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By Diana Cawfield • Bankrate.com
There's nothing like the new year to kick-start
new debt-busting habits. Act while your motivation is high --
this is the time to take action on debt.
When it comes to debt, heed this fortune-cookie
wisdom: A task put off today is a problem tomorrow.
Big problems can arise when it comes to credit
card debt. If you don't get a handle on debt, it will soon get
a handle on you.
Sage advice
When financial legend Sir John Templeton was asked
to share his best advice for investment success, he didn't miss
a beat: "The best advice is to have no debt and to diversify
your securities between many different securities and nations."
That's easy to say, especially if your credit card
habits haven't led you to a pile of debt whose height rivals the
Rocky Mountains.
But if you find yourself staring up at a mountain
of bills, here are some simple, disciplined steps that can take
you to a debt-free life.
Conquering debt -- one step at a time
If you're asking yourself how you got into this
mess in the first place, you're not alone.
According to a recent poll by Ipsos-Reid, one third
of all Canadians are concerned about their current debt load,
including credit card balances, personal loans, mortgages and
lines of credit.
Figures from Statistics Canada indicate the ratio
of consumer credit and mortgage debt compared to personal disposable
income rose to 104.4 percent in the second quarter of 2003. That
means many Canadians don't make enough money to pay off their
debts.
The number of personal bankruptcies also jumped
8 percent in the first half of 2003, more evidence of a growing
problem Canadians have with debt.
There is no sign of it stopping. Outstanding lines
of credit continue to grow despite the repercussions of overwhelming
debt.
Just ask Laurie Campbell, program manager at the
Credit Counselling Service of Toronto. More than 40,000 people
called upon her agency's services last year.
Here are some tips Campbell has for those doing
battle with debt:
1. Tally up your debts. If you're juggling more
than one credit card payment each month, chances are good you're
not aware of everything you owe. Write down your balances and,
most importantly, the interest rates being charged.
2. Pay off the highest interest rate first. The
spread between interest rates can differ by a whopping 20 percent
or more. Target your biggest payment toward the highest-rate credit
card, then pay the next highest-rate debt next. Once you've fully
paid off your most-expensive debt, start using the freed-up cash
to pay down the debt with the next-highest rate. Continue the
process down the line of debts, paying off each remaining debt
in its turn.
3. Payment boost. Consider any extra available
cash a debt-kicking bonus. That means raises, bonuses, belt-tightening
tactics, and that unexpected $20 bill that showed up in your pocket.
4. Top up minimum payments. Making only the minimum
payment each month means it could take decades to pay off your
balance. Even an additional $10 above the minimum will help chisel
off years interest payments.
5. Whittle down your debts to one card. Campbell
says the biggest mistake people make is having too many credit
cards. "The cards make it too easy for impulse purchases,"
she says.
6. Put your debts on ice. Literally. It may sound
extreme, but sticking your credit card in the freezer works. When
you're tempted to use credit instead of cash, the thawing process
puts a chill on spontaneous purchases.
7. Daily discipline. A daily promise to yourself
helps program your mind for success. Post this reminder on your
fridge or bedside table: "By living frugally, I will have
the necessary cash to pay off debts in six months instead of one
year," for example
Other take-charge strategies:
Needs vs. wants. Distinguishing between needs and
wants is not easy. This is where the icebox credit card trick
comes in handy. Walking away from a want for even 24 hours can
help you control impulse buying.
Ask yourself: if I had to pay cash for this, would
I still buy it?
Sharpen your pencil. It's human nature to think
everything will be better next year. But the reality of job losses
or unexpected bills or emergency expenses is an all-too-common
reality. So, although it is a boring prospect, put your debts
down on paper so you can figure out where you're at so you can
turn things around. If you like to dicker on a computer, use money-management
software to keep track of your spending and fixed expenses.
Reducing the burden. If you're having trouble making
payments, take charge. Call your creditors and discuss your problems
candidly. Creditors, if they wish, can be flexible when changes
in your life make repayment of your obligations difficult.
For example, you can discuss reducing monthly payments
or changing due dates to balance out your monthly bills. Notifying
creditors before your debts get out of control can play a huge
role in protecting your credit rating.
Beware of money-sucking habits. Most financial
planners agree it's the little expenses that add up, not fixed
commitments such as rental or mortgage payments. Keep a simple
record of daily expenditures to see where your money is evaporating,
then cut back on unnecessary spending. Five dollars a day saves
$35 a week, $150 a month or $1,825 a year!
Open a savings account at your bank. This shows
creditors you are working at saving and that you will have reserves
to pay debts. Once your credit cards are paid off, keep up the
monthly payments and sock them into your savings account.
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