Seven Steps To Better Debt Management

Ask many people what the best approach for getting rid of debt is, and you’ll hear something to the tune of: “Pay for everything in cash and don’t incur any debt.” Although this sounds like common sense (and actually is), the truth is that it’s an impractical answer because it’s hard to implement for us mere mortals who don’t have the luxury of a $75,000+ yearly income with no kids. Actually, from a personal point of view, I don’t think that the best way to handle your finances is to pay for everything with cash, even if you have a high enough income to have that luxury.

I don’t have the statistics, but I think it’s safe to say that very few people buy their home with cash. There are also other situations that may arise and totally wipe out your life savings should you decide to pay for them with cash (medical and family emergencies, unexpected car failure…). Carrying SOME debt doesn’t necessarily imply that you’ve mismanaged your entire financial life. It might actually mean you’ve made sound financial decisions, such as increasing your earning power by going to school or using the power of leverage to purchase an asset that (usually) appreciates, such as a house. The tricky part is realizing when you have too much debt, and usually people don’t realize it until it’s too late: when they can no longer meet their payments. Once you suspect that your debt is starting to spiral out of control, you should consider a quick diet for debt reduction.

Step 1: Stop Getting Deeper In Debt

The only exception should be a case of emergency, like the ones mentioned earlier. And no, getting a new home theater system or updating your wardrobe do not qualify as emergencies, in case you were wondering. The purpose of this article is not to tell you how to spend your money. Instead, it’s about being smarter about handling your debt by identifying the best lending deals. Unfortunately, freezing your debt usually goes hand in hand with freezing your superfluous spending, especially if you don’t have the income to support that debt. Stick to the indispensable. Real simple, but easier said than done.

Step 2: Evaluate Your Financial Condition And Start Planning

You know the saying: “If you fail to plan, you plan to fail.” It never fails (pun intended). Creating a plan to get out of debt involves several steps. One of the most important of these steps is taking a close look at each and every one of your creditors. You need to clearly understand exactly how much it’s costing you to have each particular debt, keeping a watchful eye on interest rates, late fees, and other penalties. You will also have to review your payment history with all your creditors, namely did you pay on time. This can prove critical.

Your financial plan must be a roadmap that takes you from debt to debt-free. To do that, you need to know how much your total debt is and how long it will take to pay it off, given your current rate of payments. Of course, like all plans, it must offer some degree of flexibility, but without it, you likely will just keep spinning your wheels without getting anywhere.

Step 3: Look For Money Saving Opportunities

There are plenty of options out there to save money on your debt payments, you just need to keep an eye out for them. It’s often pointed out that whenever we get interested in something, we instantly start to run into that thing more often in our daily lives. It’s not that those things surged in popularity the minute we started wanting them, it’s just that our awareness of them grew, and they had actually been there all along. The same is true when you start looking for debt-reduction options. As you start to dig into debt management, educate yourself, and closely examine your debt situation, many opportunities to save money on your payments will start popping up, the first of which will probably be all those low-rate credit card offers that flood your mailbox on a daily basis.

Last year alone, banks mailed about 2.5 billion of these offers. Many of them will save you money, but you need to read the fine print, evaluate the offer against your current offers and consider your particular financial situation so you can determine whether or not their offer is truly something you can use to your advantage.

Step 4: Take Action To Reduce Your Debt

Decision without action is nothing more than wishful thinking. All the daydreaming in the world won’t help you pay off that debt! For example, if you have medical debt, start looking into how to negotiate your medical bills. Formulate your debt reducing plan today and, most importantly, see it through! Simply knowing the route from your home to your destination won’t get you there until you actually get on the road.

Step 5: Track Credit Card Offers And Loan Offers

Remember those low rate offers I mentioned earlier? One of the best moves you can make is to track them and save them in a box or file. They can pay immediate dividends. You can use them to call up your current bank or credit card company and state the offer that you just got from such and such. More often than not, you’ll get positive results. Not only do you already have a history with them, but also acquiring new clients is very expensive for these companies.

Another reason for tracking offers you receive is that should you need to turn to another financial institution for cheaper financing, you’ll already have done your research and know which banks to contact, many of which may have already pre-approved your application. You will then be negotiating from a much better position, assuming that your payment history is relatively satisfactory.

Step 6: Don’t Rush Out And Close Credit Card Accounts

After paying off a credit card, do not cancel it. When you cancel your credit cards, you hurt yourself in several ways. The first problem with closing your accounts is that, should an emergency arise, you will be at the mercy of whatever bank(s) you decide to keep. If, for whatever reason, they decline your request, you’re left out in the cold with few options. The second problem with canceling your credit cards is that when you do, you also delete the credit history that’s attached to that card. So the older the canceled card is, the more your credit score is likely to suffer, since a part of the calculation takes into account the length of your credit history.

As long as your current credit card accounts (and lines of credit) aren’t charging you any fees for inactivity, then it’s in your best interest to hang on to that account. Just make sure you don’t turn right back and start charging them. In short, don’t give any financial institution a monopoly on your business. Keep your options open.

Step 7: Pay Your Debt On Time

Do it no matter what it takes. When it comes to debt repayment, the capital sin is paying late. You will feel the pain immediately with late fees (that’s money which would have been better used to reduce your debt). You will also feel that pain in the future as paying late hurts your leverage and bargaining power in future negotiations. But most importantly, paying late makes you a “risky” customer and makes it that much harder for you to secure the best rates and deals when you need them most, like on a mortgage. In the long run, that kind of negligence can cost you thousands of dollars. If you have the option to borrow (from family members or close friends), do so to make sure your payments are made on time and your interest rates are as low as possible. Debt management is a continuous process. Stay on top of your situation, and keep more of your money.