Avoiding Debt

Getting out of Debt Trouble
The best way to handle debt is to avoid it in the first place. But the reality is, people work differently and for most us it is difficult to do this.

Some suggestions for getting out of trouble are:

  1. Make sure you know exactly who you owe money to and how much you owe. Also find out the amounts you are paying in costs and interest and the due dates, as well as the penalties involved if you don’t meet the payments on time.

  2. Look at every possible way to increase your income.

  3. Look at every possible item you can slash off your budget to decrease your spending immediately.

  4. Do not take on any more credit until you are in better financial shape. This may mean hiding or cutting up your credit cards so you won't be tempted to use them.

  5. If you find that you are not getting anywhere fast and you cannot make payments to all creditors on due date, contact them and see if you can come to an arrangement to pay them off over a period, with a fixed amount that you have committed to.

  6. If you need help, get hold of the Citizen’s Advice Bureau, your accountant, lawyer, or a financial planner experienced in these matters. Sometimes it is good to talk things over with someone who is outside your situation, because often they see things more clearly.

Plan to Avoid All Debt

" Everyone needs to put together a debt avoidance plan ..."

To get out of debt and to achieve financial security you need to put together a debt avoidance plan.

Your plan will set out that you need funds for retirement, with your home paid off and all mortgages cleared. You should be totally debt-free with a clean credit history in case you ever need to get credit in the future.

Here are some points you need to follow in order to avoid all debt and be in the position as per your plan:

  1. Set up a budget - Establish a budget to help you sort out your finances. This budget will set out the income coming in and the expenses you need to live by.  It will identify the costs which are necessary, as well as costs which are not necessary. You have to set goals, based on your expenses and your disposable income, and then you must stick to them.

  2. Pay high interest first - Try to pay off all your highest interest debts as quickly as possible. You need to find out where the high interest rates are and then make a short list of debts. These should be paid off sooner than others because of the charges. If you have any extra money from a tax refund or sale of some assets etc., then clear the high interest debt quickly.

  3. Credit Cards - As soon as you can, get rid of your credit cards. They will cause you more headaches than anything. If you have more than one and are unable to consolidate all your cards, pay off the hefty interest ones first and then, once that's done, get rid of all your unnecessary cards. Commit yourself not to put anything on your cards again until they are clear.

  4. Consolidate - Consolidate all your bills so you only pay one amount each month or week. This might make it easier to manage. Maybe you can consolidate your mortgage, credit card debts, car finance and other charges under one loan, at a lower interest rate. Consolidation is a sensible option if planned well.

Finally, the general rule is that you should limit your short-term debt, like credit cards and charge accounts, to no more than 10% of your total income. Once you have eliminated debt, look toward saving for the future.

How to Attack Your Debts Right Now
Here are some suggestions:

  • Tear up your credit cards. Literally take a pair of scissors and cut them up. The next best option is to get rid of all your cards except one and don’t use that card, except for emergencies.

  • Pay off your highest interest rate cards or debts first. This should save you a lot of money because it is the interest burden that keeps the debts at a high level.

  • If you cannot pay your bills contact your creditors and come to an arrangement. Be honest with them and explain your financial situation. They will respect that and will most likely agree to a plan to pay off your debts over a period. Once you have set a plan in place, keep to it.

  • If you must carry a credit card, apply for a low interest credit card and transfer the balances from your high interest cards.

  • If you own a home you might consider consolidating all your loans into one. This will be cheaper for you in the long run. You should be able to receive a lower interest rate loan on your home, which can be used to clear all your high interest debts. Once you have this in place – stick to this religiously because the sooner you are able to clear that loan which is on your home – the better.

  • If you need help, talk to a financial adviser or a credit councillor. It is no use struggling along trying to be free of debt and trying to be financially free if you are finding it tough going. You may need some encouragement, you may need some advice, and you may simply need someone to talk to.