We all know that debt blows, especially these days when credit card companies can’t wait to raise your interest rate and lower your credit. Here are my tips to getting rid of your debt. You’ll be happy you followed these tips in the months and years to come.
STEP ONE: Understand the problem
First things first, you are not alone. Say it to yourself over and over again. I’m not saying this to make you feel like it is okay, because it’s not. I’m saying this so you realize that most of the people you see everyday, well, they’re in debt too. Don’t feel ashamed.
Some people might disagree with me and that’s fine. As much as I respect the Suze Orman’s of the world, I strongly feel that yelling at people is not going to help anyone face their problem. Debt is an emotional problem. So yelling, belittling, and chastising will only make people run and hide. That’s not what we want here.
Since debt is an emotional problem, you might even want to write a little to understand why you spend more than you have, how it makes you feel when you spend money, and how you feel about your debt. You can use this money personality quiz to get you started. It is critical to understand what kind of spender you are so you can apply the correct solution. I’ll use myself as an example:
I am a consumer at heart. When I have free moments, I want to go buy stuff, even when I don’t need it. Actually the word ‘need’ didn’t really factor in my thinking at all – it was all about ‘want.’ So, here’s what I decided to do. I realized that my actions were going against one of my basic values: living a sustainable, environmentally-friendly life. That bothered me enough to change my actions. Last year I decided that I would try and alleviate my consumerist habits by shopping my little heart out at thrift stores. I get to buy stuff. I’m recycling. My cash is going to a good cause. Win. Win. Win.
STEP TWO: Stop, and I mean STOP, using your credit cards.
Really, seriously, CUT THEM UP. Your budget will give you enough money for food, housing and extras… AND you have an emergency fund should you need cash for an emergency – so there is no need to put anything on a credit card ever.
If you don’t want to cut them up entirely, here is an alternative. I know that I need to know my account numbers and might need to make a small charge once ever quarter to ensure that the credit card company continues to report to the credit bureau companies (a lot of times they will stop, and in today’s credit crunch, cancel your card all together – both of which could hurt your FICO score). So here is what I do, I cut deep Vs in the middle of the magnetic strip so I can’t use them. Then, I hide them so I won’t be tempted to use them for online purchases.
STEP THREE: Get organized
By now you are emotionally (no more shame) and physically (no more cards) ready to tackle this problem.
Here is how you do it:
This is where you make a list of allllllll of your debt. You can use the debt payoff worksheet in the magic spreadsheet. You need to write down what you owe, what your credit limit is, your debt-to-credit ratio (this fact alone is about one third of your FICO score), your interest rate, minimum payment due, and the monthly due date.
Then build a plan. Theoretically you should start paying off your cards with the highest interest rate first, and I would recommend this approach AFTER you have paid off one card. So, start with the lowest balance first. This will sort of be like losing five pounds during the first two weeks of your diet. It will make you feel good and that will help you continue. Remember, this is an emotional problem we are tackling.
Fill out your debt payoff plan for the entire year. Be realistic and make sure you update the plan every month.
Some info on balance transfers… If you have some debt on high interest cards, you might want to think about a balance transfer to a lower interest or even no interest introductory offer. Here is a link with some offers. BEFORE YOU DO THIS calculate the cost (usually 3%) versus the money you will save. Do not transfer if you have a reasonable rate currently (8%). If you do transfer some debt, do not go over 70% of the credit they give you. This will hurt your FICO score. Generally speaking, this is a smart thing to do, but it can easily become a revolving circle as many rates explode after the intro offer ends. Calculate the costs before you proceed.
STEP FOUR: Stick to your plan
At the end of the day, plans are easy to create – implementing the plan is the hard part.
Make sure you schedule time for yourself to review your finances. I schedule 20 minutes a week to review my budget and expenses to make sure I haven’t overspent, forgotten to pay a bill, or was overcharged (this happens A LOT, so it’s important to review your receipts and bank statements). When I need to pay off debt, I schedule 30 minutes to make sure I pay everything according to the plan and update my plan if necessary. Once a quarter I update my balances, credit limits and interest rates to reflect any changes.
In order to make this fun, give yourself a little treat before or after. Purchase a song to listen to on iTunes every week. Buy yourself some cozy new socks once a month (Personally, I’m obsessed with Smartwool socks) after your longer finances review. Do something. Treat yourself. You are doing a damn fine job!
