Frugal moms know that one huge way to save money is, logically, to reduce the family’s debt. Having to pay out less money each month for credit card payments, medical bills, mortgages and other loans will allow you to spend more of your income on what you choose. It will also make your family more financially secure and allow you to invest and save more. The problem is, how to go about reducing your debt. Here are some ways to begin:
• Commit to paying off your debt.
Make a firm decision to begin today to reduce the amount of debt you owe. Work out a simple budget that shows exactly what you owe, how much you can pay each month, and when you will pay the debt off completely by following your plan.
• Start small.
While you will have to pay on all your bills each month to remain current, focus on paying off the bill with the smallest balance first. When that’s paid off, take the money you were paying on that bill, and with your regular monthly payment, pay the combined amount on the bill with the next smallest balance. Then, when that bill is paid off, take the money you were paying on both bills, and with your regular monthly payment, pay that combined amount on the next smallest balance… and so on until all your bills are paid off.
• Stop incurring more debt.
Stop using credit cards. Refrain from taking out additional loans. And stop buying anything you can’t afford or don’t really need. To have the best results, you’ll also need to learn to save money in a variety of ways. Every dollar saved is a dollar that help pay off your debt more quickly.
• Pay off your bills with the highest interest rate first.
This will typically be your credit cards, but not always. Check your monthly statement to be sure, then pay off those high interest debts as soon as you can.
• Never pay only the minimum amount due.
Financial experts agree that paying only the minimal amount on your bills, especially credit card bills, will keep you in debt the rest of your life. Sadly, that’s what finance companies want because that’s how they earn their money.
But you can get out of that debt trap by paying at least double the amount due on your credit card bill each month, triple, if possible. In addition, add $5-$10 to the principal on your mortgage and other loans each month. (Be sure to designate the amount to go toward the principal). That way, you’ll begin to see some real changes in the amount you owe on your bills and you’ll begin to truly reduce the amount of debt you owe.
• Use any extra money you receive to pay toward your debt.
You can earn additional money in many ways from having a yard sale, to getting an income tax refund, or selling some things on eBay. Whenever you earn additional income or get money you don’t need to live on, use it to pay off one of your bills rather than squandering it on something else. It may take discipline, but the reward of a debt-free life will be worth it!
• Refinance your loans if it will save interest.
After you’ve paid on a loan for awhile, talk to your financial institution to see if it would benefit you to refinance the loan. If doing so only adds more time to the loan, without saving you interest, it’s obviously not worth it. But if it would lessen the amount of time you have to pay and allow you to pay the loan off more quickly, it may be worth considering.
• Restructure your mortgage.
A friend of mine switched her monthly mortgage payments to a bi-weekly accelerated mortgage plan. This shaved seven years and thousands of dollars off her mortgage with an added payment of only $5 more each month! Check with your bank or mortgage company to see if this type mortgage could work for you.
• Consider a balance transfer account.
While this isn’t your best option, it may be worth it to find a loan or credit card with a lower interest rate that would allow you to transfer your high interest balance without additional costs. Be very careful with this, and be sure you are truly coming out better in the long run. This will only work if you have good credit and pay your bills on time.
As you can see, there are many ways to eliminate debt. Most situations will require using more than one of them, but whatever you choose, begin immediately to reduce the amount of money you owe. Your financial stability depends on it in these uncertain economic times.
By Cindy Morus, Creator of the Pay Debt Quickly System
Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances on their three joint credit card accounts. Months later, after Bill neglected to pay off these accounts, all three creditors contacted Mary for payment. She referred them to the divorce decree, insisting that she was not responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Mary was still legally responsible for paying off the couple’s joint accounts. Mary later found out that the late payments appeared on her credit report.
If you’ve recently been through a divorce-or are contemplating one-you may want to look closely at issues involving credit. Understanding the different kinds of credit accounts opened during a marriage may help illuminate the potential benefits-and pitfalls-of each.
There are two types of credit accounts: individual and joint. You can permit authorized persons to use the account with either. When you apply for credit-whether a charge card or a mortgage loan-you’ll be asked to select one type.
Individual or Joint Account
Individual Account: Your income, assets, and credit history are considered by the creditor. Whether you are married or single, you alone are responsible for paying off the debt. The account will appear on your credit report, and may appear on the credit report of any “authorized” user. However, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse may be responsible for debts incurred during the marriage, and the individual debts of one spouse may appear on the credit report of the other.
Advantages/Disadvantages: If you’re not employed outside the home, work part-time, or have a low-paying job, it may be difficult to demonstrate a strong financial picture without your spouse’s income. But if you open an account in your name and are responsible, no one can negatively affect your credit record.
Joint Account: Your income, financial assets, and credit history-and your spouse’s-are considerations for a joint account. No matter who handles the household bills, you and your spouse are responsible for seeing that debts are paid. A creditor who reports the credit history of a joint account to credit bureaus must report it in both names (if the account was opened after June 1, 1977).
Advantages/Disadvantages: An application combining the financial resources of two people may present a stronger case to a creditor who is granting a loan or credit card. But because two people applied together for the credit, each is responsible for the debt. This is true even if a divorce decree assigns separate debt obligations to each spouse. Former spouses who run up bills and don’t pay them can hurt their ex-partner’s credit histories on jointly-held accounts.
If you open an individual account, you may authorize another person to use it. If you name your spouse as the authorized user, a creditor who reports the credit history to a credit bureau must report it in your spouse’s name as well as in yours (if the account was opened after June 1, 1977). A creditor also may report the credit history in the name of any other authorized user.
Advantages/Disadvantages: User accounts often are opened for convenience. They benefit people who might not qualify for credit on their own, such as students or homemakers. While these people may use the account, you-not they-are contractually liable for paying the debt.
If You Divorce
If you’re considering divorce or separation, pay special attention to the status of your credit accounts. If you maintain joint accounts during this time, it’s important to make regular payments so your credit record won’t suffer. As long as there’s an outstanding balance on a joint account, you and your spouse are responsible for it.
If you divorce, you may want to close joint accounts or accounts in which your former spouse was an authorized user. Or ask the creditor to convert these accounts to individual accounts.
By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit. In the case of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.
More Help from Cindy:
Trouble with debt? Eliminate your debt and save your money using the Pay Debt Quickly System. It comes with the software and strategies you need get rid of your debt without making an large payments or making any significant lifestyle changes. Click here to learn more and get started right away or sign up for her free Powerful Debt Reduction Starter Guide.