By Andrew Housser
It’s January – a month that represents a fresh start for everything from diets to getting finances in shape. If your household is like many in the United States, you may be greeting 2017 with a resolution to get out of debt.
Approximately 38 percent of US households carry credit card debt from month to month. The financial industry calls these people debt “revolvers,” because they allow their debt to turn over each month, instead of paying it off. As the new year arrives, households that carry debt have reached a new high: Each owes an average of more than $16,000 on credit cards.
For debt revolvers, now is the time to become a “transactor” – someone who repays any credit card charges in full every month. This not only eliminates the burden of debt. It will save even more in interest charges. The Federal Reserve raised interest rates last month, for only the second time since 2006. As interest rates increase, so does the cost of interest on revolving debt, including credit card debt.
The average household currently pays nearly $1,300 each year in interest. Can you think of a few things you could do with $1,300, other than give it to your credit card company? Read on for options to eliminate your debt in 2017.
- Profit from decluttering. Look around your house and decide if you have items you no longer need. Determine if you can sell unwanted and unused belongings through a yard sale, online site or to friends. Use the money to make debt payments, even if it is only a few dollars at a time.
- Reconsider your vehicle. Millions of people have purchased new vehicles this year, motivated by redesigned models and low interest rates. If you fall into this group, carefully evaluate if you really need that car or truck, or if you could get by with something less expensive. A high car payment might be better put toward getting out of debt. Do not sacrifice reliable transportation to work – after all, your income is the way to get out of debt – but consider whether you could trade in your car for a less expensive but still dependable model. Alternatively, you might be able to travel by public transit, bike or carpool.
- Use a bonus wisely. If you are among the fortunate people who receive a holiday bonus or monetary gifts, you may be tempted to buy something special for yourself or a loved one. The best gift you might buy, though, is freedom from debt. Put your bonus toward your credit card bill and celebrate your reduced balance.
- Ask for a raise. Are you getting the most from the work you do? If you have not had an increase in your wages in quite a few years, perhaps now is the time to thoroughly review your work and consider asking for a new performance review. Prepare a list of what you have done for your company.
- Transfer a balance – carefully. People with excellent credit histories may have access to low promotional interest rates on new credit cards. Transferring a balance from one card to another can be a useful way to pay off a high-interest rate account at lower cost for some people. Carefully check the fee and the new rate. The new rate should be significantly lower than the interest rate, or you will not save money with the transfer. And before transferring, make sure you can pay off the balance before the promotional rate expires. If you cannot, you may well end up paying interest on the entire amount, in addition to the transfer fee.
- Think about debt consolidation. If the problem is many accounts with high interest rates, consolidating debts may help. This simply means combining debts to have one interest rate and one payment to focus your efforts. Some people borrow from a friend or a bank. Others consider consolidating debt with a personal loan from an online lender. These loans usually offer somewhat lower interest rates than credit cards do. They can be beneficial for individuals whose credit scores do not reflect repayment capabilities, as they use different criteria than a traditional bank or credit union to evaluate how likely a person is to repay a loan. Some companies, such as FreedomPlus, even offer a discounted interest rate if you use the loan proceeds to repay credit card lenders directly.
- Call creditors to ask for hardship status. If you have fallen behind on payments because of a temporary hardship, such as losing your job, you can call creditors and ask for temporary hardship status. Some creditors may work out payment plans with you. For student loans, you might qualify for a deferment, forbearance or an income-based repayment schedule, all of which can ease your monthly burden and free up money to repay credit cards.
- Consult a credit counselor. Credit counselors help consumers repay their debt on a set schedule. When you sign on with a credit counseling agency, the agency typically arranges a debt management plan (DMP) to reduce the monthly payment obligation. Credit card companies agree to accept a lower interest rate on existing debt, called a “concession rate.” Choose a credit counselor very carefully. Some credit counseling agencies are nonprofit, but some earn a profit. The fees can be high, at $10-15 each month per enrolled debt, and the plan may take up to five years to complete.
- Seek debt negotiation help. Firms that provide debt negotiation (also known as debt settlement) negotiate directly with creditors to resolve unsecured debt balances, generally in 24 to 48 months. Often, debt negotiation firms can reduce your debt load by 50 percent (not including fees). The process is best suited to people who are struggling to make even minimum payments and would otherwise need to consider credit counseling or bankruptcy. .
- File bankruptcy as a last resort. Many people see bankruptcy as a last resort – with good reason. Bankruptcy harms credit ratings for many years, the legal fees can be expensive and it can be difficult to qualify for a Chapter 7 filing, which eliminates most consumer debt. (With a Chapter 13 bankruptcy filing, consumers are required to repay debt if they have income to do so.) Before filing bankruptcy, speak to a bankruptcy attorney licensed in your state.
It’s difficult to stay the course until you become debt-free. The challenge is worth it, though. When you succeed, you will gain financial security, the freedom to save your money or spend it on things you choose – instead of things you owe – and most of all, your peace of mind. Is 2017 your year to get out of debt? Start working toward your goal now, and you will reap the rewards.