Monday, August 23, 2010

Piggy Bank debt reduction plan

The other day at work a coworker told me she heard I was the guy to talk to about getting out of debt and asked for ideas. So I took a few minutes asking her some questions and determined a few things. All of her debt except a car loan was credit card debt hitting just under twenty five thousand.

So here is what I told her, I call it the Piggy Bank debt reduction plan.

Step 1 reality check: Gather up all credit card bills and statements and figure out just how much debt you really have. Put the credit card bills in order from highest interest rate to lowest interest rate.

Step 2 start making calls: Call up each credit card company and ask for a interest rate reduction. This is a company who makes money off of your interest and they are going to be resistant to do this. However be firm, if asking doesn't work then threaten to transfer the balance to another card if they do not give you a better interest rate. Repeat this step once a year, its amazing to see how much lower they will let the rate go before giving up on making money off of your interest.

Step 3 balance transfers: After asking for the rate reductions its time to do your best to transfer the balance from the card with the highest interest rate to your other cards. Preferably your card with the lowest interest rate. If the available credit limit on the card with the lowest rate is not high enough ask that company to increase your limit. Explain to them what you are trying to do and that they will be the ones making the money off of your increased debt.

Step 4 quick success: Paying back debt is a long discouraging process so any amount of success is great. I suggest choosing a card with a high interest rate but a low balance and start paying it off with any extra cash you have each month. As soon as that card is paid off put that money towards the card with the highest interest rate.

Step 5 payback: It is imperative that you make all of your minimum payments so that you are not getting hit with late fees. Then with any leftover cash you have that month put it towards the card with the highest interest rate.

Step 6 leverage: In my friends case they had a fair amount of debt with their car loan. My first suggestion was to sell the car and get a cheaper car so that the payment each month would be less. Opening up a few hundred dollars that could be put towards paying of credit card debt. However in her case selling the car was not an option so I suggested she leverage it. Head to the bank and take out a personal loan with the car as the collateral. The money from the personal loan should be put towards paying off debt. The interest rate on the personal loan should be lower than the interest on the credit card. Freeing up extra money that would be going towards interest and can now be put towards paying off the card with the highest interest rate.

Step 7 creativity: Its time to get creative with your money. Making more money is not an easy thing to do which is what makes paying off debt so hard. But finding creative ways to cut back is easier. If you have any monthly subscriptions (Gym, Netflix, clubs) put those on hold. Use the freed up cash towards paying off debt. Host a garage or bake sell on the weekend and use the proceeds to pay off the debt.

I hope to update you on her progress. Paying off debt is a long and strenuous task and can take many years. However the feeling of being debt free is incredible.

I would like to hear your debt story. What are you doing to get out of debt? How is your debt repayment plan?

2 comments:

  1. I'd like to echo and add a few suggestions here.

    First off, get good at talking with Customer Service reps. Not just with Credit Cards companies, but with everything! State your case clearly and let the rep know that you're an intelligent human being by providing dates or names of people you've spoken to about the same problem before, describe the things you've tried, etc. Be kind and patient with them, chances are their last call was someone who cussed them out and wanted to have them fired. If you get a dud of a rep (they may all seem to be duds, but some people actually care about their jobs, I sure did when I worked on the phones) don't be afraid to try to take it to a manager or supervisor. Take notes and be organized with the information they give you. It pays off BIG if everyone learns these skills, especially with Credit Card companies. Customer loyalty is a big thing for them, but if the person they're talking to is yelling at them, they may not be as inclined to keep you around or offer you a lower interest rate or increase your credit. MOST IMPORTANTLY: If any Customer Service Rep really does a good job and goes out of their way to help you, ask to speak to a supervisor to compliment them. This makes their day, or life, much better.

    Second, the best way I've found to keep track of the balances on all my credit cards, checking/savings accounts, loans, and investments is Mint.com. It's the best for people who really use online banking. It's free and just as secure as your bank's website. It's free because they have sections on their site to help you find the best credit card, insurance, loan, or any other financial product, that uses your spending habits to tailor their products to you. I've used it for almost 2 years now and have never missed a payment or not been aware of bank fees because Mint.com will send you emails or reminders for such things. Here's a demo account on Mint.com that allows you to see how you can see your spending trends, make a budget, and make goals: https://wwws.mint.com/demoUser.event
    If you're a smartphone user, you can also use their mobile apps for iPhone/iPod Touch and Android phones so you're always connected to your personal finances.

    Third, go through and declutter your home. Have a garage sale or use Craigslist, eBay, and Facebook Marketplace to get rid of stuff you thought you'd use but never really use. Donate the rest to Goodwill or something and start with a clean slate. That really allows you to properly evaluate the things you need v.s. the things you want. While you're on Craigslist, eBay, and Facebook Marketplace or at Goodwill or whatever, see what deals you can find out there. Buying new isn't necessary all the time. Also, use your networking skills (Facebook, twitter, school, work, church) to see if you can borrow or trade for certain things, that way, no cash goes out and everyone's still happy. Here's a link to a blog I just found that had some great examples of trading for things: http://www.getrichslowly.org/blog/2010/08/17/man-to-live-off-coupons-for-a-year/

    Lastly, Stick to it! Whenever I'm about to make a larger purchase, I always say a little rhyme to double check myself: "Fix it up, wear it out, make it do, or do without."

    Hope that all helps :)

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  2. Great suggestions, I really love mint.com I plan to make a post about the benefits of using it. I love the quote "Fix it up, wear it out, make it do, or do without" great thing to live by. Lastly great inside take on how to handle customer service reps thanks!

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