The Internet Loan World: 04/02/07

Monday, April 02, 2007

Erase Debt Problems While You Still Can

With the economy slowing, now is the time to lower excessive household debt. Families currently in decent financial shape may find themselves in a serious state in the event that jobs disappear or other hardships occur. Some economists have said this high personal debt could be the economy's "Achilles' heel" as it softens. Although most debt problems are occurring among households with incomes below $50,000, according to the Federal Reserve, higher-income ones aren't immune.

Reducing debt isn't fun, nor is it always easy. Nevertheless, it is better to cut it now before a soft economy possibly reduces your income with which to pay the debt. The first step is to review your finances to see if you are vulnerable to debt problems. Most certified financial planners recommend that no more than 10-15% of take-home pay go to nonmortgage debt. That is debt paid to student, car, and/or personal loans, credit cards, etc. As a rough rule of thumb, many planners recommend that people aggressively target any debt whose interest rate runs 10% or more.

A note of caution here. Many people have refinanced their home mortgage or have taken out second mortgages, and more families may refinance as interest rates drop. The potential danger with this is that they often roll piled-up credit card debts, car payments, or other nonmortgage purchases into the refinancing--in short, they "mask" their nonmortgage debts inside their mortgage.

Assuming you have excessive debt you would like to reduce, what should you do? Here are several ideas from the Financial Planning Association, Denver, Colo.:

* Make a spending plan to document your income and expenses more precisely. Identify those monthly expenses you can eliminate or reduce in order to minimize the accumulation of additional debt and to free up funds to pay down existing debt. Delay buying a new car or new clothes, for example, or brown-bag lunch instead of eating out. Imagine yourself on an emergency budget should you lose your job or suffer a decline in income from such things as fewer overtime hours. What are the bare-minimum expenses you would have to meet and what could you do without?

* Get under control the things that are causing you to go into debt in the first place. Are credit cards the problem? Limit their use or quit utilizing them entirely. Start paying off new charges every month so you don't pile up the principal on which you are paying interest charges. Pay more than the minimum payment.

* Put tax refund, year-end bonuses, or any other extra monthly cash toward your debts. If you do have a tax refund, consider adjusting your withholding in order to free up income sooner. When paying off debts, start with the highest-interest debt first, or the one with the lowest balance so you can feel good about paying off a debt quickly. When it has been accomplished, put the payments you were making on that debt toward the next debt, and so on.

* Consider debt consolidation, but be very cautious. It may make sense to consolidate several high-interest credit cards onto a single lower-rate one, but just be sure you cancel the old cards so you don't rack up new debts on them. A home equity loan can work, too, but remember that you are putting your home at risk if you can't pay off the loan. Moreover, be sure that the total payments under a consolidation loan are smaller than the total payments of the individual ones over the same loan period. Don't consolidate debt you typically aren't paying interest charges on, such as doctors' or lawyers' fees.

* For more serious debt problems, consider working with a nonprofit credit counseling service or support groups such as Debtors Anonymous.

Should you consider debt consolidation? These services can put the financially overburdened on the track to debt freedom

Q I'm having trouble paying my bills on time. Can a debt-consolidation agency help me?

A Your ability to get back on track and consistently pay your bills by their due date is critical to recovering your credit standing. Here's how to tell if debt consolidation is something you need to consider.

Evaluate your position: Run the numbers for a clear snapshot of where your money is going. Write down the exact details of your income and expenses for two months. Now add up all your debts and total the minimum payments due on each.

Financial planners say if you can afford to pay double the amount of all your minimum payments each month and still put away at least 10 percent of your income in a savings fund for emergencies, you just need a disciplined spending plan so you can accelerate paying off debts. Can you get a cheaper cellphone plan or make do with basic cable? You'd also be surprised at how much you can trim from your monthly out-of-pocket expenses by making a weekly shopping list for groceries and personal-care items and sticking to it. Avoid using credit cards and refrain from unscheduled trips to the ATM. Call each creditor with whom you've been delinquent and ask to work out a payment plan, and again, stick to the plan.

Know when you're in over your head: Several of the following factors combined can signify that you need professional help. * Your voice mail is filled with messages from debt-collection agencies. * If you buy items on credit you should buy with cash (groceries, personal-care items). * If you regularly skip some bills to pay others or take credit-card cash advances or borrow money to make ends meet until payday.

If these situations are familiar, you're not alone. Nine million consumers sought credit counseling last year. Your level of debt, your level of discipline and your prospects for increased income are key indicators of the kind of help that's right for you. In addition to simple budgeting and credit counseling--but before bankruptcy--there's debt consolidation. But only about 33 percent of those who seek debt consolidation qualify for this service.

How it works: Members of the trade group National Foundation for Credit Counseling ([800] 388-2227 or nfcc.org) can be a source of low-cost credit-counseling services--$50 maximum to set up your account and no more than $20 a month in administrative fees. (If charges are higher, find another agency. And check the agency's reputation with the Better Business Bureau.)

Based on your income and debt, certified credit counselors will contact and negotiate with all your creditors to agree on a consolidated monthly payment amount. Every month you send the agency a single payment that is portioned out to each of your creditors until your debts are paid off. Most accredited debt consolidators can arrange with your creditors to reduce or waive interest and late fees. It's important that the debt-consolidation program have an educational component to teach you the money-management skills that will keep you dedicated to managing your future debt appropriately.

The Internet Loan World

Monday, April 02, 2007

Erase Debt Problems While You Still Can

Should you consider debt consolidation? These services can put the financially overburdened on the track to debt freedom

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