The debt trap is very real. So real in fact that at one point or another in your life time; chances are that you have or will find yourself trapped. The bottom line is that in our society, we feel pressure to keep up with the Joneses; ultimately leading us down the dangerous road of an uncertain financial fate. The reality is that the average American spends far more money than they can afford to. As a matter of fact, in the United States there is nearly $12 trillion dollar’s worth of outstanding household debt. With that said, you don’t have to live in debt! By following a simple plan, most people will be able to claw their way out of the debt sink hole without any third party assistance. Below, I’ve outlined a detailed step by step plan for tackling overwhelming household debt.
Steps To Escaping The Household Debt Trap
Step #1: Get In Touch With Your Frugal Side – Frugal living doesn’t mean that you have to give up anything that you enjoy that costs money. It’s the exact opposite of that. Frugal living is the idea of spending in moderation, finding unique and creative ways to save money when you do spend, and making a lifestyle change that allows you to say “I’ll buy what’s important to me” rather than “I need what you have; so, I’m going to go overspend and get it!”. OK, frugal living goes a bit beyond that, but for the purpose of this post, that’s really all you need to know. To learn more about frugal living, check out one of the blogs below…
- First Quarter Finance – Owned by CNA Finance contributor Will Lipovsky, First Quarter Finance is a great place to start when researching the frugal lifestyle!
- The Frugal Farmer – The Frugal Farmer is a blog owned by Laurie; who really is one of my favorites in the personal finance space.
- Proogal – Phroogal is a personal finance community filled with members that are all in the search of financial stability. There’s definitely plenty to learn about being frugal there!
Step #2: Get To Know Your Enemy – You don’t win a war by learning about the enemy as you go. The reality is that when you’re fighting household debt, you’re fighting a war. Another sad fact is the fact that most Americans are financially out of touch. Recent polls show that less than half of us even know our credit scores! So, before you can fight your debt, you’re going to have to get to know exactly what you’re fighting against. To do so, I recommend creating a spreadsheet. For a detailed explanation of how to create a financial spreadsheet, click here. If you’re already in tune with spreadsheets, create one that lists all of your debts and includes the following information…
- Lender Name
- Debt Amount
- Interest Rate
- Due Date
- Available Credit (if applicable)
- Lender Phone Number
- Pay To Address
Once you’ve got your spreadsheet filled out, move onto the next step.
Step #3: Prioritize Your Debts – Not all debts are created equally. Some debts will have higher interest rates than others. Because interest is the highest fee you’re going to pay on most debts, it’s best to prioritize your debt payoff plan by interest rate. To do so, order the entries in the spreadsheet by interest rate with the highest rate at the top.
Step #4: Figure Out How Much Money You Can Afford To Pay – If you really want to aggressively hammer your debts down, you’re going to have to leave the minimum payment mindset behind and start to think about your maximum payment capabilities. Start by adding up all of your minimum payments for every household debt you have. Now, add in your total monthly expenses including utilities, gas for your car, food, and anything else you can think of. Now subtract the total number from your monthly net income. Now you know how much money you have in excess of what will be paid for necessities.
Think of how much money you should set aside for Emergency savings, retirement, and having fun (be realistic). Now, come up with the amount of money over the minimum payment that you can afford to allocate to your debts. If the answer is small or even nothing, that’s fine; it’s still possible to be aggressive with your payoff plan in the long run.
Step #5: Negotiate Unsecured Debt Interest Rates – While most people think that interest rates are set in stone, when it comes to unsecured debts like credit cards and personal loans, that’s not always the case. As a matter of fact, about half of all credit card lenders will be willing to negotiate interest rates. All you need to do is give them a call. Now, keep in mind that negotiating interest rates is a very delicate process. So, follow the steps below…
- Step #1: Call The Lender With The Highest Rate – The lender with the highest interest rate is the one that’s most likely going to cost you the most money; so, start out by giving them a call.
