Steps for Reducing Your Debt...

1.  Distinguish Between Wants and Needs

NEED: essential items & services for basic survival; e.g., food, shelter, healthcare, adequate clothing

WANT: 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 wear
• 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 have.


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

• Kiplinger.com
• Household Budget Calculator
• Debt to Income Calculator

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.
• Prime 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 rates.

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 debt.

Pros:

• 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
  

Cons:

• Debt settlement companies charge an upfront fee and may charge recurring monthly fees
• 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 companies
• 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
  

6.  Deal with Debt Collectors
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 here 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 counseling agencies.

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 FTC has tips on how to choose the right credit counselor.

To file a complaint or to get free information on consumer issues, visit http://www.ftc.gov/ or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.