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Online Investing Hacks
By Bonnie Biafore
June 2004
More Info

HACK
#98
Get Out of Debt Before Debt Takes It Out of You
Running up too much debt can foil the best financial plans, so it pays to find out where you stand before you go too far
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Without debt, it would be tough to buy a house or your first car. Not many of us can rack up $100,000, $200,000, or more to buy a house free and clear. With debt, you can definitely have too much of a good thing. Mortgage payments, car payments, and credit card minimum payments are due every month, no matter what. If you borrow too much, you might not be able to save any money after buying food, paying taxes, and making debt payments. When things get really out of hand, you might end up borrowing money to buy food and that will simply end badly. Even if lenders are willing to loan you more money, it's a good idea to keep your debt load under control. If you find out you're over the edge of excessive debt, you can use common sense, discipline, and online tools to get back on track.

Bringing Debt Back in Line

If your debt ratio is a little higher than the lenders' guidelines, you can whittle it back down with some minor adjustments to your spending. Often, you can get back on track by putting your credit card in a drawer for a while. Studies show that many people don't view credit card purchases as spending real money. Try paying cash or writing checks to bring your spending back to reality. You can also replace your credit card with a debit card, so that you have to pay it off every month.

If you can only afford to pay the minimum on your credit cards each month, you can resort to using cash advances on one card to pay another, or mailing the wrong checks to creditors to buy some time. At this point, you'll need stronger measures to get back on track. Here are some techniques to reduce your debt as quickly as possible with the minimal amount of pain:

If you want to know when you can start buying grande caramel skinny lattes on your way to work again, you can prepare a more formal debt reduction plan using the debt reduction calculator at http://www.quicken.com/planning/debt/debt_planner. Before you go online, search your filing cabinet to figure out how much you have in savings and identify the interest rate, outstanding balance, minimum monthly payment, and your typical monthly payment for each of your credit cards, mortgages, home equity loans, second mortgages, car loans, any other installment loans, and other debt.

After you enter the information about your debts, the planner tells you how long it will take and how much it will cost to pay off your debt on your current schedule. If you want to apply savings toward paying off your debt, select the Savings tab, type the amount of savings you want to use, and click Save/Recalculate. To find out what steps to take to make your plan happen, click Action Plan. The planner includes common-sense tips such as stop charging to credit cards, but also tells you how much to pay to each creditor each month to optimize your monthly debt payments.

On the other hand, if lack of self-discipline got you into this mess in the first place, you might want more help than the Quicken planner can provide. Debt Counselors of America is a not-for-profit organization that can help you for a small fee. You can download their publications from http://www.dca.org or contact them to get one-on-one help. Their One-Pay service includes working with creditors to reduce monthly payments, late fees, and interest. You make one monthly payment to DCA and they handle payments to your creditors.


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