Debt Cures – How You Can Get Out of Debt

People are scared of debt. In many cases they damn well should be, while in others, debt can be your friend. By a score of 39% to 20%, a recent survey by the National Association for Business Economics found that Americans feel that excessive debt is a greater threat than to the nation than terrorism. Weather or not that's true will never be confirmed, if we have any luck (plus some great intel and a lot of hard work) at all.
If you are one of those that does have excessive debt, weather you fear it or not, a debt cure may be in order. Curing debt is easier said than done in many cases. Sure, it's simple to spout such platitudes as “Just put 10% of your pay toward your debt until it's paid off. You'll never miss the money.” Weather or not you would, in fact, miss the money is academic. To find a cure for your debt, you'll need to analyze it and determine what will be the best course of action to eliminate it.

Debt Cures – Strategy 1 - Step by Step

Debt Cure Step 1 –Get a copy of your credit report from at least one of the three credit reporting bureaus. You need this not only to establish a baseline credit score, but for debt elimination purposes, you need to be sure if all your debts are valid. Your credit report will show you if you have any debts you are unaware that may be invalid. If you have any debts you feel are in error, you can contest these while you move on to the next steps required to cure your debt problems.

Debt Cure Step 2 -List all your debts. Put down the creditor, the type of debt, the balance owed, the monthly payment, any past due balance, the interest rate, and if it is a fixed term loan, the payoff date.

Debt Cure Step 3 – Analyze your debts. Why are you in debt? Determining the root cause of your debt is absolutely essential. You can have debt from a pattern of overspending, or from an extraordinary event, such as natural disaster or medical problem. If your debt is caused by overspending, you must cure the root cause. If you’re spending beyond your income, you’ll be doomed to a life of indebtedness.

Debt Cure Step 4 -When you have all your debts listed and categorized, sort them by the interest rate. Now it's time to plan your debt elimination strategy. Usually you'll work on paying off the highest interest rate obligation first. There are some exceptions to this.
If you have any past due debts, you must satisfy these first. There are two reasons for this. One, they are probably charging you a late fee every month you are late. Second, past due debts devastate your credit score. Lowering your credit score can actually make the interest rate rise on some of your other debts, in addition to making sure any new credit you receive will be more expensive. The farther past due the debts are, the greater the detrimental effect they have on your credit score. So, if you do have past due debt, make sure that is taken care of first. Make the minimum payment on your other debts until you have satisfied all your past due debts.
Once you’ve taken care of any past due debt, it’s time to begin eliminating current debt. Make the minimum payment on all your debts but the one with the highest interest rate. You can use some discretion here. For example, if you have a credit card with a $12,000 balance and a 21.9% interest rate, and another card with a $1,250 balance and a 22% rate, you should probably pay off the 21.9% card first. The amount of interest you’re paying every month on the larger card far exceeds the interest you’re paying on the smaller card, so you should eliminate that debt first.
When that debt is gone, take the money you were paying on the now retired debt, and shift it toward paying off the next highest interest rate debt. You’ll have more money to use for this because you’ll have the minimum payment from the retired debt and the extra money you were using to pay for it as well. You’ll add those two amounts to the minimum payments you had already been making toward debt number 2. When number 2 is gone, you’ll repeat the process with debt number 3, and so forth, until you’re debt free. Yipee Ki Yay Motherf….

Strategy 2 –

Using strategy number one will get your debt paid off, but you will take an interest rate hit. After all, the entire time you’re paying off the debt, you’re also paying interest, and at a fairly steep interest rate. You can use another strategy to pay less in total interest if you do it correctly. There is much more risk with this strategy if you do it wrong, however. Strategy number 2 is to get a debt consolidation loan. Unlike what the shills on the radio will tell you, A DEBT CONSOLIDATION LOAN WILL NOT GET YOU OUT OF DEBT!!! You get yourself out of debt by making payments on the darn thing.

The advantages to this strategy are that you’re only making one payment, so it is much more convenient, and you’re far less likely to inadvertently miss a payment. The interest rate is typically much lower as well, so in theory you’ll pay less in total interest.
The disadvantages are that although the interest rate is lower, the term of the loan is much longer, so if you only make the minimum payment, you can actually pay more in total interest by using a debt consolidation loan, than you would have if you’d just paid the debts off using strategy 1 above. The other disadvantage is, and this one is huge, you must use collateral to get that lower interest rate. What collateral? In the vast majority of cases, it’s not your comic book collection. Typically the lender will want your house as their collateral. Now if you fall behind, you not only screw up your credit, you have to find a new place to live. If you have to do that with no money and poor credit, I imagine it’s no easy task.

The other problem with using a debt consolidation loan is that in many cases, the problem that caused the indebtedness is not fixed. You can easily find yourself in a situation where you are back in debt from credit cards, vehicles, and now, a debt consolidation loan as well. Not a pretty picture, that.

Remember there are debt cures, but no magic potions. Here’s to getting debt free.