Managing Debt

There are so many times when we find ourselves in financial trouble. Trouble that seems to last a few months and dig us deep into debt. Some people don’t know, but there are ways to fix your debt. Try these 6 easy steps to fix your debt.

1. Freeze your credit card debt. First, retire your credit cards. “Put them in a safe-deposit box or somewhere you can’t get to them unless it’s an emergency,” says McNaughton. “Americans are not taught to delay gratification. It’s ‘I need this now and I need that now,’ when we should be saving up for a purchase.” She adds that if you have to put cash down, you probably won’t buy things that aren’t necessities.

2. Double your payments. Pay at least twice the minimum each month. When you pay just the minimum, only a small percentage goes toward the principal. If you have a debt of $2,000 at 18 percent interest and pay the 2.5 percent monthly minimum, it will take 18 years to pay off the balance. Double the initial minimum payment, and keep paying that amount each month, and the debt will be history in just two years. You’ll save more than $2,000 in interest.

3. Negotiate with your creditors. With a lower credit card interest rate, your monthly payments work harder for you. If you’re deemed a poor credit risk, a new card may not be an option, says McNaughton, so ask your current creditors for the best deal they can give you. With a reduced rate, your minimum monthly payment will decrease, but keep sending in the same amount you’ve been paying and watch your balance shrink.

4. Bring in backup. If you can’t make headway with your creditors, call a debt management firm, advises McNaughton. These companies negotiate on your behalf, using their clout to gain concessions, including lower interest rates, lower minimum monthly payments, and sometimes the removal of late fees. Generally, you write a monthly check to the firm, which uses it to pay your unsecured debts.

Get a referral through your bank or credit union to make sure a firm is reputable, and double-check the firm with your local Better Business Bureau. Charges vary, but typically companies want $75 to $100 up front and a monthly fee, which can range from $25 to $75 and up.

5. Reduce your expenses. Scrutinize your regular bills to see if you can make them smaller, urges McNaughton. Do you really need all the cable television stations, the fastest Internet connection, call waiting? Do you really need a gym membership, or can you exercise at home? “People think, ‘it’s only $45 a month,’” she says, “but it will creep up on you.” Bill Staton, chairman of Staton Financial Advisors, in Charlotte, North Carolina, and coauthor of Worry-Free Family Finances (McGraw-Hill, 2003), finds that many of his clients are shocked at how much a daily latte and trips to the soda and snack machines can add up to each month.

6. Consider last resorts. If you need to take more aggressive austerity measures, ask your tax adviser about changing the income tax withholding from your paycheck, advises Deliso-Pollicino. “If you get a lot of money in a tax refund every year, you’re in essence giving the government an interest-free loan,” she says. Lower your withholding, get more money in your paycheck, and pay down your debt.

No matter which steps you take, “the most important thing is to realize that you do have options,” says John Ford, retired chief privacy officer and consultant to the credit reporting agency Equifax. “Don’t give up and think you’re in such a hole that you’re never going to get out.” It took the Tormeys a full five years, but by reevaluating their expenses and cutting back, they were able to pay back every penny of their credit card debt while steadily paying down their mortgage and construction loan. And today they maintain a long-standing credit card balance they’re proud of: zero.