Drowning in debt? Manage what you owe before you need saving
Calculate your debt
A debt calculator can help you figure out how long it will take you to repay your debt and can be a useful tool in developing a repayment plan. The Federal Reserve has a debt calculator on its Web site at www.federalreserve.gov/creditcardcalculator.
Contact a credit counselor
For help managing your debt, contact the Consumer Credit Counseling Service of Beloit and Janesville at (608) 365-1244 or rbcccs@charterinternet.net, or stop at the office at 423 Bluff St., Beloit.
JANESVILLE — Even in tough economic times, it's never too late to evaluate your debt and commit to paying it off, a local credit counselor said.
"You have to take a hard, honest look at it," said Rod Benstead, director of the nonprofit Consumer Credit Counseling Service of Beloit and Janesville. "If you attack that debt, you can get it out of your life—and once you do that, it really brings things back to center."
The Gazette talked to Benstead to get the 411 on debt and how to manage it.
Q: What kinds of debt can I have?
A: Debt can be broken into three categories: toxic, neutral and good, Benstead said.
Toxic debt, such as credit cards and short-term, high-interest rate loans, such as payday loans, creates stress and anxiety and can erode your financial well being.
Neutral debt, such as car loans, doesn't hold you back but doesn't allow you get ahead.
Good debt, such as mortgages, student loans or business loans, can improve your net worth over time as the investment gains value.
Q: How do I manage my debt?
A: Benstead recommends six steps.
1. Identify, understand and accept how you accumulated your debt.
"No repayment plan is going to work without first understanding what happened," Benstead said. "You've really got to be willing to make changes in your attitude, your behavior and your lifestyle and have the self-discipline to make that happen."
2. List all of your debt, what kind of debt you have, how much debt you have and which category the debt fits into.
3. Prioritize your debt repayment. Plan to tackle toxic debt first, neutral debt next and good debt last.
4. Make a budget that lists income and expenses, including payments to creditors.
5. Stop using your credit cards. Stop taking out loans. Stop accumulating debt.
"You don't get out of debt by going into debt," Benstead said. "A lot of folks get caught up in that cycle."
6. Choose a debt repayment method that suits you.
-- Under the "power pay" plan, you make regular credit card and loan payments but put an extra amount toward the debt with the highest interest rate or the highest balance. When that debt is paid, you pay the extra toward another debt.
-- Under the "snowball" plan, you start with the lowest balance and work your way up to the highest balance.
-- Under the "avalanche" plan, you start with the debt with the highest interest rate and work your way down to the debt with the lowest interest rate.
Consider talking with a credit counselor, who can help you create a debt management plan that works for you as well as help you create a budget and point you to other resources, Benstead said. But be sure to work with a reputable agency—one that is a member of the National Foundation for Credit Counseling. (Find one at www.nfcc.org.)
Q: Are there debt repayment options I should avoid?
A: Yes.
-- Do not use a home-equity loan to pay off debt.
"You're taking unsecured debt and securing it with collateral—with your house—where you live," Benstead said. "You should look at your home equity sort of as an emergency fund."
-- Do not borrow from your 401(k).
"You lose tremendously in terms of building up what's in there," Benstead said. "If you take $1,000 out, you're not going to regain the compounding interest or the tax benefit."
-- Do not transfer debt to a low-interest credit card.
"Those are sometimes temporary rates, and opening up a new account could affect your credit rating," Benstead said.
-- Do not use a debt settlement company.
Debt settlement companies advertise that they can cut the amount of money you need to pay to your creditors and lenders, and they often do just that.
But beware, Benstead said.
"You sign documents that give them complete rights to handle your debt. Any statements are sent to them. Any calls are sent to them," he said.
A debt settlement company will tell you to stop paying monthly minimum payments. They also will tell you that they will negotiate a settlement with your creditors when you have saved enough money. Meanwhile, the company collects a hefty monthly fee, and your credit rating takes a nosedive.
"They don't have a good track record," Benstead said.
Nov 19, 2009 at 1:55 p.m.
