1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Do It Yourself Debt Reduction

(April 13th, 2007)

If you are committed to reducing your debts and are willing to cut down on unnecessary expenses, it is indeed very possible to succeed in what's called a "Do It Yourself Debt Reduction" plan. Why do you need to go out and pay debt counselors or credit counselors big hefty fees when you can reduce your debts on your own?

In this article, we will articulate the steps required for a successful debt reduction plan:

1) Evaluate Your Debt

In Excel or on a piece of paper, write down the following characteristics on each credit card debt you owe:

Debt Balance Owed
Interest Rates Charged (APR)
Monthly Payments Due

Apart from credit card debt, do the above step for all other types of debt including your payday loans, auto loans, personal loans, etc. Omit writing down your mortgage loan or your student loans because they have relatively lower APR and can be paid off over the longer term.

2) Calculate Your Household Budget

In Excel or on a piece of paper, write down your monthly income (after-taxes) and subtract from it the following items:

Monthly rent/mortgage payments
Groceries
Car Insurance
Television/hydro/other utilities
Childcare expenses
Medical expenses

After subtracting all these amounts, arrive at your Disposable Income figure. If this number is too low, look for ways to cut down on your spending so that you have more disposable income at the end of the month. Remember in the introduction of this article, we said you could be successful at Do It Yourself Debt Reduction only if you are willing to cut down on unnecessary expenses.

3a) Pay Off Debt with Highest Annual Percentage Rate (APR)

Consider the following example. Peter has an after-tax monthly take home pay of $2000. After paying off all his expenses every month, Peter has $450 remaining to pay off any debts owed. He should therefore allocate this $450 towards paying off debt that has the highest Annual Percentage Rate (APR). This is the fastest way to reduce your debt.

After Tax Monthly Take Home Pay:	$2000
Monthly Expenses:
Groceries	$400
Rent	$600
Car Insurance	$150
Utilities	$200
Student Loan Payments	$300
Remaining amount goes towards paying off debt with highest APR	$450

Continue this process every month until the debt with the highest APR is fully paid off. Once it is fully paid off, move on to the next debt that has the highest APR. We make a few assumptions in this Do It Yourself Debt Reduction Plan:

You are not racking up any more debt on your credit cards

To achieve faster debt reduction, try to cut down on some spending such as "Groceries" or "Utilities" and allocate more of the saved up money towards paying off debt. Track your spending by doing this:

	Jan 07	Feb 07	Mar 07	Apr 07	May 07	June 07	July 07
Estimated Debt Payment	$450	$450	$450	$450	$450	$450	$450
Actual Payment:	$480	$495	$440	$460	$450	$450	$465
Improvement:	6.7%	10%	- 2.2%	2.2%	0%	0%	3.33%

3b) Debt Repayments Worksheet

Here is a sample Debt Repayment Schedule that you can use. It is also self-explanatory.

Type of Debt	Balance Due	Interest Rate	Current Monthly Payment	Additional Payments
i) Walmart	$400	21%	$72	$128
Between January 1st, 2006 - Feb 28th 2007, you will make an additional $128 per month payment towards your Walmart Credit Card and pay it off in 2 months. By tightening your budget and cutting down on unnecessary expenses, you will get rid of your Walmart Credit Card debt in 2 months! You will then use the freed up $72/month to pay off your next debt, the Sears debt.

ii) Sears	$600	20%	$60	$72
By combining the current $60/month debt payment with the $72/month extra payment saved from Debt #1 (the Walmart Debt), you will be able to pay off the Sears debt in ($600 / $132) roughly 4.5 months! Upon then, you will have an extra $132 per month to pay off your next debt, the Wells Fargo Debt.

iii) Wells Fargo	$1500	18%	$120	$132
By combining the current $120/month debt payment with the $132/month extra payment saved from Debt #2 (the Sears Debt), you will be able to pay off the Wells Fargo debt in ($1500/ $252) roughly 6 months! Upon then, you will have an extra $252 per month to pay off your next debt, your Federal Student Loan.

iv) Federal Student Loan	$3000	12%	$100	$252
By combining the current $100/month debt payment with the $252/month extra payment saved from Debt #3 (the Wells Fargo Debt), you will be able to pay off your Federal Student Loan in ($3000/ $352) roughly 9 months! Upon then, you will have an extra $352 per month disposable income!

Use our sample debt repayment schedule above to enter in the following characteristics:

Balance Due
Interest Rate Charged
Current Monthly Payment
Additional monthly payments you can make (after careful budgeting and cutting down on expenses)

Rank your debts according to their relative interest rates. The debt with the highest interest rate is #1, the debt with the 2nd highest interest rate is #2, and so on. Make additional payments one debt at a time (debts with the highest APR charged). Trust me, this is the fastest way to eliminate credit card debt and you shall be happy with the results!

4) Debt Negotiation

Whilst carrying out Steps 1-3, you should contact your creditors and negotiate your debts with them. This is also known as the process of debt negotiation. Some lenders will be willing to lower your Annual Percentage Rate (APR) so that you have to make less monthly interest payments and pay off the original balances faster. You could also carry out balance-transfers where you move credit card debt from high interest rate credit cards to ones with lower interest rates. For example, if you move your $7000 debt from an 18% APR credit card to an introductory 0% APR card for 6 months, you could save a lot of interest payments.

5) Keep Track of Success & Failures

If Peter (in the above example) makes a payment of $450 or more towards his highest APR debt, then he will reduce his debt very fast! Whenever you achieve a milestone in debt reduction, do celebrate it! Look at areas where you can cut down spending and allocate that savings towards paying off your debt. Keep a progress chart sheet on your refrigerator on near your television that reminds you Debt Reduction is your #1 short term goal!

Comments

Felix Cruet Comments on August 6th, 2007

Could you please send me info on how to eliminate or pay off my student loan?

Anette Comments on April 26th, 2007

I would recommend that serious debtors join Debtor's Anonymous. DA is free and has weekly meetings to educate and motivate it's members. In addition, you can request a pressure relief meeting with two ex-debtors to help you figure out how to pay off your bills. It's a real life saver!