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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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January 15, 2004
"The Best Ways to Get Out of Debt"
Now that the post-holiday credit card bills are pouring in, it’s time to get
serious about reducing your debt. The amount of debt Americans have taken on
is staggering -- and it keeps growing every year:
- The Federal Reserve reports that the average American household has
$18,700 in non-mortgage debt, double the level of 10 years ago.
- Total non-mortgage debt adds up to about $2 trillion, with $739 billion of
it in credit card debt alone. On top of that, Americans owe about $7
trillion on their mortgages.
- The Internet is encouraging people to use their credit cards to buy things
they don’t need or can’t afford. Over the holiday season, sales at physical
stores were up 3% to 4% while Internet sales jumped about 25%.
- Student loan and medical debt is soaring as the cost of tuition keeps
rising and more people without health insurance have medical
emergencies.
- More and more people are getting into debt trouble: There were 1.6 million
bankruptcies in 2003, over 4% of credit card accounts are delinquent, and
the home foreclosure rate is at a record high 1.5%.
So, if you have taken on too much debt and either are already in trouble or
are headed that direction, what should you do? Here are a few actions you
can take to reverse the rising tide of debt in your household:
- Negotiate with your creditors. If you are honest, humble and
communicative, it is possible that they will give you a break and lower your
interest rate or reduce late or over-limit fees. If something has just
happened which will reduce your ability to make payments on time, like you
have lost a job or had a car accident, it is better to communicate with your
lenders than try to hide from them. Offer them a realistic amount that you
can pay and how often you can pay it -- and then keep your promise.
- Don’t take on more debt. Many people who get behind compound the
situation by taking on more debt to pay old debts. They clean out 401k’s,
take out home equity loans, borrow against cash value in life insurance
policies and try debt consolidation loans, only to find out that the
additional interest digs them in even deeper. And, if they pay off their credit
cards with another loan, they often spend up the credit cards again. If
possible, avoid the temptation to take on more debt.
- Get help from a reputable consumer credit counseling organization.
Nonprofit consumer credit counseling organizations can help advise you on
ways to cut your expenses and work within a budget. If you sign up for a
Debt Management Plan, you can get much lower interest rates on your
credit card and other debts than you could ever negotiate on your own. The
agencies get money from creditors called Fair Share in return for
collecting on these debts and passing the money on to lenders. The best
credit counseling organizations actually share some of this Fair Share with
you, the debtor, if you make your payments on time. One such organization is
the Debt Relief Clearinghouse (800-779-4499), which last year paid over $13
million back to consumers in what they call "Good Payer Rebates."
Whatever strategy you take to get out of debt, the best thing to do is deal
with the debt and not run from it. If you avoid creditors by not answering
the phone or opening the mail, the situation only gets worse. Tackle the
problem as soon as you know you have it -- and you can work yourself out of
debt over time.
For More Financial Tips From Jordan Goodman
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