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Archive for the ‘Debt’ Category

How to Pay Off Your Credit Card Debt

Brought to you by: The Frugal Buzz On November 21, 2011 No Comments

If you’re struggling with credit card debt, it makes sense that you want to pay it off quickly. The faster it is paid off, the better your credit. The faster it is paid off, the faster you can focus on saving money. The faster it is paid off, the sooner you can enjoy one less stressor. However, paying it down fast may not be your primary goal. You may, instead, look to pay it down as cheaply as possible.

The cheapest way to pay off your credit card debt isn’t the same for everyone. It depends on your balance. It depends on your interest rates. Finally, the cheapest way to pay off your credit card debt also depends on your assets. Let’s take a look at a few possibilities.

 credit card dec 2011

Use Your Savings

If you have a savings account, take a look at the amount of interest you’re earning on that money. Now take a look at the amount of interest you’re paying on your debt. If you’re paying more than you’re earning, consider cashing out your savings to pay off your debt. Wipe away your debt and then you can once again focus on building your savings. If you’re not making monthly credit card payments, you may be able to rebuild your savings quite quickly.

Debt Consolidation

Can you qualify for a debt consolidation loan? If so, at what interest rate? Compare the interest rate of a loan compared with the interest rate you’re paying on your credit card debt. Most often you’re paying credit card companies much more than you’d be paying a bank. That being said, make sure once you’ve paid off your credit card debt that you cut up those cards. If you run up a balance on them, then you’re paying back a loan and paying on your credit cards.

Home Equity

Home equity loans can be an option depending on the market, how much equity you have in your home and interest rates. Additionally, a portion of the interest you pay on a home equity loan is tax deductible. However, like a debt consolidation loan, you’re in danger of running up your credit cards again and paying on two loans simultaneously.

Just Paying It Off

Finally, consider cutting back on your expenses and paying more than the minimum balance on your card each month. This is often the most effective and cheapest way to pay off your credit card balance. Get a second job, sell your car or move into a cheaper apartment if you need to. The faster you pay off your credit card debt, the cheaper it will be.

If borrowing isn’t an option, and we didn’t mention borrowing from friends and family, and you don’t have savings to pay off your debt, consider taking drastic measures. Take a second job, pick up some freelance work, or sell some valuables. You’ll be relieved once your credit card debt has been eliminated.

Frugally yours, Mary

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How to Eliminate Debt

Brought to you by: The Frugal Buzz On February 17, 2011 No Comments

Steps to Eliminating Debt

Debt is easy to get into.  We all buy things on credit, take loans out to get instant money or pay for goods on credit cards. Credit can take minutes to build up, but years to pay off.  When debt builds up we end up paying regular monthly payments that simply increase every time we get more credit. 

The first thing we all have to do to clear debt is stop getting into any more debt.  If you never took out another loan and cut up your credit cards then after a while you will pay off all your debt (provided you are making regular monthly payments).

However, there are lots of clever ways to pay off debt quicker and help you to become debt free.  Simply make a list of all the debt you have.  This is everything that you pay to a creditor and includes any loans, credit cards, financed items such as the finance on your car or furniture and also the big one, your mortgage.

You should know:

1. How much the debt is for or the total amount
2. How much is left to pay off the debt
3. What you pay every month
4. How many months you have left to pay
5. AND the interest rate you are being charged

If you add the amount of debt (number 2 above) you have left on each one of your debts then this is how much you owe to creditors.  If you then add up all the monthly payments (number 4 above) then this is what you have to pay every month.  Once you have worked this out then you are in a good position to start working out the fastest and cheapest way to clear this debt.

Paying off the debt as quickly as possible:

There are several ways you can pay off debt quickly.  Some will be better than others and it also depends on the type of debt you have.

The interest pay off – Targeting number 5 on the list above

If you have a credit card or mortgage then you should be charged interest monthly on the amount of credit you have left to pay.  If you pay off larger amounts off this then amount you have to pay every month goes down.  The more you pay off the less you have to pay in interest every month.  If you take the credit card or loan that charges you the highest rate of interest, then paying this off earlier saves you the most amount of money every month.  Once it is paid off, you move to the next credit with the biggest interest rate.  Because mortgages usually have the lowest interest rate out of all your loans or credit cards and is secured debt you should leave this until last on your list.

