Getting out of Debt

How can you tell when you are under financial stress − getting in over your head? If bill collectors are calling, you are in financial trouble. But what if you are simply having difficulty stretching your paycheck to pay monthly bills? Answering yes to any one of the following questions could indicate financial stress:

1. Do you routinely spend more than you earn?
2. Are you forced to make day-to-day purchases on credit?
3. Are you able to make only the minimum payments on monthly credit card debts?
4. If you lost your job, would you have difficulty paying next month's bills?

Three basic steps to get out of financial trouble

1. Fixing the Current Situation
To fix your climbing debt, you have to make more money or cut expenses. Because making more money is not an option for most people, you must reduce your current expenses. Consider these steps:

• Reduce expenses. Eliminate any unnecessary spending, such as eating out and purchasing expensive entertainment. Clip coupons, purchase generic products at the supermarket, and avoid impulse purchases. Above all, stop using credit cards.

• Consolidate debt. A home equity loan, mortgage refinancing, or short-term bank loan can help you pay off a lot of debt at once. You can consolidate all of your short-term debts (credit cards, personal loans, automobile loans) into one loan. The advantage to consolidation is that you have only one loan to repay and the finance charges are specific (except for home equity lines of credit) and will not change. Home equity rates are substantially lower than credit card interest rates, making monthly payments lower.

• Refinance your mortgage. Homeowners can consolidate their short-term debts by refinancing their homes. A lower mortgage rate and a rising value of your house means you can take out cash when you refinance and pay off your bills. The lower mortgage rate also lowers your monthly payments substantially. Refinancing does spread the payment of the short-term debt over a longer period of time, but with a lower rate, it may well be worth it.
The problem with consolidating debt into one loan? You may feel free to start spending more on credit cards. If you are using your home as collateral, be clear on how you are going to change your spending habits. The only way to stay out of debt is to control it.

• Seek information. While most active service members will not qualify for public assistance, in certain situations they may receive unemployment compensation, Medicaid, Social Security, food stamps, and low-income energy assistance. Other sources may be churches or community groups.

2. Fix Your Credit
If you have creditors demanding payments, deal with them realistically. Contact your creditors and let them know you're having difficulty making your payments. If you have had a temporary financial setback, explain it. Try to work out a payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty, but they will want regular payments.

The Fair Debt Collection Practices Law prohibits a debt collector from telling anyone but your attorney how much you owe, harassing or threatening you, using false statements, giving false information about you to anyone, and misrepresenting the legal status of your debts. Under federal debt-collection laws, creditors cannot seize most government assistance and can only garnish a portion of wages to collect debts.

3. Stay Out of Trouble
The most important aspect is to know what financial condition you are in now and how you got that way. Then, as you make changes, you should keep going back to see how things are progressing. One of the most important tools for doing this is creating and following a set monthly budget.

Getting a Handle on Credit Cards
Reestablishing good credit starts by paying off current debt. Close unused credit cards and voluntarily lower your credit line to limit the total debt you can get into. As you pay off certain debts, close the accounts and make sure each company sends you a confirmation.

Ideally, you should carry one or two bank credit cards (according to www.myfico.com, the average household in America has nine credit cards) and no more than three cards. When creditors look at your credit file, they want to see that you can handle more than one credit account at a time. You can do that by using a card and paying off the amount in full each month.

Creditors frown on applicants who have many open credit lines. Keeping cards open that you don't use may lead to denied credit. Rejected credit applications are kept in your file. Too many don't give a good picture of you.

A credit report that shows voluntarily closed accounts looks a lot better to your creditors than those that have been involuntarily closed. Review your credit report to verify that all of your actions are being processed.