Towards Financial Freedom: How to Shrink Your Debt

Today’s society is teeming with borrowers and lenders, where the two are continuously feeding on each other in order to exist. Well, that is until a borrower can no longer pay. And in his inability to pay, his debt balloons into an alarming volume, making way for a more undesirably complex borrower-lender relationship.

Lydia Sermons-Ward, spokeswoman for the National Foundation for Credit Counselors, said that there is a tendency for American consumers to take advantage of credit offers without really thinking through the consequences of overspending.

And how big can a consumer debt be? Below are some of the most unsettling facts about debt in America taken from Paul Banister’s “25 Most Fascinating Facts about Personal Debt.”

• Some 43 percent of American families spend more than they earn each year
• Average credit card debt among all American households is $8,400
• About 60 percent of active credit card accounts are not paid off monthly
• Personal bankruptcies have doubled in the past decade

But getting out of debt doesn’t have to be hard if you make a plan and stick to it.

Credit cards

Focus on paying off high-interest-rate credit cards. You can do this by freeing up more money each month. Simple things like making a well-discerned list before shopping and sticking to it helps a lot. Weed out unnecessary expenses. Cutting down on the frequency of shopping trips can make a difference as well.

Studies have shown that people using credit cards in fast food restaurants spend up to 50 percent more than when they pay cash. Therefore it would be a lot easier to control purchases and stick to your budget if you leave your credit cards at home and pay by check or cash. Better yet, start making it a habit to cook your own meals and bring your own lunch at work than eat out.

Mortgage debt

More often than not, lenders are open to helping their customers needing more flexible mortgage payments plans. Therefore, as soon as you’re encountering difficulties in your monthly payments, it is important that you contact the lender at once. Current laws stipulate that since lenders must take your present paying circumstances into account, the following are some arrangements they may agree to:

• Reduce your payments for a period
• Allow you a “payment holiday”
• Allow interest-only payments, if you’ve got repayment mortgage
• Extend your mortgage term in years to reduce your payments

The flexibility and helpfulness of a lender can also be influenced by your track record. Therefore, whether you are on a normal payment schedule or on a new arrangement with the lender, make a real effort in keeping up with the agreed payments as it will show them that you are serious in paying off your debt no matter how long it takes.

Student loans

Statistics have shown that the average debt per bachelor’s degree recipient grew from $10,600 to $12,400 within the 2006-2007 academic year. Add this to the fact that in the 2007-2008 school year, lenders gave out about $17 billion dollars in private student loans (a whooping 592% increase from the previous decade), students nowadays seriously need debt management skills.

If your monthly loan payments are starting to become difficult and financially heavy, consider consolidation in order to lower your monthly payments. Or, you may find out if you are eligible to defer your student loans. However, a good credit score may be required or advised since consolidation loans carry fluctuating interest rates.

Car loans

If you are paying a loan for a second car, you may consider downgrading to an older model but just as efficient car that you can buy without a loan. You may also save around 15 percent off your insurance premiums by increasing your insurance deductibles from $250 to $1000 for both the first and second cars. At the same time you’re doing it, you may scout around for lower car insurance rates.

One way to support your plan to pay off all kinds of debts is to effectively manage utilities expenses. It is said that next to monthly rent and mortgage, utilities are eating a big chunk off an average American household’s budget. Consider getting a programmable thermostat, which can cut your heating or cooling bill by approximately 10-20%. You may also replace as many light bulbs as possible with compact fluorescent bulbs (CFL’s) as they use 75 percent less energy than most incandescent lamps and last 10 times longer.

Finally, if you can bundle your phone, Internet and cable services into one package, then it can save you up to $50 month. How about that monthly savings to add to your debt payments?

Remember the B-word. Budget your monthly expenses, stick to it and pay as much as you can on your debt obligations. You’ll surely never get lost on your road towards financial freedom.