Strategies For Eradicating Debt: Payments, Rates, And Prioritizing

This article explains how to prioritize and slash debt.

Having a big pile of debt hanging over your head is enough to make anybody toss and turn at night. If you're reading this, I'll make the bold assumption that you're looking for ways to get rid of the debt once and for all, but you're not quite sure where to start. After all, with a dozen credit cards, two car loans, a student loan, a first and second mortgage and perhaps a few installment payment arrangements, there is no obvious square one. Your job here is to prioritize your debt.

The first thing you have to do is write down all your debt. This is likely to be a somewhat scary experience, but you need to get a firm grip on just how bad things are before you can do something about it. Start with the credit cards and move down the list, writing down name of card/loan, current balances, minimum monthly payments and each respective percentage rate. Sum up the total debt and the total minimum monthly payment. This is your baseline.

Next, it's time to focus on where you are bleeding money the worst - and odds are that is the credit cards. Write an additional, short list where you sort the credit card debts by interest rate, starting with the highest rate and moving down. From now on, you will only make minimum payments on the other debt until the 3 most expensive (highest rates) credit cards are paid off. Then cut up the cards and cancel the accounts - you don't need high-interest credit cards anyway, so just toss them in the trash where they belong. If you have cards you rarely use, ditch those too as excessive 'available debt' may hurt your credit score and thus boost everything from auto loan rates to insurance premiums.

Sum up the remaining credit cards on a new list and add the rest of your consumer debts, again sorting by the highest interest rate at the top. That means car loans, installment payments and other stuff that is not a mortgage or student loans. The reason we keep those types of loans out of the equation is that they may be partially or fully tax deductible. In other words, $100 paid in interest for a credit card debt is $100 down the drain, while $100 paid to a mortgage in the 28% tax bracket means the real cost to you is only $72.

Once you have your remaining consumer debt on a hitlist, you start whacking them down one by one. Tax refund? Don't even think about a trip to Bahamas - make a big dent in that car loan instead.

But all this assumes you have a surplus every month. What if you're barely making ends meet, so that you only have enough to cover minimum monthly payments? This is very precarious territory, as you're vulnerable to layoffs, illness, accidents and anything else out of the ordinary. Simply put, if life throws you a curveball, you're toast. Now, while you're employed and healthy, is when you have your chance to get out of that spot - but it may require drastic measures.

Suppose you have a big car loan. That means you're probably paying a few hundred a month for a fairly new car. But cars drop in value like a rock, so you're not only paying interest; you're also losing hundreds every month in depreciation. Add on the expensive insurance and you've got a financial black hole. Sell the car and get a reliable, older model instead! This will remove a big debt, cut insurance by as much as half, and free up those $200-300 a month from the car loan to start paying down your credit card debt.

If you have decent amount of home equity built up, you can tap it for a cheap, large loan that may wipe out ALL your credit card in a single sweep. Since credit cards typically charge something in the range of 12-20%, not counting sneaky fees, you effectively slash your monthly interest payments at least in half. However, and I can't stress this enough, discipline is absolutely essential for this approach. As soon as the cards are paid off, cut up all but a few, low-interest ones. Don't feel into the trap of feeling 'rich' and end up with a big mortgage AND a new round of credit card debt.

Lastly, if your only option do it the hard way and slowly chip away at the debt as well as you can, there are still ways you can ease the pain. Call the creditors and ask them to slash the interest rate. They know your debt to them and other companies, so they know you're not bluffing. From their perspective, it's better to give in and lower interest rates and give up a bit of profit, than risk you declaring bankruptcy that makes it a total loss. Don't resort to over-the-top sob stories, but a polite request for lower rates pay off surprisingly often.

One thing that won't work, however, are the offers of 'cleaning out' your debt, overly generous consolidation schemes or other too-good-to-be-true offers. You recognize these by how you're basically told to fork over money to some company that promises to magically make your debt disappear in return. Think about it; these guys don't want to do you a favor out of the goodness of their hearts, they want to make money. Guess who'll be supplying that money? Hint: it's not the credit card companies.

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