Financial Freedom

Tips and Resources for Living A Debt-Free Life

By Pete Alfano


 

Early this year, it was announced that the United States was more than $30 trillion in debt — the number thirty, followed by 12 zeros. Are we faring any better as individuals when it comes to personal debt?

The mind-boggling truth is that most American households owe from $90,000 to $150,000, including mortgage, credit card, auto loan, student loan, and home equity loan balances. According to Debt.org, average Americans spend 8.7% of their income paying down debt.

But consumers may not have a choice when it comes to auto loans and using their credit cards. Understandably, most people cannot afford to pay cash for a car. Maybe a pre-owned vehicle or lower-end model is a good compromise. Credit card debt may not be eliminated, but it can be controlled. More than 191 million Americans have credit cards, and the average is just under three cards per person. Does one really need that many?

So, one way to reduce debt and take a baby step toward living debt-free is to show some restraint, then consolidate your credit card debt by transferring it to a card with no annual premium and a lower interest rate. If you still have a balance on more than one card and make more than the minimum payment, you may want to consider the “debt snowball” method. This involves snowballing your extra payments toward the smallest debt to pay it off first. And if you prefer using plastic instead of carrying cash, make a point of paying the balance on your credit card every month. Better yet, don’t be tempted to use a credit card at all. Use a bank debit card instead.

Are you getting a sizeable tax return? Use it to pay down or pay off debt before you spend it on a vacation, your wardrobe, or a purely cosmetic home improvement. No, it is not as nice as a trip to Hawaii, but it will help keep you financially solvent.

We may not have been math majors in school, but we can take the time to do a budget and separate necessities from luxuries. Also, divert some of your savings to paying down debt. If your money is in a bank account, those record-low interest rates are earning you pennies in interest. Pay down debt, which typically has higher, more punitive interest rates.

Consumers can also look around the house and sell clothing and items they don’t use or need anymore. Have a garage sale or bring clothing and furniture to a consignment store. If feasible, get a second job. It’s another way of dedicating income to debt reduction. If you budget wisely, avoid extravagances, and begin to lower your debt, reward yourself on occasion. Oh, as a reminder, filing for bankruptcy is not a strategy but should be used only in desperation. It should be avoided unless you are in dire straits financially and have no income or not nearly enough to pay any of your bills. It will take several years to rebuild your credit reputation.  

Debt-Defying Help? 

You have probably heard ads for companies that promise to reduce or eliminate your debt. Well, Experian, the consumer credit reporting company, advises being wary of these companies. First, they are in business to make money, so that it will cost you fees for their services. These companies also advise clients not to make any payments to creditors during the negotiation period. This will further hurt your credit score.

There are several nonprofit credit counseling agencies that will help you formulate a budget and plan for reducing debt. According to Experian, the federal government or National Foundation for Credit Counseling can determine whether you qualify for a debt management plan. Under that plan, you pay a monthly fee to help lower your debt. You don’t have to go it alone but be wise about how you choose to eliminate your debt.