A Plan to Break Out of Debt

The average credit card balance for an American household as of this month was $5,897, which is (remarkably) DOWN from years past. Also interesting: personal bankruptcies are NOT yet rising, compared to years past.
But unemployment is still VERY high, and Congress has been slow to create more relief. There is a very good chance that 2021 could be very ugly for a significant portion of my readership, and our nation.
You may be in a better situation … it may also be worse. So, to answer the questions we often get around here from clients facing tough times, I’ve put together a step-by-step process which we often help people work through.
1. Do NOT just pay minimum payments
If you only pay the minimum payment each month, credit card and other loan companies typically engineer the “default” repayment plans such that your bill could continue to INCREASE, even if you completely stop using your card or source of credit. This is called “negative amortization”–where you think you are paying on your debt, but the additional fees and finance charges are more than the minimum payment. The bottom line is: Pay more than your minimum or you will eventually be in debt over your head.
2. Set it and forget it
With online banking and automatic payment options, there are GREAT tools for ensuring you don’t mess up because of administrative chaos. If you feel you can’t manage all your bills by pen and paper, there are several good software programs available for keeping track of your financial records.
In fact, I recommend that you automate a payment ABOVE the minimum monthly payment, just to be certain that you start getting ahead of the game. Do it now, while you’re feeling that zeal. Again, those minimum payments are rigged against you, and the only way to get ahead is to … get ahead. I have some more thoughts on automation in a moment.
3. Get on the phone and ASK — and then send a letter
No, you do not need to be an attorney or other professional to negotiate with your credit card company (negotiating with the IRS, on the other hand, is a very different story!). The amount of consumer debt in this country has made creditors realize that they need to be more understanding of their customers — if they hope to get any money back. If you file bankruptcy, they are only going to get pennies on the dollar, so they are often willing to make deals.
Open communication always helps. Usually, credit card companies get ignored and end up sending delinquent files to a collection’s agency. So, they’ll actually appreciate your openness in contacting them, and may be more understanding of your situation. Proactively dealing with your debt problem, rather than hiding, will not only help your financial problem, but will make you feel better about yourself as well.
4. Pay down proportionately
If you are not able to pay the full amount of your credit each month, you should still pay something to stay on top of it. You should work off of a written budget so you know exactly where you stand. Some experts suggest that you divide your monthly debt budget, by the percentage each bill makes of the total and pay that amount.
Here’s an example: If you owe a total of $1,000, and one credit card is $800 and the other is $200, and you only have $100 available to pay for that month… You should pay $80 on the $800 balance, and $20 on the $200 balance. This way you are reducing each debt by the same percentage.
If you have multiple debts (excluding your mortgage), a simpler option is to make a list of all of the balances. Put them in order from smallest to greatest, and make payments on only the smallest first, until it is paid off. Then move on to the next, and so on.
Whichever method you choose, the important thing is to have a plan and commit to following it.
5. Remember: there are people on the other side.
Don’t be intimidated. No matter how forthcoming and honest you are, some creditors have been taught to be mean and downright nasty. Hang in there, and don’t let this tactic intimidate you.
Give YOURSELF the gift of light at the end of your tunnel, and remember … we’re here to help in Annapolis, Maryland:

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