This year you may plan to exercise, eat healthier and hopefully lose a few pounds. You've mapped out your fitness goals and your ideal weight, yet when it comes to your debt you may just be planning to take things as they come--paying off one debt here, while racking up interest on another. If only you could think of your debt like a strict diet plan. Instead of big portions (spontaneous shopping sprees, for example) that come back to haunt you, consider taking small steps that will help cut you loose from the bondage. Here are seven steps to getting rid of bad debt.
Prioritize Your Bills
We'll give it to the credit card companies; their persistence when it comes to collecting money is unmatched and their tactics leave consumers so shook that it's the first debt they pay every bill payment cycle. But this may be the wrong strategy, says Mitchell Allen, author of "A Survival Guide To Debt," who advises paying for secured debt like your home or your car before anything else. "These should be priority number one," he says, "because you don't want to lose the roof over your head or your car." Secondly, he adds, pay for debts that aren't secured but are "must-pays" like child support, taxes, and student loans. Then comes unsecured debts that are likely to appear on your credit report such as credit cards and then lastly unsecured debt that are least likely to go into collections, such as doctor's bills.
Set up a budget and a goal
Let's talk about that other "B" word that has most of us running scared. Creating a budget can be daunting, but just as difficult as the day you finally step into the gym, the rewards are immense. It will not only let you know where your money is going but it can also help you curb unnecessary expenses. Like a budget, having massive debt can be equally overwhelming. Michelle Singletary, author of "The Power To Prosper" suggests you list your debt from the smallest to the largest and then focus on paying off the little ones first. "What I've found is that people get such a rush that they really want to get rid of those other bigger debts on their list," she says. Even short-term goals like wanting to pay off a $500 department store credit card debt is a start. "When you start reaching these little goals it becomes addictive in a very positive way," adds Allen.
Don't borrow your way out of debt.
Remember your diet? Like a decadent slice of chocolate cake, having equity in your home can be as tempting. You may even consider paying off your credit card debts by taking out a home equity line of credit. Ask yourself if it is indeed worth it because if you default on payments, you risk losing your home. Even dipping into your retirement plan is a terrible idea if you don't plan on getting to the root of your problem: your spending.
"Make more, spend less."
Look at your monthly expenses and see if you can increase your income to cover your deficit. Think about getting in some more hours at work or even a part-time job to cover those few hundred dollars that often leave you in the red. "Surprisingly, most people are not short a $1000 a month, it's more like $200 to $300," says Allen. "But that builds up over time and if you can earn extra income that will make up that difference you can start going in the right direction."
Don't ignore calls from your credit card company.
Your "No, she's not here" trick may be doing you more of a disservice than you think, says Allen, who suggests a four point plan of action in which you begin by picking up the phone when the credit card company calls and acknowledging that you owe the debt. Secondly, be as specific as possible about why you can't pay it. Thirdly, ask your credit card company for help with the interest rate, the payment due dates and then document all of your communications. Lastly, follow through with what you say you're going to do. "Banks are hurting right now and they would like for these credit card loans to be paid off," Allen says. "Essentially what you're doing is the same thing that credit counseling and debt settlement companies. You'll be surprised with what kind of results you can get if you just negotiate with them."
Change your attitude.
Incurring debt is not a sign of your failure, and those collection calls you're getting should not start messing with your emotions. If anything it's a chance to put your game face on and become proactive. As you know, attitude is everything. "Separate your net worth from your self worth," adds Allen.
Educate yourself about your options.
According to Freddie Mac, 60% of delinquent homeowners were not aware of programs that were out there to help them, while moderate-income borrowers were found to be 68% less likely to lose their homes if they entered into a repayment plan or a loan modification plan, says Allen. The programs are out there if you dedicate yourself to looking for them. Educate yourself and then communicate with your creditors and see if you can work together to get yourself out of debt.
In the "The Power To Prosper: 21 Days To Financial Freedom", personal finance columnist and author Michelle Singletary offers a 21-Day Financial Fast. Some of her strategies include cutting out trips to the mall, restaurant meals and credit card purchases for three weeks. Read more of her tips for effective money management, here.