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God for Bid...I'm sure no-one ever "wants" to file Bankrupsy (I can't even spell it)...but I will say I have a neighbor who has filed bankrupsy two times since I have known them. In the interim they purchased two motorhomes and other very expensive items...now they are filing again.....Who's gonna pay for it? You and I!! Who's NOT gonna loose?..THE BANKS!! They'll pass the cost on to us. Great system we have here in the US of A.
Nov 18, 2009 at 4:43 p.m.
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Interestingly, Dave Ramsey's website does not take credit cards for payment. He absolutely does not condone use of credit cards. You can use a debit card or check. We did pay $90 for all the program materials through our church and did so with cash we had saved.
It takes sacrifice to get out of debt. It is extremely difficult for most of us. My wife and I have two cars that are 10 and 11 years old. One has over 200,000 miles on it. We would love to get a replacement vehicle but getting out of debt is more important.
We had to accept we had to stop living like everyone else where debt and credit cards are the norm. When you decide to take the plunge and to be "weird" by saving, living on a budget, and not using credit things will turn around. Having faith that you are strong enough to do it also helps.
Nov 18, 2009 at 2:56 p.m.
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Get your self help "Get out of debt program" for only 6, YES SIX. VERY EASY PAYMENTS OF $159.99. Oh , but wait. if you call now, you not only get free burro express, you also get an unlimited credit card to the Dollar Tree!
Nov 18, 2009 at 2:49 p.m.
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Also check out http://www.youneedabudget.com. It's a personal budgeting software (which I do highly recommend), but also a methodology. Even if you don't buy into the software, read up on the 4 rules that's presented at http://www.youneedabudget.com/course/ (that part is free!)
Nov 18, 2009 at 2:41 p.m.
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spark, attitude is also one of the things that Dave Ramsey talks about. If you have an "I can't do that" attitude.. guess what. You won't do it.
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Wife and I were in the middle of step 2 when unemployment struck. We immediately panicked and figured it didn't make sense to continue. Well, all it took was a couple phone calls from rude creditors looking for money to get us back on track again. It's hard, but we're doing it.
Nov 18, 2009 at 2:15 p.m.
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grizzlybear - That sounds great, but the things I listed below make this next to impossible for most in todays horrible economy. In order to do what you've listed, you would have to have one hell of a salary coming in.
Nov 18, 2009 at 1:19 p.m.
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I am taking Financial Peace University by Dave Ramsey through my church and would highly recommend it to anyone regardless of income. Check out website at financialpeaceuniversity.com
The main focus is to go through 7 baby steps, and some will take time to accomplish but they keep you focused.
1. Save for an emergency fund of $1000 ($500 if lower income) This protects you for an emergency so you don't have to go into more debt.
2. Pay off all debt except the house using the debt snowball method
3. Save for larger emergency fund of 3-6 months of living expenses
4. Start saving 15% of income for retirement
5. Save for college for kids
6. Pay off mortgage
7. Live debt free and build wealth and give generously
It works and has helped many come back from the brink of bankruptcy. Ramsey has been helping people for the last 20 years.
Nov 18, 2009 at 11:17 a.m.
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A. You must have a job.
B. The cost of living going up, yet your salary being froze or decreased makes this next to impossible.
C. A mortgage is not good debt when the value of you home has dropped upwards to 30% it's original value in places.
D. The Government forced rules on credit card companies that were suppose to help the consumer. Now the companies are increasing the rates to make up for that.
E. In other words, unless you have a savings stashed away, all other avenues to pay off debt are not recommended, so you're screwed. Unless of course, the Government gives you a bailout.
Nov 18, 2009 at 10:20 a.m.
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This is a great article for those who are able to make payments toward paying down their debt but don't quite understand the best way to do it. If you seriously want to eliminate your debt the right way, this article gives you a great place to start.
Nov 18, 2009 at 8:50 a.m.
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This debt repayment scheme rubric implies the debtor has a job. Isn’t the reason for all the neo-financial shamans besieging us lately, the overwhelmed and severely damaged employment situation? No job usually = no funny money. Under employed usually = no credit anyway. – Seems like simple math to me; what am I missing here?
Bob Keith
– humble and obedient citizen -
Nov 17, 2009 at 8:36 p.m.
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(this comment was charged 38.5% in compounding interest by the site staff.)
Nov 17, 2009 at 8:09 p.m.
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Too bad our government can't live by the same rules.
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