The Ultimate Guide to Paying Off Debt
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Despite the good news, millions of households are still impacted by the lasting effects of debt. 56% of Americans have less than $25,000 in savings according to the Employee Benefit Research Institute. This means more than half of Americans are living one emergency away from bankruptcy.
If you have debt, don’t let the statistics freak you out. The good news is that we have more tools available than ever to shed debt.
Although the list below doesn’t have every single way to pay down debt, it has tips that I’ve given as a financial advisor. The list also focuses on credit card debt. It’s just information and not advice, so please talk to someone that you know and trust about your specific situation.
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[/s2If] [s2If is_user_logged_in()]Despite the good news, millions of households are still impacted by the lasting effects of debt. 56% of Americans have less than $25,000 in savings according to the Employee Benefit Research Institute. This means more than half of Americans are living one emergency away from bankruptcy.
If you have debt, don’t let the statistics freak you out. The good news is that we have more tools available than ever to shed debt.
Although the list below doesn’t have every single way to pay down debt, it has tips that I’ve given as a financial advisor. The list also focuses on credit card debt. It’s just information and not advice, so please talk to someone that you know and trust about your specific situation.
Tip #1: Avoid debt consolidation services.
Debt consolidation services (or credit counseling services) will attempt to negotiate better terms for paying off your debt directly with your creditors. They may charge a fee and attempt to sell you other services (like workshops) when you’re most vulnerable. What’s worse is they may drop the ball following up on your behalf.
Save yourself the fee and the middleman by calling your lenders directly. Card issuers like Chase have programs to settle your debt. In exchange, you may lose your credit line and your credit rating may take a hit. However, you may have a better shot of paying off your card under a repayment program. Your credit rating will go back up as you responsibly address your debt.
Reputable credit counseling services exist. But it’s not rocket science. Negotiate directly.
Tip #2: Pay more than the minimum.
As I grew up in the 80’s, a popular way for moms to buy winter gear for their kids was through layaway. They’d buy a lot, but pay for it a little over time.
Surely, that same principle can be applied to credit cards? No!! You can’t do that with a credit card because credit cards charge interest. Layaway does not.
You don’t need me to tell you that the money that you owe on a credit card or other loan grows over time according to your debt’s interest rate. Ensure that you’re paying off principal each month, and not just the interest. This usually means paying more than the minimum. Otherwise, you’re simply swatting flies and not removing the food that fell behind your stove.
Tip #3: Avoid applying for new credit cards if you have a high amount of debt.
Alec Baldwin does a great job of tempting viewers to apply for a low to no-APR Capital One card. You can transfer your balance, and save interest. What could possibly be the catch here? You have to apply for a new card.
When you apply for a new card, credit card companies perform a hard query on your credit report. That causes your credit score to drop. Too many hard queries, and your score can really fall. Your existing lenders may see this, and raise your interest rates. Higher interest rates take more money out of your pocket.
Understand your chances of getting a new card before applying. Otherwise, you could hurt your credit score and not get a new card. If that happens, don’t blame Alec. (As a side note, I’d make not blaming Alec a life rule).
Tip #4: Crowdfunding.
Folks associate crowdfunding with projects or businesses. Crowdfunding actually became popular in 2008 as a way to consolidate debt when banks stopped lending to individuals. Sites like LendingTree offer a way to raise money from friends, family, and people that believe in your story. The money that you raise may have a lower interest rate than what you would get through a traditional lender.
Lenders on these sites will get access to your credit score and other information that you provide. Plus, you usually have to reach your goal amount in order to get the money that you raised. It’s a bit of a popularity contest. But what in life isn’t.
If you have a great story, and if you instill confidence in your lenders, you may be able to crowdfund yourself to a lower interest rate.
Tip #5: Use your valuables as collateral for a consolidation loan.
This sounds like a fancy way of saying go to a pawn shop. However, the pawn shop model has actually gone high end and mainstream.
I investigated this trend by talking with the CEO of Borro.com about alternative lending on my blog “The Wall Street Geek”. Companies like Borro give fair value loans and hold your jewelry, art, and other valuables as collateral. Borro has even given a loan on a Grammy!
If you have debt and things of value in your home, you may be able to get a collateral-based loan to consolidate your debt at a lower interest rate without having to sell your valuables. The watch that your great uncle left you may help you after all.
Tip #6: Build an online career in your spare time.
Think Perez Hilton, Tyler Oakley, Leandra Medine, Brian Kelly — you may not know all of these names, but within their niches they’re hot.
Monetize your hobby using online tools. Do you paint or create jewelry or t-shirts? Create a WordPress blog and use ShopLocket to sell directly from blog posts. Budding filmmaker? Use Youtube or Blip.tv to monetize your videos. Love to write? Insert Google Adsense or Commission Junction affiliate ads into your sidebar. Don’t forget to SEO optimize and add Quantcast tags to your site (or register for free with Alexa).
It takes months — even years — of persistence to build a following. Once you do, you can approach companies with an ad package to advertise their products on your blog. Or, you can use CreateSpace to self publish books and videos to sell to your loyal readers. If you self-host a WordPress blog at a web host like Site 5 and have useful niche content, consider a product like S2Member to turn your blog into a subscription-based site. (By the way, I’m not compensated for any of these mentions and have used each myself).
Be real, share what you love, and use tools to spread your message and build a following. I’ve seen lucrative careers launched from a love of blogging.
Tip #7: Budget based on spending history.
If you had to jump into a pot of boiling water, which would you prefer: jumping into a rolling boil, or cool water whose temperature raised over time?
Companies like Mint.com and my firm can give you a web-based personal finance portal to create a budget. However, nothing is more demotivating than creating a budget and going way over it by the end of the month.
I’ve recommend to clients to generate a budget using a finance portal based on past spending habits. Then, commit to reducing spending within the next 3-6 months. This includes getting rid of cable and watching shows online, ending unread magazine subscriptions, using Spotify, and cooking at home.
Believe it or not, there’s more — including selling your old books and DVDs, and increasing your income while lowering your spending. With the right strategy, you can pay down your debt. Get to it.
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