1. Distinguish Between
Wants and Needs
essential items & services for basic survival; e.g., food, shelter,
healthcare, adequate clothing
things, activities, or services that increase your
quality of life; e.g., movies, ice cream, vacation home, fitness equipment,
name brand clothing
People can get into debt when they spend more money than
they make or make decisions based on wants, rather than
needs. Consider how you spend your money, and why you
spend your money. Many factors affect your spending--mood,
family patterns, peer pressure, etc. Examples:
- I want to feel better, I deserve this item
- My friends purchased this
item and I want it too
- There is a great sale, and I
just can’t pass it up
- My kids want this item, and I don’t
want to say no
- I want to impress my friends or coworkers
- I want something new to
- A friend or family member wants my help
Think about your behavior and identify some spending
triggers. Before you buy something, stop yourself. Determine whether the
purchase is something you need or are just something you would like to
2. Create A Budget
The first step toward taking control of your financial
situation is to do a realistic assessment of how much money you take in
and how much money you spend. Once you create your budget, you can see
where and how you are spending your money and identify areas where you
might be able to cut back.
- Look at your monthly income, and figure out how much money you
bring home after taxes.
- List all of your necessary monthly expenses such as utilities,
rent or mortgage, loan payments, and insurance.
- List additional expenses such as clothing, food,
gas, a gym membership, Internet service and entertainment.
- Make an even more detailed list of all your expenses, no matter
how small they seem. This would include your morning
coffee, a pack of gum, bottled water, a haircut,
birthday presents for friends and family and more.
The general goal is to be able to pay for the basics; mortgage, rent,
food, gas, insurance, etc., every month and regularly put money into
a savings account. It is wise to also save money for emergencies such
as appliance or car repairs. One common budget strategy is the theory
of thirds—set aside one third of your monthly income for your basic
living expenses (needs), another third goes towards carefully tracked
spending (wants); the last third goes into savings. Others strategies
suggest donating a small percentage every month to a favorite charity.
You can create a budget online or create one by hand, as long as you are
tracking and adjusting your spending. A basic Excel spreadsheet can be
a useful tool for creating and maintaining a budget, balancing your checkbook,
and tracking your expenses.
Online Budget Calculators
3. Manage Your Loans
It’s crucial to pay your loans on time, every time, every month.
Pay your credit cards bills off in full; making only the minimum monthly
payment will cost you extra and drive you deeper into debt. If you are
late on your mortgage or car loan or have missed a payment altogether,
you should contact your lenders and discuss your situation. If you are
acting in good faith or can show the lender that your situation is temporary,
they might be willing to negotiate new or temporary terms. If your mortgage
lender is unable to work with you, you can contact the local office of
the Department of Housing and Urban Development (HUD) or the housing authority
in your area for guidance.
HUD approved housing counseling
4. Negotiate for Lower Interest Rates on Credit
Cards and Loans
If you have credit cards or loans, then you pay interest on the money you
borrowed. Interest rates can vary widely and depend on several things.
Some of the criteria lenders use to determine your interest rate includes
your credit reports, payment history and how much debt you have acquired.
The APR refers to the annual percentage rate of interest
you are charged on your credit card. A single credit card might have several
different APR’s depending upon your monthly payments, whether you
take out a cash advance, or transfer balances onto the card.
- Introductory APR – Often companies will offer you a low introductory
rate and a higher interest rate will kick in after the initial APR expires.
Rate – The prime rate is the lowest rate of interest banks charge to
their best customers.
- Fixed Rate – This type of loan or mortgage has
as an interest rate that remains at a predetermined
rate for the entire term of the loan.
- Variable Rate – This interest
rate fluctuates over the term of a loan on the
basis of changes in an index that reflects changes in the market interest
So what can you do now? Search for lower interest rate
credit cards and call the credit card companies to see if they are willing
to reduce your fees. If you have a high credit score, the lender might
be willing to lower your percentage rate if you can show that your situation
is temporary and you are working to make it better. Before you contact
an organization, you should do your homework, know what type and rate of
interest you are being charged, identify other credit card fees and know
the penalties for late fees.
5. Debt Consolidation/Management
Debt consolidation is when someone takes out one loan in order to pay off
many other loans. People choose this option in hopes of securing a lower
interest rate or for the convenience of only having to pay one loan back.
This larger loan could potentially cover your monthly bills, including
credit cards, telephone and utility bills, fuel bills, income taxes, property
taxes, etc. There are pros and cons to consider before consolidating your
- You might receive a lower interest rate
- You can reduce all your payments
to one payment per month
- You can satisfy a debt
in full while paying less than the total amount
6. Deal with Debt Collectors
- Debt settlement companies charge an upfront fee and may charge recurring
- Creditors typically don’t settle debts until they're
a few months past due and you may have to stop paying
your accounts for a few months.
- Late payments are
reported to the credit bureaus, your credit score
can drop, and you might receive collection calls.
The late payments will remain on your credit report
for up to seven years.
- Some creditors won’t work with debt settlement
- You may owe taxes on the forgiven portion
of the debt
- It can take you longer to pay off your debt and
paying more interest over the duration of the loan
If you are far behind in paying your bills, you might receive a notice
or call from a collection agency. Even though you may feel like avoiding
these calls, it’s a good idea to deal with things head on. Once you
get a call, make sure you are dealing with a legitimate organization and
that you do in fact owe money on that account.
The Federal Trade Commission (FTC), the nation’s consumer protection
agency, enforces the Fair Debt Collection Practices Act
(FDCPA) which prohibits debt collectors from using abusive,
unfair or deceptive practices to collect money from you. Click
for more info.
Once you have established that these debt collectors
have a legitimate claim against you, negotiate terms for repaying that
debt. Once you have paid off that debt, obtain official letters from the
collection agency confirming that your debt has been repaid in full. Save
those letters as documentation, in case that debt still shows up on your
credit report in the future.
7. Credit and Debt Management Counseling Services
Sometimes it helps to get a little guidance when you
are struggling to pay your bills. There are for profit and nonprofit organizations
that provide debt management solutions, support and resources. While some
organizations provide free services, others charge fees.
Many organizations offer services through local offices, online, on the
telephone and in person. You can search for programs at local universities,
military bases, credit unions, housing authorities and nonprofit credit
A reputable debt management organization can advise you
on managing your money and help you develop a budget. Their counselors
are certified and trained in the areas of consumer credit, money and debt
management, and budgeting.
The Federal Trade Commission (FTC) works for the consumer
to prevent fraudulent, deceptive and unfair business practices in the marketplace
and to provide information to help consumers spot, stop
and avoid them. The
on how to choose the right credit counselor.
a complaint or to get free information on consumer issues,
call toll-free, 1-877-FTC-HELP
; TTY: 1-866-653-4261
Content on this site is compiled from a range of sources including:
America Saves, Consumer Credit Counseling Service of MD and DE, Federal Reserve, Federal Trade Commission, MyFico.com, MyMoney.gov (U.S. Government’s Web site for financial education), National Foundation for Credit Counseling, Saveandinvest.org (A project of FINRA).