For some loans, creditors can sometimes charge the entire interest on the full amount across the time you have to pay the loan so that if you decide to pay a loan off early, you may still end up paying the same amount as if you continue to pay the loan every month.  In this case you are probably better off not paying that specific loan early and focusing your efforts on a different loan.

The minimum loan pay off – Targeting number 2 on the list above

If you take a look at all your loans and start paying extra on the smallest loan then this will be paid off the fastest.  Once you pay this off, take the amount you were paying on that loan and use it towards paying off the next smallest loan.  Eventually you will again end up with only your mortgage left which if you use all the money you used for your other loans this will also be paid off much faster.

The biggest payment pay off – Targeting number 3 (or 4) on the list above

This works best for small loans with fixed payments and is great for people who find themselves with lots of loans with money to pay off on all of them.  Because you want to reduce the amount of time and money you have to use to pay off the loan you simply target the largest payment you have to make every month.  This may be the loan with the highest interest or the one the one with the highest balance.  Once you put everything you can into paying this off your monthly payments will suddenly drop.

You can also do this by targeting the loan that has the least number of months left to pay off the debt.  This will reduce the monthly payments quicker.

This will leave you with a lot more money every month and helps to control your finances better especially for people that struggle to pay off their loans.  Clearing the loan that takes the highest payment every month has the biggest effect on your bank balance every month.  Clearing the loan that has the least number of monthly payments left has the fastest effect on your monthly bank balance.

The clever part is to then use the money you save once you have paid off the loan to pay the other loans off faster and not to get comfortable with the debt you have left.

Frugally yours, Mary

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Pros and Cons of Debt Consolidation

Brought to you by: The Frugal Buzz On February 14, 2011 No Comments

Debt consolidation loans – a good idea?

What is a debt consolidation loan?  A debt consolidation loan is typically a loan of a large amount that you can use to consolidate all your existing credit.  The purpose of this is to pay off all your outstanding debt so that you have just one loan left to manage.

People can have lots of small loans, credit cards or purchases made on credit.  Smaller loans typically have higher interest rates so that lenders make enough money during the repayment period so they can make a profit from giving someone credit.  Consolidation loans are bigger so they should have a lower interest rate in the same way as a mortgage loan for a house. 

If you have a lot of small loans then applying for a debt consolidation loan may be the best option for you.

What are the benefits to getting a debt consolidation loan?

A debt consolidation loan can be used to pay off all you existing loans.  Usually a debt consolidation loan will have a lower interest rate.  This can also be a great way to bring several loans together so that you are accountable to one lender rather than four or five at one time.  This will help if you struggle to pay all your loan repayments every month because if you can get the right consolidation loan with a lower interest, then this should help you stay within budget every month.

What are the disadvantages to getting a debt consolidation loan?

The repayment period is usually longer so you will probably be paying more money in the long term.  The other problem with debt consolidation loans is that it is typically successfully pitched to people that are struggling to pay their repayments.  This means you have to read the small print very carefully to make sure you are not going to get ripped off by accepting bad terms and conditions.  This may mean that the interest and repayments are structured in such as way that if you want to settle the loan earlier, you then find you end up with much more total debt to repay.

Things to remember

Debt consolidation companies have to make profit just like everyone else.  The term you have to pay off your loan may be a long term commitment that doesn’t suit your life-style. So it is worth considering whether cutting back to pay for your current loans is better than spreading payments out over a longer time.

Because consolidation loans are much bigger loans you have to be more careful with the small print.  Signing up to a high interest rate could mean you end up paying a similar amount to what you were paying but for much longer.  You must make sure the numbers add up for you.

Remember not to make hasty decisions in signing up for a debt consolidation loan.  If you have a great credit history and a lot of credit on poor interest rates then it may be a good solution.  However, if you have bad credit then reacting to your finances with a short term goal may just be setting yourself up for big debts in the long term future.

Coming Up: How to Eliminate Debt

Frugally yours, Mary

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