For some reason I have been on a financial advice kick this week. Next week I will have to return to lighter topics like fashion.
So there are a large amount of people I know who have debt. Now there is good debt and bad debt and it is important to understand the difference. Good debt (or okay debt) are loans with low interest rates, ones that either are lower interest than your investments (so if your student loans are at 4% and you can make 8% on your savings, you are better putting money into savings than paying off the loan). Often times interest on these loans are tax deductible (as is the case with mortgages and student loans). Even car loans to some extent can be considered okay debt (since the interest rates are relatively low and cars can even maintain some of their value and be considered an asset). Bad debt, on the other hand, is the high interest debt with little-to-no long term benefits. The biggest example of this is credit card debt. This is the debt you want to elminate.
So how do you get rid of bad debt? Well first you need to evaluate your lifestyle. Do you have enough money leftover each month to put into savings after your bills have been paid? Then you are getting ahead. Do you spend as much as you earn and have little or nothing left over for savings? Then you are getting by. Do you have to rely on your credit cards or savings to meet your monthly expenses? In that case you are living beyond your means. The first thing you have to do is get control of your spending. For many people that can mean changing your lifestyle. Eating in, instead of eating out. Packing a lunch to work. Making your own coffee instead of your daily trip to Starbucks. Once you have made the changes, hopefully you can find yourself in the getting ahead category.
Now each month you have a little extra money. The first thing you need to do is collect all your “bad” debt statements. Make a list of the balance, minimum payment, and interest rate for each. Each month pay the minimum payment for each one and then take you left over money and apply it to the card with the highest interest rate. Continue to do this until it is paid off. The only way this will work though is if you stop charging on these accounts. Hide the cards, freeze them in a bowl of water in your freezer, just put them in a place where you truly can’t use them. Over time each account will get paid down one by one. For some people it is even easier to pay off one credit card, and then the others, so they start with the lowest balance. That is fine too, just make sure you pay for the minimum payment (here is a calculator that shows you how long it will take to pay down a balance if you only pay the minimum).
The other thing to do, is to take each of your statements and call the company. Call each credit card and request that they lower your interest rate. Here is a great article I found on the topic; they even have phone scripts to follow like below:
Script 4: I visited your website and noticed that you are offering a ____ rate to attract new customers. I have been an excellent customer of yours for __ years and would like to receive the same rate being offered to new customers.
Once you have all your debt paid off make sure you are saving money for the future, and remember to keep your spending under control. You don’t want to end up back in the same place.