Manage Debt (part 3)

Ten Ways You Can Pay Off Your Debt (part – 3)


9) Borrow From Your 401k:

Check the literature of your employer’s retirement plan to see if
you can borrow against your 401k balance. Most plans allow you to
borrow up to 50% of the account’s value of $50,000, whichever is
lower. In most cases, you’ll have up to five years to pay the loan
amount back and the interest rates are reasonably less than credit
card rates. The good news: you not only borrow from your account
but the interest you pay also goes back into your account, not the

Before you pursue this strategy, take a look at a few of the

  • You lose the earning potential
    of the money you borrowed.

  • The interest that you pay on the
    loan is deducted from your paycheck with after-tax dollars.
    The interest will also be taxed again when you withdraw money
    from your 401k.

  • If you leave your employer
    before your loan is re-paid, the entire balance on the loan
    may be due in a short period of time. The balance of the loan
    will be reported as a distribution to you and will be taxed as
    ordinary income. If you’re under 59 and 1/2 you will be
    subject to a 10% early withdrawal penalty as well.

10) Talk To A Credit Counselor:

If you feel you can’t negotiate with creditors on your own or your
debts are just getting out of control, there are many credit
counseling services out there that can help you. One of the best
known is the  National Foundation for Consumer Credit (NFCC).
The NFCC is a network comprised of 1450 non-profit community
organizations (most use the name Consumer Credit Counseling
Services or CCCS) spread across the United States. 

Certified counselors at CCCS will examine your financial
situation, help you develop a spending plan, or just answer
general questions about money management. If you have severe debt
and your situation warrants, you may be able to enroll in their
Debt Management Plan (DMP). In this plan, you agree to deposit
funds into a CCCS account each month. CCCS distributes payments to
creditors according to the proportion of debt owed to each. They
also contact your creditors to ask for lower interest rates, lower
monthly payments, and waived finance charges. It will take
approximately 48 months to repay debts through the DMP and when
you have completed your payments, CCCS will help you re-establish

A few things you should know when dealing with CCCS:

  • CCCS is funded with voluntary
    contributions from creditors.

  • Up to 15% of your DMP payments
    to creditors will come back as voluntary contributions to CCCS.
    Your accounts with creditors, however, will always show 100%

  • CCCS and your creditors will
    discuss many options but they’ll never mention bankruptcy as
    one of them.

  • If you enroll in the Debt
    Repayment Plan from CCCS, make sure you follow through. Missed
    payments or a hesitancy to keep up with the plan may show up
    on your credit report as an uncollected debt. Not good.

If there are no CCCSs in your area,
the NFCC recommends asking the following questions to help choose
a qualified credit counseling service:

  • Is this agency a non-profit

  • How much will these services

  • Are agency services

  • What counseling services are

  • Are the counselors qualified?
  • Are budget and credit education
    opportunities offered?

  • Will my funds be protected?
  • Is the agency accredited?

If your debts are too high to
make the CCCS plan work or you’ve exhausted all other options,
then you may want to explore bankruptcy as a last resort.

To contact the NFCC:

Foundation for Consumer Credit

8611 Second Avenue (Suite 100)
Silver Spring, MD 20910
1-800-388-2227 [24hr automated listings]

Or look under "Credit and Debt Counseling" in the
business pages of your local telephone directory. The NFCC also
has a
office locator
at it’s web site that
will allow you to find the NFCC member organization nearest you.

<-- back

Manage Debt (Part 2)

Ten Ways You Can Pay Off Your Debt
(part – 2)

5) Transfer
Debt To A Low-Interest Card:

If your low-interest card hasn’t been maxed out, and your creditor
allows, you should consider transferring all your high-interest
debt to it. This strategy won’t eliminate your debt, but it can
lower your costs. Call the bank that issues your card and ask for
a lower rate. Tell them another company has offered you a better
rate with no annual fee. You will be surprised at what your lender
will do to keep your business.

Another alternative is to take advantage of the introductory rates
many card issuers offer to get you to switch credit cards. We’ve
all seen the rates that start out at 5.9%. This temporary solution
may save you a few bucks in interest and allow you to pay down
more principal each month.

A word of caution: Read the fine print before you act. Many of
these "teaser rates" last only a few months. After that,
the rate may rise dramatically, even exceeding the rate you’re
currently paying. The terms of your card may also stipulate that
the low rate applies only to new purchases, not existing balances
and that it is valid only to account balances kept for at least a
12-month period. Be careful how you execute this strategy.

6) Borrow From Family Or Friends:

Borrowing from your family or friends is worth considering. After
all, they know you, trust you, and probably understand your
financial situation better than anyone else. They might even cut
you a favorable interest rate or repayment plan. Make sure you put
the agreement in writing and that all parties involved understand
the terms and conditions of the loan. Keep this part of the
relationship professional.

