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Dear Debt Adviser,
Recently, you ran a column about a woman who had used a debt consolidation service. You said she should
lose her debt first and
protect her credit later.
I'm in a lot of debt, but I can make all my payments and even pay down a bit more than the
minimum. However, it's too much to really make a dent in my balances. When you're talking about paying off a
few hundred every month out of a $20,000 balance, I might as well be swimming up a waterfall.
What advice can you offer for people who can make their payments and aren't adding to their
debt, but just can't get out from under their obligations?
-- Cameron
Dear Cameron,
Have you ever come to right place -- the Debt Adviser has all the answers you will need.
You won't need to swim up a waterfall. But you may have to paddle upstream in a kayak for
a while. I'll even show you how to increase the size of your paddle, so it won't take as long to get where
you want to go.
Gaining perspective over the situation is where you need to start.
First, you need to find out exactly what you owe and how long it will take to pay off your
debt with the monthly payment you are currently making.
As an example, let's say you are paying $300 per month on balances of $20,000 at an average
interest rate of 12 percent. Given that payment amount, it would take you nine years and three months to pay
off the debt.
Yes, that may seem like swimming
up a waterfall. But once you can see that there
is an end to the payments, it may give you the
strength to work even harder to get your debt
paid off sooner.
Add an extra $100 to the monthly payment and you will decrease your payoff time by three years
and five months, meaning you would be debt-free in five years and 10 months. See, we've increased the size of
your paddle and decreased the strength of the current and you are well on your way.
You may ask, "How am I going to find an extra $100 or $50 or even $200 per month to pay
toward my debt?"
Well, being able to stop those payments may be enough of an incentive, but I personally like
rewards better. Set a really pleasant goal -- perhaps a trip or something similar -- and promise yourself that
as soon as you pay things off, you'll redirect the money that's currently going to the debt service to fund
the vacation.
Now you have a motivation to look at your spending and make some cuts. Remember, a $4-a-day
latte is $120 a month that you can put toward your debt (and, thereby, your vacation) if you brew your own
coffee.
The obvious choices for cost-cutting are items of discretionary spending, such as entertainment,
food and clothing. Get creative and keep your goal in mind.
If $100 a month extra is not doable,
try to lower your interest rate by consolidating
balances onto a lower interest rate card and pay
whatever extra you can each month.
As time goes by, you may receive a raise at work, a year-end bonus or a tax refund. Consider
putting at least half (or more) of your increased earnings into your debt payments and the time will be that
much shorter until you have paid off your debts and can leave for that well-earned holiday.
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