|
Get Out of Debt and Stay Off of Louise's Hit List
Edited and reprinted with permission from MSN Money, “Five steps to shedding new debt” by Kathy Kristof
Step one: assess your situation
Make a list of your credit card bills and their minimum monthly payments, as well as the interest rate and the total amount owed on each card. Add up the minimum payments and the amount owed.
Do you have nonretirement savings sufficient to pay off the debts? If so, use it—especially if it’s sitting in a low-yielding bank account or money market fund. Earning single-digit interest on your savings while paying double-digit interest on your debts is folly.
Step two: create a repayment plan
If you can’t pay off your debts immediately, compare your minimum monthly credit card payments to your discretionary income. If your discretionary income is higher than your minimum payments, use the extra cash to begin paying off the debts. (If you have more bills than income, skip to Step
Three.)
There are two common repayment strategies. One is to make only minimum payments on most debts and use whatever money is left at the end of each month to pay down the balance on the card with the highest interest rate. When that card is paid off, attack the balance on the second-highest-rate card, and so on until every credit card is paid off.
The other strategy is to pick off the low-balance cards first. This provides a psychological boost to those who need to see progress, but it’s not as effective as getting rid of the high-rate cards first.
Step three: trim discretionary spending
If the total of your minimum payments is more than your available funds, look for ways to cut your spending. Look first at discretionary spending—everything that doesn’t have to be paid each month—and try to find ways to reduce it. Giving up every luxury might be unrealistic. But most families can trim at least some minor expenses that could provide money to whittle down the credit card bills.
Be particularly careful about late fees. Whether it’s paying the bills
or returning rented videos, being a day late costs money and provides nothing of
value.
Step four: bargain-hunt for necessities
You can probably save some money if you re-examine your options for auto insurance, homeowners insurance or long-distance phone service. Using coupons for grocery shopping also can save money. A little time spent clipping coupons from the Sunday newspaper can save hundreds of dollars a year. Dry cleaning, auto supplies and tools also are available at discount prices if you’re willing to shop
around.
Step five: stay on track
Make a point of keeping your spending in line. The best-case scenario is to pay off your credit card balance every month. If you must carry a balance, confine it to one card with the lowest rate you qualify for.
Never go over your credit limits and never pay your bills late. If you do, you’ll get hit with penalty fees. Moreover, it hurts your credit rating, which gives lenders reason to hike the interest rates on your debts, putting you even further behind.
For information on specific programs at the McCombs School, consult our contacts page. For media information, contact the Communications Director by phone at 512-471-3314 or by email at CommunicationsDirector@mccombs.utexas.edu.
