Have the holidays left you juggling your finances, scrambling to get out of debt or back on budget? Well, fear not, for the combination of the sub-prime fallout and bank competition has been bad news for bank investors but may be good news for you. Financial institutions are currently offering attractive high-yield savings accounts and low interest rate credit cards to attract more customers and accumulate more of their money. This creates a golden opportunity to reduce the cost of your debt right now, and buys you time to pay down your debt. Now could be a good time to start personal expenses tracking:
- Transfer any Balances to a Lower Interest Credit Card. Market conditions mean that there are a slew of 0% interest rate credit cards available today. Many cards offer this “teaser” rate for up to 12 months, with no annual fee to worry about. While this does not reduce your overall debt, it does save you from accruing costly interest for the next year, buying you time to pay down your debt. It also has the advantage of consolidating your debt, giving you a single statement to manage. Here are two options to consider:
- Negotiate a Lower Interest Rate with your Current Lender(s). Ask for a lower interest rate or the best “new customer” deal from your current card providers. Competition for your debt is fierce, and the cost to the bank of losing you is usually more than the expense of reducing your interest rate. For more guidance on the best negotiation tactics, read Three Ways to Ask for More Money.
- Consider (carefully) leveraging your Home Equity. If you have equity in your home, you might consider using a home equity loan to pay off your credit cards. This is not for everyone. But given the typically lower interest rates offered on these loans, it might be a smart option to reduce your interest costs. Tread carefully here, however, and consult a pro before taking this step.
Once you’ve reduced the cost of your debt to a minimum level, you have to focus on reducing that debt burden. Mint suggests a four step approach:
- Decide which Debt to Pay Down First. In the ideal world, you ought to pay down the debt with the highest interest rate (a nod to compound interest) first, regardless of balance. But the Snowball Method, popularized by Dave Ramsey, says the opposite and encourages you to payoff lower balances first. Psychologically, this approach makes it easier for you to get some quick wins and possibly gain the motivation to continue paying off the rest of your debt. If you’re feeling overwhelmed, the Snowball Method might be right for you.
- Set up Automatic Payments. This is a great way to ensure that you consistently pay down debt first, with the remaining money representing your new budget for your day-to-day expenses.
- Yes, Tighten your Belt. It may sound simple, but until you’re out of debt you should be reducing or eliminating dinners out, travel or even that new gadget you’ve been eyeing. Think of the interest you’re paying now as a recurring expense that increases the overall cost of everything you’re buying. You’ll only be making it worse by continuing to spend more than you earn.
- Get Better Organized in 2008. Understanding where your money is actually going is perhaps the most important first step to reducing your debt, preceding all the others. We designed Mint.com with the needs of the person striving to reduce or eliminate debt in mind. That’s why we made it easy for you to:
- See every transaction across your multiple accounts in one central place
- Set up budgets for the couple of categories you’ll want to watch most closely to get back on track
- And set up email or text alerts to let you know if your spending is exceeding those targets
- Find ways to save on bank interest and fees, as well as typical monthly bills.
- Use personal money management software like Mint to help track your spending.
And lastly: stay calm and keep your sense of humor. You are not alone in feeling under water. If you need any reassurance, please check out our Holiday Spending Hangover Contest (in preview now until its 1/31 launch). You’ll probably find that the stories submitted there sound familiar to you. Submit your own story and, who knows, you might win $5,000 yourself! That could represent a big step out of debt in 2008.
Is there a debt reduction idea we’ve missed? Please comment to let us know.