Helping You Avoid Life's Financial Mistakes

The Pros And Cons Of Getting Debt Free Yourself – Part 1

September 15, 2008 By 8 Comments


Can you do it yourself?

Out of all the different ways we have been talking about over the last few days, getting debt free yourself will probably be the first option most people try.  Simply for a few reasons.

  • It cost you nothing to do it yourself.  Other than just paying the debt off.
  • You don’t have to qualify for the program.  It’s your program.
  • Finally, you can do it how you want to.  You have complete freedom of how you want to get debt free.

How do I get debt free?

This is the biggest question people consider when they want to get debt free.  Some will just pay minimum balances on all there accounts or apply a little extra to every account thinking it will save me more than if I just made the minimum payment.  Along with that doing some tough budgeting to apply more money to your debts.  But does this work?

However this may seem like a great way to go about getting debt free but there is a difference in getting debt free just by doing some strict budgeting or actually putting a plan together.  This plan is in known as the debt snowball plan.  You may have heard of people like Suzie Orman or Dave Ramsey talk about this.

How does the debt snowball plan work?

The plan is actually very simple.  Although once you impliment it you must stick to it.

1.  Agree that you won’t stack up more credit.  If you keep adding to your credit cards or any other debt then getting debt free will not actually work.  You must stop using your credit.  You must also stop creating new credit as well.  No new credit cards.

2.  Gather all of your current debts.  Get all of your credit card bills, HELOC (Home Equity Line Of Creidit),  car loans, personal loans, school loans, and mortgage bills together.  Include all debts not just the ones with higher balances. 

3.  Line your debts from lowest to highest balance.  This order is how you will pay off your debts.  Some will say pay off the highest interst cards firsts.  I disagree.  Order them from lowest to highest ballance this way you will see progress right away in the plan.  Also put your mortgage last to pay off.  The reason being there are some great tax benifets to your mortgage as apposed to your credit cards.  Also credit cards will usually have higher interest rates.

4.  Pay the minimum payments.  Pay all the minimum payments on all of the debts except for the one with lowest balance.  The debt with lowest balance you will pay the minimum payment along with an extra $50 to $200.  Whatever you pay extra keep it the same.  Don’t add or subtract any of the extra that you pay.  So if you apply $100 extra always keep it at $100.

5. Continue to pay this until you have the first debt payed off.  For example if your first credit card balance is $1000 and the minimum payment is $50 then pay the minimum plus an extra $100 or whatever you choose to pay extra.

6.  Celebrate!  This is a very important step that most skip.  Celebrate that you have paid off a debt especially your first one.  You don’t have to do anything big.  Maybe you go out to eat at a nice resturant, take the kids to the zoo, or go see a movie.  Have some fun with this.  Getting debt free doesn’t have to be a drag.  It can be fun too.

7.  Start paying off the next debt.  Start paying off the next debt with the next lowest balance except this time add the $100 that you are paying extra plus the $50 you paid on the previous debt along with the minimum balance you are paying on the current debt.   Do this until the debt is paid off.

8. Celebrate again!  Obviously you know why this is important from reading step 6. 

9.  Pay off the next debt.  Again start paying off the debt with the lowest balance and add the $100 extra payment along with the minimum balances you paid on the previous two debts. 

10.  Celebrate again!  Again you know the drill. From here just keep on repeating steps 9 and 10.  Once one is paid off continue on to the next debt with lowest balance applying all the minimum payments plus the extra $100.

You can see how this will eventually begin to escalate to the point where the only debt that is left is your mortgage.  Then with all of those minimum payments you were applying to your credit cards along with that extra $100 you will have that mortgage paid off in now time at all.

I’m debt free, now what?

Once you are debt free start saving the money for an emergency fund.  Save six months worth of expenses in some sort of savings account for emergencies only.  This way if sudden expenses do come up they won’t dig you deeper into debt.

After you have an emergency fund established save the rest back for retirement and possible college savings for your kids.

Last but not least take action.  This is the only way you will solve the problem.  If you wait you to long you may have no other choice but to consider debt negotiation, consumer credit counseling, or worse bankruptcy.  Do let that happen to you.

Start Now!

