Wouldn’t it be great if getting out of debt were as easy as getting into debt? It’s not, and here’s the reason: Getting into debt, so long as you don’t realize you’re doing it, is fun. Splurge all you want, put it all on plastic and worry about the bills later. Getting out of debt is not fun. It takes initiative, imagination, planning, follow-through and, worse of all, self-discipline. But it can be done, if it becomes a way of life. Suddenly, you feel free as a bird.
These five steps can bring success in as few as 90 days.
1. Create a monthly budget
List all monthly bills. Make sure you can pay them in full with your monthly income. Ask your employer to direct-deposit your paycheck. Train yourself to use only the after-bills money for new purchases. But don’t ever spend all of it. Impose a limit on how much you let yourself withdraw each day, week and month. Save some.
2. Pay off credit card balances
Start with the card having the highest interest rate. Pay it off in full. Don’t make merely the minimum payment, because you’ll have to continue to pay exorbitant interest on the balance. If this is a new account (opened within the past year) and you have other, older accounts, close the new one after you pay it off. Next month, start again with the next highest-rate card. Keep doing this until the card with the lowest interest rate is the one you use for most credit purchases. Watch as your credit score begins to improve.
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3. Learn the danger of credit cards and the advantages of cash
Use of credit cards is dangerous. You can retain one credit card for emergencies and other unexpected necessities. Keep it in a safe and inconveniently located place, such as a bank safe-deposit box. Don’t charge anything to this card that you know you won’t be able to pay off in 90 days. Make as many needed purchases as you can with checks. This helps establish a history of timely bill payment and rebuild a damaged credit record.
4. Become a scientific shopper
When shopping for food, clip coupons; look for sales, stock up on discounted items and shop at the store that consistently offers the lowest prices. Save money on housing costs, which should be no more than one-third of your income, by comparing insurance rates and minimizing your energy use.
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5. Be proactive with creditors
If you start to fall behind on payments, don’t wait for creditors to call you and start threatening to put a debt collector on your case. Contact them immediately, apologize for your mistake and ask for their help in working out a realistic repayment plan. Stay cool and polite. You may be surprised to find that they want to help you because, in the long run, it will save them money.
Finally, consider professional help
All right, you’re trying, really trying, to get your life in order, pay your old bills and stop racking up new ones. But 90 days have passed and it just doesn’t seem to be working. It’s time to bring in a professional financial advisor. A pro will offer to formulate a plan that may work better than the one you devised. Among the tactics the counselor could suggest are these: debt consolidation, debt settlement and, if worse comes to worst, bankruptcy.
Here, as in the grocery store, become a scientific shopper, your credit record depends on it.