Paying Off Debt

Paying off debt is a routine part of life for most Americans today, and it's a critical step in personal financial planning. Most of us deal with debt of one kind or another. Having debt of some type is usually necessary, especially in the earlier years of life. But learning how to manage it effectively, and being able to discern good debt from bad debt are really the keys to success.

Not all debt is bad, in fact, some kinds of debt is very good and in fact necessary. Here's the basic difference.

Good debt allows you to purchase long-term benefits. You take on good debt so that you can buy things that will most likely increase in value over time. This would include things like a house, or getting a college education.

Bad debt is all other forms of debt where you are using money you don't have for short-term pleasures or things that will not increase in value over time. This could include expenses for vacations, dining out, home appliances, cars, clothing, etc. This list could be endless.

The secret to paying off debt, if you have a problem with it, is this:

1. Acknowledge and own the problem.
2. Build a plan for coping with it.
3. Connect with resources that can help.

There are a lot of factors that are contributing to so many people having bad debt and struggling with paying off debt today. Some of them would include:

1. Debt & credit have good benefits. In today's fast paced, electronic world, it's very necessary to have access to credit and debt. Online shopping would not be possible without having credit or debit cards. Also, most airlines and hotels require a credit card in order to use their services. Having access to credit has almost become a necessity these days, and it offers a lot of convenience and flexibility. But this is exactly one of the biggest reasons why so many people are getting caught in the debt trap.

2. Ease of getting credit. We all know how easy it is to get access to credit cards today. While the recent financial meltdown has slowed some of the aggressive lending practices of banks, it's still fairly easy to get a new credit card any time you want one. Most large retail stores offer their own credit card, and give discounts for using them. You can amass a wallet full of different cards in no time at all. These can be very difficult to keep track of and pay on time.

3. Ease of getting into debt. With easy access to the credit, and the convenience and flexibility of using it, the debt can pile up pretty quick. When you use credit and debit cards to buy things, it's difficult if not impossible to keep track in your head of how much you've spent. When all you do is swipe the card and punch in a pin, or sign your name on a screen, many people often don't even look at how much the bill was. Doing this multiple times per day, every day, adds up to a pretty large credit card statement at the end of the month. You open it up and you're shocked to see how high your balance is. "Where did all this come from?!" you ask yourself. Then paying off debt becomes your biggest concern.

4. Many ways to borrow. There are so many ways to borrow money and get into debt. There are credit cards, in-store credit cards, medical bill credit cards, debit cards, and car loans just to name a few. But unfortunately, there are not as many solutions for paying off debt. However, it can be done!

5. Personal relationships with money. We all have our own personal relationships with money, whether we realize it or not. Some people use money to buy things as a reward for themselves when they've done something good. Others will buy things when they are feeling bad as a way to cheer themselves up. Some people will spend money when they are upset with a spouse as a form of "revenge". See the article on "Revenge Spending" for more information. Some people even feel that they don't deserve to have money, possibly because of something that has happened in their past. These people will spend money that they have, and then some, to make sure that they don't accumulate more money than they feel they deserve. All of these personal relationships with money can be unhealthy and damaging to your future. If you are stuggling with something of this nature, you may consider seeking professional counseling help.

4 Steps To Paying Off Debt

2. Stop debt spending. Before you can start paying off debt, you first need to stop accumulating new debt. To help yourself to do this, you need to make it difficult for you to debt spend. Many people who have done this in the past have cut up credit cards that they don't really need so they won't use them any more. Of course you probably need to keep at least one card active, but do you really need more than that? I have also heard of people freezing the one card that they can use in a block of ice in the freezer at home. This way, if they really need it, they can thaw it out and use it. But it's not in their wallet, easy to use any time they want it. In a sense you are stopping the bleeding of a serious wound by taking this important step, and it's necessary if your goal is paying off debt.

3. Make a spending plan. If you plan out in advance how much you will spend each month, and then make sure you don't go over that, you will be much more successful in paying off debt. Setting a budgeted amount of what you will spend on certain items like groceries, gasoline, dining out, entertainment, travel, gifts, etc. is the first step. Second and even more important is the tracking of your monthly spending. Here's some easy things to do to help you in this effort: * Track your spending every day.
* Track every cash expense.
* Make your notes as you spend the money.
* Track the checks you write and payments you make with credit debit cards or ATM cards. * Make a spending plan.
* Make an earning plan.

After doing this, you should know how much extra "debt-payment" money you have available each month to put towards paying off debt.

4. Pay down your debts. Now that you've created and are following a spending, you should be able to pay all your bills and hopefully have a little extra each month to go towards paying off debt. Here's how you can do it: * Create a list of all the debt payments you make each month.
* After you've completed this list, note how big or small your debt problem is.
* Return to your monthly spending plan and the amount that you think you can save each month. (This is the extra money that you can use to pay down debt.)
* Look at your list of debts, and choose the one to pay off first. (We recommend starting with the smallest debt).
* Add the extra "debt-payment" amount to your regular payment for the debt that you've chosen to pay down first.
* As soon as you pay off this debt, apply the entire amount that you've been paying towards debt amount each month to the next smallest (now your smallest) debt amount. Now you are sort of making a double payment each month on this debt. * Keep it going! Stay with this plan until all your debts are paid off!

Credit Counseling Agencies

When to contact a credit counseling agency.

You should probably contact one of these agencies for help if...
Your total debt payments, excluding your mortgage and car, are more than 25% of your take home pay

OR

You have more than one delinquent account and your monthly minimum, required payments on credit cards, or service bills is more than 20% of your take home pay.

What do credit counseling agencies do?

A legitimate credit counseling agency is a non-profit organization will advise you on managing your money, offer solutions to your current financial problems, and develop a personalized plan to help you prevent future difficulties.

These agencies have relationships with credit card companies that allow them to in many cases reduce your current interest rate on credit card balances that you have.

They will help you make your payments to the various cards on time, which will help you avoid a lot of late fees. Making on time payments will also help you improve your credit score, which is very important.

How does it work?

Once you enter into a relationship with a credit counseling agency, you will decide which of your credit cards you want to have them help you pay off. They will usually require that these cards be closed before they will help you with paying off debt. You will make one monthly payment to the agency, and they will in turn make the individual payments to all the credit card companies. Your payment to the agency will include any additional money that you can afford to apply toward paying off debt, and they will apply that amount to one of the cards to speed up paying that off. Once that card is paid off, they will apply all the money that was going towards that card to the next card that needs to be paid off. For their services they will usually charge you a small monthly fee of somewhere between $4 and $10 per month. This sure beats late fees of $35 - $50 a pop!

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