Reducing Debts Fast
Thursday, July 2nd, 2009 Subscribe To Our Feed
The current downturn in the worldwide economy has resulted in many households feeling the pinch with reduced incomes or unemployment. It is no longer surprising to know that consumer debts, including credit card debts, are soaring higher than ever. In recent years average consumer debts have reached records levels and in many cases have got out of control.
While it is important to pay off all the debts you owe, you may not have sufficient money to cope with the monthly payment on all your existing loans. Prioritising or getting your debts in order keeps in you in control of your finances, and helps you pay off your credit card debts, personal loans, and home mortgage.
To make it easier for you to identify which debts should be paid off first, you may want to prepare a list containing all your loans. The corresponding interest rates, outstanding balance, and the required monthly payment must be found in your list. You can then proceed to sort your debts, starting with the loan which attracts the highest interest rate to the loans which are intended for investment.
If you are looking to take control of your finances and debts then you can start by following these simple tips
• Prioritize paying off personal credit card debt and other personal debts ahead of borrowings for investment (e.g. in property or shares). Borrowings made for personal purposes are not tax-decuctable making them much more expensive than borrowings for investments. In contrast, interest on borrowings for investment can be deducted as an operating expense.
• Pay off the highest interest debts first. This refers to the debt that bears the highest interest such as credit card debt.This may not be the debt with the largest principal to be paid off.
It is a common mistake to focus attention on the debt with the largest balance. The interest rates may be higher. Consider this example: credit card 1 has an outstanding balance of $6,500 with 18% interest rate, while credit card 2 has outstanding balance of $10,000 with 11% interest rate. The basic interest charge on card 1 would be about $97.50 per month and $91.67 per month with card 2.
You can continue the process of paying off the credit card or personal loan which attracts the next higher interest rate until all of your credit card debts are paid off. Avoid getting into any further debt by using a Visa debit card instead of credit.
• Make sure you pay on time. Pay at least the minimum required payment, but paying more than the minimum amount is really the best thing to do as you will eliminate the debt faster. But whatever you pay, never miss the due date. Being late on one or two payments will really burn your pockets. Credit card companies can do a lot of things when you miss payments — e.g. impose additional fees or increase the interest rate on your card. Getting rid of your credit card debt can become much more difficult it that occurs.
• Consolidate your loans. Debt consolidation loans are good options to help you lower your interest payments and speed up the process of becoming debt free. One way to do this is through balance transfer of credit card debts to a lower-rate credit card. Don’t forget that using a debt consolidation loan or balance transfer won’t wipe your debts out and is just the start of the process. Do not use this as an excuse to go and clock up even more debt. The idea is to lower the interest cost on your existing debt so you gain a fighting chance to actually clear it. While the interest rates may result in lower repayments you should make at least the same repayments as you did before and if possible much more.
The rough economic times only adds more good reasons to choose today to start getting debts in order. Create the list, sort them in order of priority and then smash them down one by one.
Article by Richard Greenwood of click4credit.com.au
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