How To Stop "Recycling Debt"

NEW YORK, June 14, 2008

How To Stop "Recycling Debt"

LETTER ONE

Dear Ray,

My husband and I have $70,000 worth of school loans and debt to pay back. Most of our debt has little-to-no interest, but we're still not getting anywhere. We don't have enough money each month to pay out over $1,000 to debts plus our regular bills and cost-of-living expenses. We end up using our credit card to pay for things like groceries, gas, etc., so we're not lowering our debt, we're just recycling it. Any advice?

Frustrated in Ohio

Ray has a three-step plan for anyone in this situation:

1) Reduce the cost/monthly payments of your current debt:

Since you mentioned that most of your debt has little-to-no interest, there may not be a lot of opportunity here, but just in case, here are a few tips to consider: To reduce the cost/monthly payments of your current debt, one way to make your student loan payments more manageable is to consider a transaction called "loan consolidation" under which you may qualify to combine all student loans from various lenders into one single loan with a single lender. One of the main benefits of "student loan consolidation" is a smaller monthly payment.

After you tackle your student loans, look at your other debt l; write down a list of each debt account, what you owe, the interest rate, and the monthly payment. Then, shop around your local area banks and credit unions to see if any of them are offering similar loans at lower interest rates. If so, refinancing higher-rate debt to lower-rate debt will reduce your interest payments and enable you to make a bigger dent in the principal each month. Of course, the credit crisis will not make this easier for you, but if you have a good credit score and have no late payments on your current debts, then you may have some success here.

2) Reduce the costs of your current expenses:

Rule No. 1 here is to reduce/eliminate the costs you are paying for any discretionary living expenses immediately, so you are not "living on credit cards." It makes no financial sense to pay down low-cost debt just to leave you short on cash to pay living expenses that you end up putting on a credit card. If I have seen this situation once, I have seen it a thousand times, and it always ends badly. You need to take action now! Sit down together, scour your credit card and bank statements for the past six months, and write down a list of ALL the things you spent your money on each month. Then, on each and every one of the items, ask yourself these questions: Was this expense truly essential? If not, then what can be done to reduce it or eliminate it?

Don't forget to look at ways to reduce essential expenses, too: You can call your auto and home insurance company and ask about raising your deductibles, or shop for a lower-cost provider. Leave no stone unturned and look at everything. When facing difficult financial times, big companies do the same thing to reduce expenses, so you should, too. If you are truly honest and do exactly as I say, you can always find some expense reductions.

3) Increase your cash flow:

Yes, it's obvious that, if you had more income, you wouldn't be in the situation you are currently in. But ask yourself this: Do you have the time and ability to work an extra job, even for only a few months or a year, so you can get your debts under control?

A friend of mine, when faced by the challenge of paying high winter heating bills, does just that: In addition to her full-time job, she works a night or two a week in a restaurant and brings in an additional $200 to $300 a night. While she says it would be nicer to have those nights to herself, she would be so stressed out over not being able to handle her bills that she wouldn't enjoy the time off, and she really enjoys the people she works with, so it works for her.

The point is that there are lots of ways to make money if you just think positively and get out of the "frustrated mind set"! So, start thinking about what you can do to increase your income and do it!

Another of my favorite tips: Do you typically get a tax refund each year? Over 70 percent of taxpayers do, which means that you are over-paying your taxes each month and have to wait a year to get the money back, which is an insane thing to do for a person in your situation. If that applies to you, file a new W-4 form with your employer to reduce the taxes withheld from your pay now, so your take-home pay will be higher. Also, eliminate any non-essential deductions from your pay (extra insurance, 401(k) deductions in excess of what is required to receive the employer match, etc.)....

Source

http://www.cbsnews.com/stories/2008/06/14/earlyshow/contributors/raymartin/main4181210.shtml