Till Debt Do Us Part?

Year 2008:  the year when the U.S. – and inevitably the rest of the world – has been hit by grave economic problems.  Lehman Brothers declared bankruptcy because its real estate arm experienced extreme losses.  Foreclosure rates soared due to non-payment of mortgages and high interests.  When the going gets tough, the debt-ridden suffers.  Get rid of debt if you want a better life.

Techniques to a Debt-Free Life

There are two prescribed methods – debt snowball and debt avalanche.

In financial advisor Dave Ramsey’s debt snowball, you should pay the minimums on all credit cards, except the one with the smallest balance.  The order of payment is lowest to highest balance.  You can say, “Cool; one card down!”  This technique offers immediate, visible results.  It has a bad side, however; you suffer in paying more interests since the card with the highest balance remains not fully paid.  You would be in debt for a long period of time!

On the other hand, in debt avalanche, you are advised to pay debts with the highest interest rates first.  The setback is that it may take awhile before you get to finish paying off even one debt in full.

Between the two, however, debt avalanche is the “winning” strategy.  It is also the more efficient technique.

The Debt Avalanche Way

Transfer credit card balances with high interest rates to cards or credit lines with low interest rates.  Usually, credit cards that are new in the market offer low introductory interest rates; you can use them to your advantage.  However, you should not use such cards for anything else beside balance transfers; otherwise, you will still end up buried in debt.

Zero-percent introductory rates on balance transfers are often transitory – they can last one or 1 ½ years but if you keep on adding to your balance on that card, you will not be rid of the balance or debt which you have transferred on it before the expiration of your special rate period.  In cases where the card offers a low, for-life introductory rate, such a deal is usually applicable only to transferred debts.  If you still use your card for purchases, the credit card company will probably apply your card payments to your purchases first (i.e. high-interest balances) before they apply them to your transferred balance (low-interest balances).  In this case, you will accrue interest fees; low the interest rates on your transferred balances may be, but interest charges will still add up.

Get hold of credit report copies at least once a year and review your credit trail.  Remember, these reports affect your credit score, which affects the interest rates you will be charged in the future.

If you know a personal financial crisis is coming, let your credit card company know.  You can probably move your due date or negotiate lower interest rates.  Make a budget for expected future expenses, too.

Save for financial emergencies.  It is wise to save 10% of your take-home pay and save enough to survive without a job for around 3 to 6 months.  If you have extra money though, consider paying high interest rate accounts more than the minimum amount required.  However, it is absolutely necessary that you pay at least the minimum amount due.

As much as possible, charge only those purchases beyond $50.  Stop being so dependent on credit cards!

Pay dues on-time; mail your payments 10 days before the specified due date.  It’s much better to pay online or via phone for you will not be subject to lost mailed checks and other delivery problems that are out of your control.  If your check arrives late, you will be charged a penalty – even if it’s the post office’s fault.

Settling the debts you have accumulated is no joke.  It requires patience and determination.  You should have the drive towards a debt-free life because if you don’t, no technique will do you any good.  The ultimate solution is still in your hands.