Part 4: Reduce Your Debt
Tackling your debt will not only reduce stress in your life, it will increase the amount of money you have for saving and other planned expenses.
Many people feel as if they will never be out of debt, and are tempted by credit card offers with low introductory rates or an ad urging debt consolidation into one easy payment. If you feel like you’re on the debt treadmill with no way of getting off, you should know there is a better way.
Understand the costs of credit card debt:
If you had 3 credit cards with an average interest rate of 16% and a balance of $7,700.
What would happen if you made only minimum monthly payments?
It would take you 28 years and 2 months to pay it off.
On $7,700 you would pay $20,600 in interest for a total of $28,300!
Consider the following…You may be too deep in debt if:
- Your mortgage purchasing power is limited because of debt.
- You often borrow from one lender to pay another.
- You use more than 20% of your take home pay, excluding housing costs, to pay-off your loans.
- You need to take out loans or use credit cards to pay for regular living expenses.
- You can’t keep up with your monthly utility payments and other bills.
Perhaps you’ve heard ads encouraging you to consolidate all of your debts into one easy payment, telling you this is the way to get rid of your debt. Before you take that road, there are some important questions you should ask.
What’s the rate of a debt consolidation loan? It may only be one rate, but if it is higher than your other rates, that’s no bargain.
Is the interest rate adjustable? Perhaps it’s a good rate now, but where will it be in a year or two from now?
What is the term of the loan? How long will it take you to pay it off? Will it take longer to pay off than if you paid the individual debts on your own? If so, you’ll be paying more interest over the long term.
Are there prepayment penalties? If you’d like to pay off the loan early to save yourself some of the interest, will you have to pay a fee?
What are the terms and cost of the loan? Study them carefully, do they really benefit you?
Does it fix the problem or extend it? Are you locking yourself into a situation where you will be forced to pay more interest over a longer period of time, which would extend the debt?
There is a better way! Power Pay is a no-nonsense way to reduce your debt and your stress along with it.
When you power pay your debt away, you focus on paying down one debt at a time while making minimum payments on all the others.
- First free up whatever additional money you can from your budget. This is your initial power pay amount.
- Focus on paying down one debt at a time. What works for you: shortest term, highest interest rate, or the debts identified by the housing counselor that would help you increase your purchasing power? Use that additional power pay amount to pay down that debt event faster.
- Don’t forget to continue making minimum payments (or what you can afford to pay above the minimum) on your other obligations!
- When your first debt is paid off, take one month to build in a reward by using the extra cash for savings or a treat for yourself. Celebrate the fact that you paid off one debt you deserve it (but don’t go overboard)!
- Now focus on the next debt. Use your initial power pay amount plus the minimum amount you were paying on the first debt as your new power pay amount.
- Remembering your goals along the way will help keep you motivated.
- Be cautious and thoughtful about adding new debt as it will extend the time it will take you to pay off all debts.