A few years ago, Travis Pizel and his wife, Vonnie, found themselves in crisis. The Rochester, Minnesota, couple had good jobs and lived well, often eating out, buying what they wanted and taking vacations to water parks with their two children.
But a letter from them credit card the company informing them of higher payments forced them to face the truth: they had accumulated $ 109,000 in credit card debt during their 13-year marriage. Despite a family income of around $ 100,000, they couldn’t afford the higher payments.
“We had basically accumulated credit card debt from the moment we said ‘yes’,” Pizel says. “It was just a big snowball rolling down the hill that kept getting bigger.”
They are far from the only Americans facing huge debts. Credit card, student loans, auto loans, home equity lines of credit – it’s easy to find that you’ve put yourself over your head with numbers so big you don’t even want to face them.
That’s the wrong approach, says Beverly Blair Harzog, author of “Confessions of a Credit Junkie” and “The Debt Escape Plan,” which will be released next month. “The first thing to do is to own the debt,” says Harzog. It means saying to yourself, “I did that. I’m not a victim, and now it’s my job to pay. “
The first step, she says, is writing down exactly how much you owe each creditor, along with interest rates and minimum payments. The next step is to budget, figure out how much it costs you to live on and what the expenses that you can reduce to find the money to pay off your debts.
It’s best to tackle debt as early as possible, as consumers with strong credit have more options – the flexibility to negotiate lower interest rates or get a credit card with transfer. balance – than those whose debts have been turned over to collection agencies.
“If they feel like they’re just one paycheck away from the crisis, now is a good time to call,” says Thomas Nitzsche, a financial educator in St. Louis for ClearPoint Credit Counseling Solutions.
Pizel and his wife signed up for a debt management (not debt settlement) program, which cost them $ 50 to start and $ 55 per month. They paid off the $ 109,000 in 55 months and believe the program, which negotiated lower interest rates on their cards, saved them $ 30,000 in interest charges.
“We didn’t really understand how much we had to change our lifestyle at times,” Pizel says. Restaurant meals have been reduced and vacations have become fewer. They started planning meals and sticking to grocery lists. “We looked at every monthly bill,” he says, asking a question, “Does this add value to our lives?”
What works for one person won’t necessarily work for another, and most people have to experiment to find the best way to budget and pay off debt, says Harzog, whose new book aims to help people find the best ways to budget and pay off debt. methods that suit their personality.
“You have to change your behavior, and that takes time,” she says. “It won’t happen overnight, where you have this revelation and it all falls into place.”
Calculate what you owe. List all of your creditors, including minimum payments and interest rates. Plan to tackle one debt at a time, making minimum payments on all the others. Some advocate the “snowball” method, starting with the least amount of debt. Others start with the debts that have the highest interest rate. Either way, you want to spend as much money as you can each month on your target account and then move on to the next. Yes, there is an app for that. Jackie Beck from TheDebtMyth.com created Pay Off Debt, an app for the snowball method.
Reduce your expenses. If you are lucky you may be able to pay off your debt reducing vacations, restaurants, gym memberships and shopping. If that isn’t enough, you may need to consider moving to a smaller house, moving your kids from private school to public school, selling your car, or moving in with the family.
Make a budget. You can create your budget on paper or use tools like Mint.com or YNAB.com (You Need a Budget). Some people like the envelope system, where you use money for everything, creating envelopes for each category of expense and savings. Start by writing down every penny you spend. “If you can squeeze yourself into it for three or four weeks, you’ll be surprised at where some of your money is going,” Harzog says.
Earn more money. This could mean getting a new job that pays better, taking a part-time job on the side, or working freelance. You may also be able to sell goods to generate more cash.
Stop using credit cards. Many customers are reluctant to give up credit cards because of loyalty programs, Nitzsche says. But if you pay 10% interest, the 2% cash back you receive is a net loss.
Transfer balances to get a lower interest rate. This is a good option for people with strong credit as long as you can pay off the balance during the introductory period. Take into account the balance transfer fees. While you can sometimes refinance your mortgage or take out a home equity line at a lower interest rate to pay off your credit card debt, remember that not making those payments can put your home at risk.
Call your credit card company. If you are up to date or close to payments, you may be able to negotiate a lower interest rate or a smaller minimum payment. Ask to speak to the hardship department or a supervisor. “Act quickly,” says Harzog. “Do not wait until you are three months late to call.”
Get advice. Find a nonprofit business that is accredited by the National Foundation for Credit Counseling, that has positive customer reviews and a good Better Business Bureau rating. Most companies will offer a free initial consultation. After that, you can decide if you need a credit management plan, in which the agency negotiates with your credit card companies, takes a payment from you, and then pays your creditors. These non-profit agencies, which were previously known as consumer credit counseling services, can also help with student loans and mortgage modifications.
Consult a lawyer. This is an especially viable option if you are considering bankruptcy or have been sued. A credit counseling agency can help you find one.
Review medical bills. Medical debt accounts for 52 percent of invoices sent to collections, according to a study conducted last year by the Consumer Financial Protection Bureau. Make sure your bills are correct and the insurance company has paid their fair share. Once you’ve figured out what you owe, ask for financial aid, a payment plan, or a discount. “A lot of people don’t know they can apply for financial help with a hospital,” Nitzsche says. Even if the answer is no, the hospital may offer a payment plan or cancel part of the bill.
Beware of debt settlement companies. These for-profit companies usually collect money up front, tell you not to pay your bills, and wait for the debt to become past due in hopes of negotiating a settlement. It may or may not work, and the result could be a lawsuit or lien against your home. Many businesses take customers’ money and then disappear. “There are situations where debt settlement can be a good idea, but I don’t recommend going to a debt settlement company,” says Nitzsche. Start with a credit counselor, who can recommend other options for settling debt.