- Step #2: Be Polite Yet Firm In The Opening Of The Call – First off, you’d be surprised at how much power most lenders give representatives with regard to making the decision to reduce your interest rate or not. So, when I say that being rude will get you nowhere, I mean it! It’s also important to be clear about what you’re calling for. After all, you’re calling for low interest rates and you want them now! With that said, a perfect way to start the call would be… “I was going through my debts and realized that this account has the highest interest rate. I love the bank and the customer service you provide, but with so many balance transfer offers available, I can’t justify overpaying on my debts. What can you do to bring the rate down.”
- Step #3: Zip It! – A good negotiator knows when to talk and when to listen. After you’ve opened the conversation, it’s time to be quite and listen to what the representative has to say. Be sure not to interrupt. The representative will have one of four responses. The response will either be, “based on your account, I can reduce your interest rate to…” or “…it looks like you’ve missed a payment recently, unfortunately your account doesn’t qualify for a lower rate….” or “it looks like you may qualify for a lower rate, but I’ll have to get you to another department…” or “I’m sorry, we don’t negotiate interest rates”. Based on the answer you receive continue the conversation with the firm stance that you feel you deserve a lower interest rate without being rude. You may have to sit through 2 or 3 nos before you get a yes; and in some cases the bank may not reduce your interest rate at all (remember, this is effective about half of the time).
- Step #4: Move On To The Next Account – Once you’re confident that you’ve done all you can to reduce the interest rate on your account, end the call and repeat steps 1 through 3 with your next highest interest rate account. Continue doing this until you’ve called all of your unsecured debt lenders.
Step #6: Consider Making Good On Your Threats – One of the key factors to the opening of the call is making sure that the representative knows that you have other, lower interest rate options. Believe it or not, in most cases you do. Do a bit of shopping to figure out what balance transfer credit card offers are available. In many cases, you’ll be able to transfer your entire balance from a high interest rate credit card account to one with a 0% promotional interest rate and a competitive long term rate for when the promotion expires. However, to qualify for these offers, you’ll generally need to have good to excellent credit. If that’s the case, skip step #7 and move onto step #8. If you have poor or fair credit, continue to step #7. If you’re not sure where you stand with regard to credit, click here to get your credit score free!
Step #7: Consider Credit Card Hardship Programs – If you have poor or fair credit, chances are that you’ve made some mistakes in the past. In many cases, these mistakes aren’t your fault. You’re in over your head and you just can’t seem to catch up. If that’s how you feel, you may qualify for a financial hardship program. These programs are offered by many lenders and give consumers that are having a hard time a way to pay off their debts faster with a lower monthly payment by reducing interest rates and changing the structure of minimum payments. If you’d like to learn more about what credit card hardship programs are and how to apply for them, click here!
Step #8: Time To Get Aggressive With Payments – Now that you’ve got the lowest interest rates possible, and you really know your debts, it’s time to really get aggressive with payments. One of the most aggressive debt payoff strategies available is the Debt Snowball strategy. Here’s how you do it. Do you remember coming up with a total number you could afford to pay to your debts each month. Perfect! From now until your debts are paid off, I need you to commit to paying that amount each and every month no matter how much your minimum payments change.
With that said, when you pay your debts each month, you’ll need to pay minimum payments to all accounts with the exception of the highest interest rate. Any money that’s left over from your total monthly debt payment number should be allocated to the highest interest rate debt. As you make minimum payments on other debts, the balances will reduce and minimum payments will fall; giving you more money to pay to the highest interest rate and accelerating the speed at which you’re able to pay off your debts!
Once you get your highest interest rate debt paid off, allocate 100% of the extra money you now have available to the next highest interest rate and continue the process until all of your debts are paid off.
Would You Like Help With The Process?
CNA Finance offers a complete debt relief service that follows all of the steps above to ensure that you get out of debt as fast as possible while paying as little as possible. If you’d like help with the process, please fill out the form below![contact-form-7 404 "Not Found"]