Breaking the Cycle of Bad Debt

Posted on 09. Mar, 2006 by in Saving & Investing

I’ve posted more than a few entries on how to get out of the death spiral of debt, but I’m always looking out for more tips. Sometimes my tips don’t work for everyone so perhaps a different approach to debt reduction will help. Business Week published a piece this week that contained a “Five for the Money” list of ways to climb out of the bad debt cycle:

  1. Assess the Situation:
    We’ve covered this topic before here, but it can always be reinforced: before beginning the fight you must first understand your enemy. You need to calculate exactly how much debt you have, what the interest rates of each piece are, etc.
  2. Play Hardball:
    You have a bargaining chip: Your creditors want their money back, and they may be more flexible than you think.

    Gener@tion Debt writer Wong Ulrich recommends that you call your credit-card company before it starts sending you late-payment notices. Explain what you can afford, and see if you can negotiate a modified payment plan. “A lot of times they’re willing to work with you, especially if you explain that it’s temporary,” Wong Ulrich says.

  3. Get Good Information:
    Where can you go for good information on overcoming debt? I’ll give you a hint – you’re there now. Be sure you check out any organization that claims to help you get out of debt. Consult with government organizations or the Better Business Bureau before you commit any time or money to even non-profit organizations in order to help you get out of debt.
  4. Lose the Expensive Debt:
    Since you’ve already assessed your situation, you know which debt has the highest interest rate. Begin your repayments there. For example, if you have 3 credit cards with 10, 13, and 18 percent interest rates begin by paying the minimum balance on the 10 and 13 percent-rate cards and put everything you have into paying down the 18% card. As soon as that one has been paid down to $0 you can then apply everything you have to the 13% card, and so forth.
  5. Knuckle Down:
    I could go on and on about this topic but the gist of it is: stop spending and begin paying off the debt. Easier said than done, right? Well, the fact of the matter is that you could have the lowest interest rates in the world and have the nicest creditors, but if you can’t change your habits you won’t be able to eliminate your current debt and you will most likely fall into the same trap again in the future.

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