Ways to Save

The first step toward paying off your debt is getting a realistic understanding of your current situation - how much money you take in each month; how much you spend; and how much you can save. This basic information will help you formulate a long-term action plan on your own or decide that you need to seek professional assistance. To get started, read these 10 Smart Steps today.

Paying off your debt means cutting your spending immediately. It may also mean talking with creditors, debt collectors, and credit or debt counselors. The following information will help you reach your goal.

Find Daily Savings: You Can Do It Save on the Interest You Pay Contacting Your Creditors Debt Know-How Collectors Understanding Secured and Unsecured Debt Debt Consolidation Loans Home Equity Loans

Find Daily Savings: You Can Do It.
You might be surprised how quickly small expenses add up to big savings.

Some of your regular, periodic expenses are luxuries - things like house cleaning, manicures, lawn-care services - do them yourself, or do without. Trade in those luxuries for the big luxury of paying off your debt.

That expensive coffee grabbed in the morning rather than having coffee at home or at work, bringing lunch instead of spending $7-$10 a day to grab lunch at a sandwich shop, not ordering expensive drinks at restaurants and going out less - these are things everyone can give up or change that will make a big difference in monthly expenses.

Other things like premium cable, cell phone service with all the extras, new CDs or buying online music, and many other items like these are luxuries we may want but don't need. Often you can opt for a less expensive cable or cell phone service package with no penalty for changing, and this will save you real money every month.

Other items like an expensive car lease or apartment may take longer for you to downsize, but with planning you can. Making these changes can add up to hundreds of dollars a month or more. This will provide you with money you can use to start making a real difference in paying off your debt.

It is equally important not to take on new debt until you get your finances under control.

Sticking to a budget and contacting your creditors if you have problems making payments are the first steps on the road to dealing with your debt. Sometimes, though, they are only a beginning, and professional assistance may be necessary. Review the information under this section, and if you feel like you may need professional help, check out Getting Help for tips on seeking professional services.

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Save on the Interest You Pay.
When less of your money goes to paying interest on your debt and more of it goes toward paying off the actual debt, you will reach your debt reduction goal sooner.

Cutting your interest rate by even a few percentage points will enable you to put more toward paying off your debt each month. While a savings of $10 or $20 dollars a month may not sound like a lot, putting all of those savings toward paying off your debt can be a big help. The larger your debt, the greater the savings from bringing down the interest rates on it.

These suggestions will help you minimize the amount of money that goes to interest and maximize the amount that goes toward paying off your debt.

• Ask each credit card lender for a lower rate. It sounds almost too simple, but it often works. Call each lender's customer service department and let the representative know that you are shopping around for better terms. If you have received a pre-approved offer for a credit card with a lower rate and are thinking of switching, let them know about this offer and see if your current credit card company can meet it. The credit card market is very competitive today, and you may find that this simple tactic can lower your rate by at least a couple of percentage points, and often more.
• Prioritize your debts by interest rate. To minimize the amount of interest you pay, concentrate on paying off the debts that carry the highest interest rates first. Keep all your accounts current by paying at least the monthly minimum due on each one. Focus the additional amount you are able to pay each month on paying off the highest interest rate debts.

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Contact Your Creditors.
If you are having trouble paying your bills, contact your creditors, explain the problems you're having, and try to work out a modified payment plan that reduces your payments to a more manageable level.

If you wait until you miss payments, you already will have been accessed late fees and had negative marks put on your credit report. Reaching out to your creditors early can save you real money by avoiding late and other penalty fees. It also shows them that you are serious about your commitment and responsibility and they may be more likely to help.

If you agree to a modified payment plan, make sure you pay what you said you would each month or the creditor could return to requiring higher payments.

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Deal with Debt Collectors.
Many creditors will turn your account over to a debt collector to achieve payment if your account goes unpaid for a certain amount of time. If you are in a tight financial situation and can't pay the full monthly payment, debt collectors, like original creditors, often will agree to a modified payment schedule.

If a creditor, which can be a telephone company, bank, store, or anyone who has extended you credit, has asked a debt collector to collect on your debt, you should know federal law regulates how and when a debt collector may contact you. The Fair Debt Collection Practices Act forbids a debt collector to call you before 8 a.m. or after 9 p.m., or while you're at work if the collector knows your employer does not approve of your receiving personal calls. A debt collector may not harass or lie to you or use other unfair practices in trying to collect a debt. The law also requires a debt collector honor a written request from you to stop further contact, although this does not prevent a collector from pursuing court or other action to collect a debt that is legally owed.

