Better Business Bureau of Minnesota & North Dakota offers consumers facing mortgage and credit crunch issues practical advice on managing debt. Nearly 75 percent of Americans envision themselves debt-free, excluding mortgages, at some point in their lives according to a recent survey by LendingTree, but only half said they have a plan for how to get there. If your New Year's Resolutions include getting out of debt, Better Business Bureau has advice to help you achieve that goal.
Photo: Steve Woods
The Federal Reserve reports that almost 75 percent of Americans have at least one credit card, 58 percent of which are carrying a balance. The median amount owed is $2,200 while 8.3 percent of the population is in debt for more than $9,000. Altogether, consumer credit card debt in the U.S. is at approximately $915 billion.
"The consumer credit crunch, when coupled with the fallout from the mortgage crisis, is impacting businesses small and large across the broader economy," explained Bert Hubbell, president of BBB of Minnesota and North Dakota. "Consumers are increasingly being forced into the win/lose choice of prioritizing among their bills, and having to create "delinquency budgets" to determine which bills get paid on time and which don't."
"Government, lenders and businesses can and should play a role in addressing the current culture of debt by acting on the lessons learned from the home mortgage sector," added Hubbell. "But consumers must take responsibility for their actions and hold themselves accountable for spending behaviors that leave them trying to choose between paying their mortgage or credit card, phone, healthcare, or utility bills."
If you're looking for guidance on becoming debt-free this year, BBB offers the following steps to put you in the black:
Step 1. Set up a household budget to guide your spending patterns. Setting up a budget seems mundane, but as the old adage says, "failing to plan is planning to fail." Look at the bottom-line totals for your monthly income and expenses. If your expenses exceed your income, you'll have to either boost your income and/or cut expenses in order bring the totals in line. Not all expenses are necessities and cutting discretionary spending is the first place to start – make reductions in items such as restaurants, entertainment and vacation/travel. For additional information on constructing a household budget, see BBBTips™ on How to Develop a Working Budget at www.bbb.org.
Step 2. Don't go any deeper in debt! This point seems self-evident, but it requires consumers to use restraint and act responsibly. Put your credit cards away and make a concerted effort to refrain from accumulating any more debt in the coming months. Pay cash or use a debit card. If you must charge something in an emergency, use the card with the lowest interest rate.
Step 3. Use daily money-saving strategies to free up more money. Adopt the mindset that you will save a bit of money each day. The possibilities are endless: forgo the daily coffee; take public transportation; use money-saving coupons; eat more home-cooked meals; seek out lower-priced auto insurance; cancel your cable TV; or switch your cell phone provider. Challenge family members to come up with other ways to save money.
Step 4. Correctly prioritize debt repayments. Not all of your debt obligations carry equal weight. Start with the most expensive revolving types of credit.
- Pay off high-interest rate balances first. Pull out your credit statements and review the interest rates and terms of payment. Which one carries the highest APR? Pay double or triple the minimum monthly payment each month on that credit card until its balance is paid off; then start directing that freed-up money toward the next highest rate balance. In the meantim