Some alternatives to help solidify the deal:
a) Call the loan an early inheritance and  make sure your
siblings fully understand your financial situation so they don’t
get upset.
b) Split the difference. Pay them an interest rate that is less
than what you’re currently paying but considerably higher than
what they would earn in a liquid account.

7) Cut Expenses:

An effective way to find money and pay debts is to reduce your
expenses. Is it possible that what you consider necessities are
really optional? There are a variety of things you can do in your
daily life that can produce big savings. Here are a few simple

  • Pack your own lunch for work

  • Buy generic brands

  • Buy second-hand clothing or

  • Cancel your health club

  • Clip coupons

  • Cancel your cable service

  • Cancel your extra phone services
    such as Caller-ID or Call-Waiting

  • Read books, magazines, and
    newspapers at the library instead
    of buying them

  • Carpool to and from work or

  • Skip your daily latte or candy

  • Rent movies instead of going to
    the  theater and buying those
    expensive goodies

8) Obtain A Home Equity Loan:

If you own a home and have accumulated equity throughout the
years, you might consider a home equity loan, also called a second
mortgage. Many lenders allow you to borrow against a certain
percentage (usually 80%) of the equity in your home. For example,
if you owed $50,000 on a house that was appraised at $150,000,
your equity would be $100,000 ($150,000 – $50,000). You’d be
able to borrow up to $80,000, or 80% of $100,000. 

You can use this type of loan to pay off all your outstanding
debts and start paying only one monthly payment at a lower
interest rate. The interest on home equity loans is generally
tax-deductible if you itemize on your income tax return. You’re
effectively getting one of the cheapest rates for personal
consumer debt.

This type of debt consolidation is not for everyone however. It
only works if you stay disciplined and avoid charging up your
cards again. The last thing you want to do is have credit card
bills to pay on top of the home equity loan payments you’ve just

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Manage Debt

Ten Ways You Can
Pay Off Your Debt

or later you must come to terms with your outstanding debt
problems. The consequences of not repaying your debts are dismal –
it’s possible you could lose assets such as your home or car. Your
ability to borrow again might be limited due to a bad credit
rating. Your earnings could be garnished or you could even wind up
in court. Not a happy situation.

The good news is that there are a number of debt reduction
strategies that can help you reduce financial distress, manage
your money better, and improve relationships with creditors. Here
are ten of them:

1) Contact Your Creditors At Once:

This is one of the most overlooked ways to resolve your debt
problems. Don’t wait for your accounts to be turned over to a debt
collector. Communicate with your creditors and assure them you
will continue making payments. They are most likely willing to
work with you. Be honest and explain your financial situation.
Tell them you plan to pay off your debts as soon as possible. Ask
for a reduced payment schedule or a lower interest rate. Some
creditors might even be willing to accept interest-only payments
for a few months. It never hurts to ask.

2) Empty Your Savings Account:

Do What? If this advice comes as a surprise to you, please try and
understand that it makes absolutely no sense to have money in the
bank earning only 4% while you’re carrying credit card debts that
charge in excess of 18%. Paying off high-interest cards like these
is like finding an investment that yields an 18% return, all
tax-free and without risk. Even if you’re a stock market guru,
your investment returns would actually have to beat 18% because of
the tax consequences. If the interest rate on your debts are even
higher, the decision to repay versus invest becomes more obvious.

Your asking me to deplete my emergency fund? There are two schools
of thought to this question. You may want to leave a small cushion
in your account to absorb any unforeseen expenses or temporary
loss of income. On the other hand, if you truly need them, you may
decide to use your credit cards for an emergency situation.
Otherwise use some of the other strategies that follow (borrow
from your family, etc).

3) Increase
Your Minimum Payments:

Consider this. If you only made the minimum payment on a $2,000
credit bill with an 18% interest rate, it would take you roughly
18 years to pay it off. The interest alone would amount to $3,690.
Have you ever wondered why the minimum payment on your credit bill
is so affordable? Take a hard look at that last number and you’ll
see why lenders set your minimum payment so low (often 2-3% of the
outstanding balance). Doubling or even tripling your minimum
payments will have a significant impact on your ability to reduce
debt. Those increased dollars will save you thousands in interest
payments and shave months, if not years, off your debt. Don’t play
by their rules.

4) Pay Off The Highest Rates First:

Paying off the highest interest rate rather than the highest
balance will result in quicker debt reduction. Your debts may take
many years to pay off, so don’t allow the additional interest
charges that are still accruing to be at the highest rate. Pay the
minimum to each creditor and apply all your remaining money to the
debt that has the highest rate. Once the debt is paid off, move to
the next highest rate and apply the rollover amount from your
first debt. Continue down the list to the next-highest creditor
and repeat this process until your debts are gone. Stick with your

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