If a debt is over a certain number of years old, outside of the statute of limitations, you may not have to pay it. The number varies by state. However, there are some debts, such as government student loans that can be collected regardless of how old they are. More information on your rights under the Fair Debt Collection Practices Act can be found on the Federal Trade Commission Web site.

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Understanding Secured and Unsecured Debt.
Debt can be secured or unsecured.

Secured debts are tied to an asset, such as a vehicle loan or your mortgage. If you fail to make payments on a secured loan, the lender can take steps to repossess the asset, for example taking back the vehicle or foreclosing on your home.

• Vehicle Loans - Most vehicle loans allow a creditor to repossess your vehicle any time you're in default of your loan. The creditor is not required to notify you before repossessing the vehicle. To recover a vehicle that has been repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, or the creditor can sell it. If you believe you will default on the loan on your vehicle, you may be better off selling it and paying off the loan, avoiding the costs of repossession and the negative mark it will leave on your credit report.
• Home Loans - If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. It could take as little as two or three missed mortgage payments for your lender to initiate foreclosure. Most lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary and correctable. Some lenders may agree to extend the repayment period to reduce the monthly payment. Others may reduce or suspend your payments for a short time and, when you resume regular payments, you may have to pay an additional amount toward the past due payments. Ask whether additional fees would be assessed for these options; if so, calculate how much they will add to the total over the long term.

If you are unable to work out an acceptable plan with your mortgage lender, contact a housing counseling agency. While some agencies limit their counseling services to homeowners with FHA mortgages, many will offer free help to any homeowner who is having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city or county for help in finding legitimate local housing counsel.

Unsecured debts are not tied to assets. They include credit card debt, signature loans, medical bills, and debts for other types of services.

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Debt Consolidation Loans.
Debt consolidation means combining all your debts into a single loan at a lower rate, which can be done in a number of ways.

Credit unions are among the best sources of lower interest debt consolidation loans. If you do not belong to a credit union, other options, including banks, are available. You can explore debt consolidation loans on your own or through a credit counselor.

Beware of unscrupulous lenders, operating under names such as "debt consolidation specialists," and offering fast approvals and easy terms. They will only lead you deeper into debt. Before signing any debt consolidation loan, check out the lender with the Better Business Bureau. And remember, if it sounds too good to be true, it probably is.

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Home Equity Loans.
Another way to consolidate your debt is by tapping into the equity in your home. With a second mortgage or home equity loan, both the interest rate and monthly payment likely will be considerably lower than they are on your current debts, and in many cases, the interest will be tax-deductible, thereby freeing up even more money to pay off your debt.

However, taking out a home equity loan or second mortgage can put your home at risk.

Before you even begin to explore this option seriously, ask yourself these questions - and answer them honestly.

• Have I controlled my spending so that I am now living within my income - spending less than my paycheck each month?
• Have I developed good money management habits and can I be certain that, when my current financial crisis is over, I will continue to save and spend wisely?

Only if you can honestly answer "yes" to these questions should you begin exploring the possibility of tapping into your home equity to consolidate your debt. If you cannot answer "yes" to these questions, it is very likely that once you have paid off your current debt, you will revert to the same bad habits that got you into trouble in the first place. Eventually, your mounting debt load will threaten your ability to pay your home mortgage expenses each month that will now be higher than before because of the added second mortgage or home equity payment.

If you do not handle a second mortgage or home equity loan responsibly, you could lose your home.

If you decide to tap into your home equity, be sure you are working with a reputable lender, as there are many unscrupulous home equity and second mortgage specialists operating in the marketplace. If you plan to remain in your home for years and already have a low interest rate locked in for 30 years, be wary of a promise of lower payments by converting to an adjustable rate mortgage that may mean lower short-term payments but could mean significantly higher payments in a few years if interest rates go up.

Also be wary of prepayment penalties on loans, and loans that have balloon payments, unless you understand them well and are fully comfortable with following these terms. Check with the Better Business Bureau before entering into any agreement that could cost you your home.

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