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How to Pay Off Debt

When the economy is prospering, debt isn’t an issue. You can pay your obligations of today because you know that you’ll be earning more tomorrow and lenders aren’t worried you’ll miss a payment. But as the economy sank last year, you saw a lot of credit card and loan companies scramble to assess the risk of their borrowers. If you had a credit card balance, you might have seen your interest rate go up. If you wanted to buy a house, you may have had to document your income a lot more stringently than you expected. It’s not surprising because the average household credit card debt, based on the Federal Reserve’s Survey of Consumer Finances in 2007, was $3,039.70.

At first glance that may seem a little low, but remember that a lot of people don’t even have access to credit cards. If you only include families with credit card debt, that value goes up to over $7,000. Ultimately, any amount over $0 is too much because credit card companies charge interest rates in the double digits. High yield savings accounts pay out less than 2% these days, so a double digit interest rate on credit cards is far too much. It’s time to pay them down, here’s how.

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 Debt 
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Debt Isn’t A Bad Thing

I’ve read in a lot of places, from mainstream media to little bloggers like myself, about how debt is such an evil thing and I wonder how our financial markets would’ve fared if the concept of debt and leverage never existed. We wouldn’t be as prosperous as we are now, that’s for sure, because debt is not a bad thing! In fact, debt is a good thing. It allows you to do some of the things you might otherwise not be able to do, such as buy a house, go to college, and buy a car.

However, like many things in life, it’s good in moderation and when appropriate. I don’t think anyone can make a good case against getting a mortgage and buying a house (though I have tried). I also don’t think anyone can make a good case against going to college (again, I’ve tried). However, anyone can make a case against using a credit card and carrying a balance so that you can keep your three a day Starbucks habit. That’s where the moderation and appropriateness tests come into play and that, also, is up to your own personal preferences.

Ultimately, debt is important because allows you to do the things you want to and should be doing. It allows you to leverage some of your future in order to enjoy something now. While you can’t buy a home outright, you can still enjoy it while paying a fee to do so (interest). The only problem is that you can’t leverage the future so much that when it does come, and it will, you find yourself struggling to keep up. That’s why you must exercise moderation.

Appropriateness is a matter of personal opinion but even if you fail this particular test, being moderate in your debt accumulation will leave you in a good enough situation that all won’t feel lost. So you go through life spending on transient things, let’s say you go to movies all the time, and rack up a little credit card debt. While you have nothing tangible to show for the debt, if it’s kept in moderation it’s not something that will be a life changer. A few thousand dollars of credit card debt, while still bad, isn’t something that will play with your psyche… twenty thousand dollars of credit card debt will require much stronger fortitude to overcome.

So, don’t approach the idea of debt as something that’s evil and loathsome, think of it like a tool that can cut both ways and use it with care.


 Debt 
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What Do Debt Consolidation Services Offer?

I see these advertisements all the time on television and in magazines promising to lower your monthly payments, help you get out of debt, and basically solve all of your life’s problems. If it really were as easy as making a simple phone call, why can’t you do it yourself and what exactly do these debt consolidation services offer? The inner skeptic in all of us is always wary of promises like those offered by debt consolidation services because they sound too easy and too painless when we know the actual fight out of debt is neither.

Please don’t confuse debt consolidation services with credit repair services. Credit repair services are all scams. If you have an error in your credit report, go to the reporting agency and let them know and they will fix it for free. If you were just irresponsible in the past, you will have to mend your ways and time will heal your credit.

The Debt Consolidation Process:
This is what happens when you work with a debt consolidation service. You sign up with them and enter into a negotiation period in which the service contacts all your creditors and tries to lower the amount you owe or the monthly payments. During this time, since you’re not paying, the creditors will still be calling you. Then the debt consolidation service hooks you up with a loan referral company, which becomes the only company you send money to, who will take your payment and disperse it amongst your creditors. The first and possibly second payment goes towards fees and other incidentals (such as the fees for the debt consolidation loan mentioned later, credit report, etc.), not towards any of your debt! Once you make multiple on-time payments to the loan referral company, they consolidate your outstanding debt and they become your single creditor. All throughout, you can expect double digit interest rates on your loan.

Sounds great right? Well, you may or may not have known NCN just paid off over ten thousand dollars in credit card debt in less than a year’s time and I wanted to know his opinion of these services and this is what he had to say:

Jim,
I never considered using a debt consolidation company. Here are the reasons why.
1. I wanted to be in total control of my money.
2. I wanted the success (or failure) to rest with the decisions that I made.
3. I have heard that using a debt consolidation service reflects negatively on your credit report. I have never looked into this, but Dave Ramsey mentions this several times a week on his radio program. Good enough for me.
4. Why do I want to pay MORE money for the privilege of having some company do the work that I should be doing for myself? I can call and get lower rates, I can schedule extra payments, I can negotiate.
5. Quite frankly, most debt consolidation services strike me as “slimy”. Just my opinion.

There you have it. The one person I know of that would’ve benefited from a debt consolidation service stayed away because he could do it all himself (and you can too).

If you’re considering a debt consolidation service, I suggest popping over to No Credit Needed (NCN’s blog), reading his stuff, and fire off an email to him. He’s a very friendly guy and always seems willing to give you a well thought out answer to your question. If you’re interested, he also has a podcast that I’ve enjoyed from time to time.


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