Finally, are you using this method to get debt free?  Are you interested in doing this program?  What are your concerns?

Read part 2 of getting debt yourself to learn the pros and cons of this program.

Filed Under: Debt Managment Tagged With: , , , , ,

The Pros And Cons Of Consumer Credit Counseling

September 10, 2008 By Leave a Comment

Do you need Credit Counseling?

If you are looking for someone to work with you on your credit problems this is a definite option.  However if you are someone who can pay there bills and debts on time you don’t need a credit counselor.  Credit counseling is meant for those that are behind on there bills and living on a lot less than the norm.

With that said there are a few things to watch out for when looking for a credit counselor.  Such as do they have proper accreditation’s or are they one of those fly by night companies. 

Second, do they have big up front fees.  Usually Credit Counseling services will charge around a $10 set up fee.  Unless you are getting extensive coaching you are overpaying.

Third, watch out for false promises these companies may claim just to get your business.  Things like being able to pay your debts off with little or no money, or claim your credit rating will improve quickly.  Don’t fall into this trap of big promises and no results.

If you are looking for a credit counselor make sure you look at the Association of Independent Consumer Credit Counseling Agencies.  Here you will find accredited credit counselors that you can choose from and get more info in needed. 

So here are a few advantages and disadvantages to doing credit counseling.

Advantages

1.  Stops creditor harassment.  Usually once you have someone helping you the phone calls and letters from the collections agencies will stop.  Although I wouldn’t put it past them to keep trying.  I knew people who did this for a living and they will employ about any tactic to get a hold of you even if you have a credit counselor helping you.

2.  Some creditors may agree to lower interest rates.  This isn’t always a guarantee but sometimes it does happen. 

Disadvantages

1.  Significant damage to credit.  Your credit will go down the tubes usually by doing this.  In fact a lot of banks will often treat the reporting as a chapter 13 bankruptcy.  Which means if you are trying to get a loan you may not be able to.  It all depends on the lender.  Some will be fine with it others will not.

2.  Takes around 5 to 10 years to complete a consumer credit counseling program.  It is shorter than if you just paid the minimum balance on your credit cards which could take years to do.

3.  You must pay back 100%.  This includes usually everything.  The principle and the interest.  This is one of the biggest down sides of the program.  If you are looking for a lot of slack from paying your bills you probably won’t get it.  Which leads me to my last disadvantage.

4.  Little reduction in your payments.  If you are looking for your payments to drop you probably won’t see much of a drop.  So if this is one of the big reasons you are looking at getting into the program don’t expect them to drop much.  However if someone is claiming they will drop your payments by huge amounts watch out.  Make sure you check there accreditation’s.

Finally, are you thinking about going through consumer credit counseling?  Have you gone through it before?  What are your thought?  Is it worth it or not?

I’m interested to hear what your thought on consumer credit counseling are.

Filed Under: Debt Managment Tagged With: , ,

5 Ways To Get Debt Free

September 8, 2008 By 2 Comments

Of all the ways to get debt free I have decide to spend a week discussing the different way to do so.  Also I will be discussing the pros and cons of each option.  A lot of the problem of getting out of debt is knowing really what options are available to you and which will help you the best for your situation.

1. Bankruptcy.  Is this the best route?  Sometimes it may be others it may not. 

2. Debt Consolidation.  This is a technique where you combine you current debts into one and make just one payment usually to get a lower interest rate.  A lot of people will usually combine everything into there home loan.

3. Consumer Credit Counseling.  This option allows you to work with an individual to get debt free.  I think of it like a debt coach. 

4.  Debt Negotiation.  This option is where you higher a company to go out negotiate your debts for you helping you cut your interest rates.

5. Do it yourself.  This option is the least costly of them all and allows you to employ tactics such as snowballing.  However just because it’s the cheapest doesn’t mean it’s the easiest.

Out of all 5 of these options they all have there up sides and down sides.  This will be the discussion as the week unfolds.  However knowing your options is just part of the process doing them is a whole other. 

If you are considering any of these options you may want to read these articles before you decide.  In the end you may decided it may be simpler to go with another option first.

Filed Under: Debt Managment Tagged With: , , , , ,