is like getting in shape and losing weight. Both
require discipline and little treats along the way, and both should target the
one area that bothers you the most. As with a diet, make sure your debt
repayment plan is not unrealistic. There’s no point in giving up halfway
through and going on another spending splurge.
Don’t miss any
If you are overwhelmed by your credit cards or car loan, but
haven’t yet missed a payment, make sure you don’t. Becoming a problem won’t
endear you to the credit card companies. In 2001, a consumer owed $100,000 on
credit cards, and she paid them all off within three years. She says she had
one advantage hadn’t missed a payment in 20-something years. This track record
helped her negotiate double-digit interest rates to single digits, in one case
cutting an interest rate to 4.9% from 16%.
around debt management and debt settlement
Know the difference between a “debt management” organization
and a “debt settlement” company that offers legal and financial services. The
former category includes non-profit organizations that belong to the National
Foundation for Credit Counseling, while the latter is made up of for-profit
companies. Confusing the two could cost thousands of dollars.
The practices of debt settlement companies have frequently
been the target of consumer complaints and warnings from regulators. Earlier
this year, one client heard about a debt settlement company on the radio. He
was instructed to stop paying his creditors so the company could offer a
reduced lump sum. He made seven payments of $400 a month, yet no accounts have
been settled, and the company has charged him a $2,100 fee.
Debt management programs aren’t completely seamless for
consumers, either: When you enter a debt management plan, that fact can be
reported to credit agencies, hurting your credit score. But when payments are
made on time through a program, that can also help rebuild credit scores.
forgiveness for public employees
Student-debt holders who work in public service, for the
government or a non-profit, or who want such a job, should find out whether
they’re eligible for debt forgiveness. Under the government’s Public Service
Loan Forgiveness Program, borrowers in public service jobs may qualify for
forgiveness of the remaining balance of their Direct Loans after making 120
qualifying payments on those loans. A person with $150,000 in federal student
loans at 6.875% with a $40,000-a-year job who owes $281 a month in student-loan
payments could save $321,000 in principal and interest payments by committing
to public service for 10 years.
Refinance debt to get
lower interest rates
Consolidate your loans, but only if you can do so at a lower
interest rate. Your home loan could also help you manage your other debt. Most
mortgages have an interest rate of 5% or less, while student loan debt might be
closer to 8%, auto loans could be as high as 7% and credit card debt could
range from the teens to 20% or more. It might be worth paying off hefty credit
card bills or unexpected medical debt by borrowing money against your home
through a home-equity loan refinancing. But you should only do this if you’re
100% sure you’re not putting your home at risk.
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