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Dealing with debt is a financial fact of
life for most people and the trick is
dealing with the problem without sliding
into deeper money trouble.
Ignoring debt just puts off the day when you have to
face up to paying the money back.
Just remember owing money does not make you a bad
person and that if you take action to deal with
debt, the problems will pass with time.
Here are our 10 tips for handling problem
debts...
TIP 1 -
Find out what you owe
Grab a copy of your credit report from each of the
three main providers - Experian, Equifax and
TransUnion and compare the listings on each. Some
banks or card issuers may not report to each agency,
so having your report from all three means you won’t
miss a vital debt out of your calculations.
List all the debts by giving a line to each one on a
sheet of paper.
You need to know the same information about each
one:
• The creditor’s name and address. A creditor is
someone you owe money to.
• The account or card number
• The latest balance owed
• The monthly payment
TIP 2 -
Prioritize the debts
Prioritizing debts is splitting the money you owe in
to two groups - priority debt is debt like a
mortgage or another loan secured against your home.
Not keeping up the payments on this debt can lead to
foreclosure.
Debts with less priority are unsecured debts like
credit cards. You still have to repay these debts,
but although missing or reducing payments will
affect your credit rating, they generally do not
mean you could lose your home.
Payments like an auto loan could be a priority debt
if you cannot travel to work because losing your job
could mean having no income to pay your bills.
TIP 3 -
Work out a budget
Take a long, hard and honest look at your income and
outgoings. In one column, list every cent coming in
and in the other every cent going out - including
priority debts like rent or home loan payments.
If spending is more than income, then you need to
cut costs.
Go through you spending line-by-line and tick off
any expense you do not really need to make. The
exercise is good even if you have some spare cash at
the end of the month because at least you can see
exactly where every cent goes.
TIP 4 -
Calculate your disposable income
Take spending away from income and you are left with
a magic figure to pay towards your non-priority
debts.
If your spending is more than your income, cut
expenses. If you can’t cut expenses, then you really
need to talk to a consumer debt counselor for some
help.
TIP 5 -
Offer your creditors a payment
Some debt advisers suggest paying off the largest
debt or the one with the highest interest rate
first.
The best strategy, however, is apportioning
disposable income to debt.
So, if you owe $10,000 but have $350 a month to make
repayments, then give each creditor some money
according to the size of the debt.
For example, that $10,000 is made up of $5,000 auto
loan, a $1,500 credit card balance, a $1,200 credit
card balance and a $2,300 retailer card balance.
The auto loan gets $175 - 50% of the total, the
$1,500 credit card is paid $52.50 (15%), the other
credit card $42 (12%) and the retailer card $80.50.
TIP 6 -
Play your cards right
If you can see you won’t be able to make your credit
card payments, think about a balance transfer to a
lower interest rate.
You may find you can’t transfer if you already have
a patchy financial history, so the best think to do
is stop spending, however painful that may be.
A sensible borrower can see that borrowing to pay
debts will eventually lead to bigger debts and a
time when they cannot borrow any more. Do not put
off the fateful day. Own up to your financial
difficulties and take positive action to deal with
them before you hit that bad debt wall.
TIP 7 -
Take the driving seat for auto loans
Most auto loans let the lender take back your car
any time you miss a payment without any notice.
If a car is repossessed, you may have to pay
the balance on the loan plus towing and storage
bills to get it back.
Think about selling a car if you can see you
can’t make the payments. Paying off the debt will
stop a black mark on your credit report and save
money.
TIP 8 -
Chop those expenses
Most of us have some bills that we just
don’t notice or are too lazy to sit down and sort
out. Little payments like a few dollars to a fitness
club or an online subscription.
Start looking at what you spend. Don’t eat out so
often, cut your drinks bill or buy a smaller car
that’s cheaper to run.
TIP 9 -
Debt management plans
A credit counseling agency may recommend you sign up
for a debt management plan (DMP).
A DMP is not for everyone. You should only join a
DMP after a certified credit counselor has reviewed
your finances and offered personal advice on money
management.
DMPs work by taking a monthly payment from
you each month and distributing the cash among your
creditors to pay non-priority debts. Some banks and
credit card issuers may agree to freeze or lower
interest payments or waive fees if you enroll for a
DMP.
TIP 10 -
No pain, no gain
Part of dealing with debt is handling the psychology
of your relationship with money. Some people spend
because they don’t like to look cheap in front of
friends, for others, spending makes them feel better
and improves their self-esteem.
Whatever buzz spending gives you, that’s OK, as long
as it’s in moderation and does not push you in to
financial hardship.
The
point is you must change your spending habits to get
out of debt, but not so much that life loses all
meaning.
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