Tuesday, April 15, 2008

3 ways (I would use) to reduce debt

I've been out of debt (again) for months now and it definitely feels good. However, watching the news these days - or reading it as I do - makes me feel as if I might be one of a shrinking minority - those free of debt. For everyone who's out there, currently in debt. I have to say - I've been there. Here are some ideas for reducing your debt today.

1. Negotiate down your interest rates - One way to reduce debt is by taking the time to humbly call your credit card company and talk up the CSR about your interest rate. Now it should go without saying in order for this technique to work - you almost have to have an excellent payment history - If you don't, you most likely won't succeed. that being said, a good way to start out the conversation is by talking about how much a great customer you've been over the year's and how you'd hate to break up the relationship by switching to a card that will give you a better rate or even a 0% rate. If the CSR seems unwilling to budge, then immediately ask for a Manager and again start off polite. Being and @$$ over the phone line with someone who deals with jerks all day will not magically open up doors for you but, just might win you the 'jerk-of-the day' award - an award by the way that has more likelihood of increasing your interest rate than decreasing it.

2. Sell that shiny new car ..for a junker - You just graduated from College or maybe you got tired of carrying around Bondo to patch up your multiple dings and dents on your 80's model car. So you went out and headed towards the new car lot searching for something that was affordable but would be around for year's to come. The salesperson was so nice and explained everything except for the fact that you would be contributing a little too much money out of your monthly budget if you chose the cherry red sports car. But man, can it turn heads! Now, however, buyer's remorse has set in and the new car smell has long since left. You can turn the heads of the opposite sex but can't help pay for dinner or really go out for that matter. It might be time to swallow your pride sell the pretty little sports coupe and buy a 90's model dependable car until you're out of debt. It will be painful no doubt at first to switch in the automatic starter for the 'manual power windows' but, in the long run your pocket book will thank you and you'll be able to maybe just meet you date at the restaurant that's within walking distance form your house if you're that embarrassed of the new car. If you can't give up the car, just make sure your car and your pride don't lead you to bankruptcy - which will no doubt lead you to both in the process.

3. Pay the smallest balance OR the largest interest rate first - This is an ongoing debate between debt-hating people like myself. Which do you do first - pay off the bill with the highest interest OR the smallest bill? Honestly either way will probably work - it's just a matter of personal preference. If you have a pretty high credit card/debt bill in general - over $5K or $10K - then either way will get you there. I personally like the Dave Ramsey approach of paying off the smallest bills first. For example:
- If you have a 5 cards, 1 with a balance of $500 at 0%, 2- with a balance of $1500 of 15% and cards 3, 4 & 5 all with balances at or around $3,000 with 20% interest rates. It would probably be easier to pay off the $500 card first then the $1500 cards as well. You could also use that extra money from one less payment to attack the next card in line once the first is paid off. Having one less payment also builds your confidence and allows you to gain more focus as well.
- In contrast, if you have 1 card with $9000 on it at a 30% rate and 4 other cards with balances all under $1000 and interest rates under 15% it might be best to attack the big card. Even possibly look for balance transfers to the lower rated cards and then focus all your energy on the remaining balance while paying the minimum on the smaller cards. Have a small party (with cash) once the big one is paid off and then repeat said steps for the smaller cards.

Anyway, those are just a couple of ideas to get out of debt quicker. Just be aware that there WILL be hurdles along the way. Don't get discouraged and give up just realize that any worthwhile goal in your life will have roadblocks and detours. Your goal should always be to continue on despite these roadblocks.

Disclaimer: Reggie, is by no means a CPA or CFP so it would behoove readers to speak to professional financial adviser before making any major or minor financial decisions. Thanks for reading!


dm said...

I completely agree on the DR method of debt repayment. I have been 'snowballing' my debts for 2 years now & everytime another one bites the dust, it gives me the boost I need to tackle the next one!

Is this the method you used to get out of debt?

Reggie said...

Yes DM,

This is the way I got out of debt. Although I think I read it somewhere else before I learned it was the method Dave recommends (I think he might have got it from someone else himself) - when I was down to my last big card I continued to transfer over whatever was left to 0% cards until I was not getting charged any more interest.

Thanks for reading!