o t tips t eigh
inate elim your
I
ebt
BY SHERYL NANCE-NASH
n 2006, Dorothy L. Thomas will finish paying off $15,000 in credit card debt she has accumulated over several years.Thomas’s illness, multiple sclerosis, forced her to retire early. But she says the loss of her job and subsequent drop in income were only partly to blame for her debt problem. Equally significant was her costly habit of charging every item she bought to her credit cards. The first step Thomas took to CON S I D E R WH ETH E R YOU R EALLY N E E D THAT ITE M eliminate debt was to contact a local To rein in spending, consumers should consider WHAT EVERY credit agency, the Consumer Credit whether they truly need an item before purchasCONSUMER Counseling Service (CCCS) of ing it. Melinda Wright, director of education and SHOULD KNOW Northwest Indiana Inc. CCCS then community relations for Momentive Consumer consolidated her debt into monthly Credit Counseling Service in Indianapolis, cautions consumers payments of $285. Next,Thomas elimagainst taking on more than they can handle when buying a big inated all but one credit card, which she ticket item such as a car or a home.“If you have to spread a car paypays in full each month. And last but not least, ment over five to seven years then you probably can’t afford it,” says Wright. she toned down her passion for buying new “Choose a less expensive car.” clothes and eating out. “Now I buy only what is necessary,” she says. PLAN AH EAD F OR YOU R E X PE N S E S Americans have a healthy appetite for spendBy anticipating large expenses such as a new car, you can save for them and ing. Since 1990, the average amount of credit not add to your debt load. If you can’t save all the money, at least you’ll have card debt among households in the United some and won’t have to borrow as much. States has more than tripled to $9,205, accordPlan for large periodic bills, including annual life insurance premiums or ing to Cardweb.com, which tracks payment quarterly tuition bills. Lawrence J. Rybka, a financial planner in Akron, Ohio sugcard information. According to financial gests setting aside money each month to cover these anticipated bills.You should advisers, monitoring your spending habits, add the total amount of your expenses for the year, divide it by 12 and have the budgeting and setting financial goals are the divided amount directly deposited into an interest-bearing account each month so most important factors that will lead you out that the money is there when you need it, Rybka advises. of debt and enable you to remain debt-free. Preparing for your expenses is preferable to simply reacting to them and being caught off guard.“I took for granted that I would always be able to work, so I U N D E R STAN D TH E TR U E COST OF didn’t think much about saving for a rainy day,” says Dorothy Thomas. “I got caught. I had to retire early whether I was financially prepared or not.” B OR R OWI N G One mistake consumers make is Saving money is a good habit to develop. Married couples with two incomes to treat a loan as if it were can try living on one and using the other to save and to pay down debt. Single peoincome. It is not. If you have a ple can live frugally too. If they put $10 a day into an interest-bearing account, they net income of $3,000 a month will be surprised at how quickly it accumulates. Advisers suggest keeping three to and debt payments of $500 a month, six months’ worth of savings on hand in case of an emergency. then 17% of your salary is not available to you. Think of your payment S MALL E X PE N S E S AD D U P as a 17% pay cut. Remember, debt When people track their spending, they are often surprised at how costly holhampers your ability to save for iday spending, lunches out and even cups of coffee are. Small expenses can your financial goals, including overwhelm your budget each month. retirement or your child’s educaBy being aware of what you spend, you can limit these expenses and your tion. It also creates stress that can potential for debt. Decide which items you can do without. If you can’t pay for an item affect your health. within 25 days, then don’t buy it.
• continued
PHOTOGRAPH BY IMAGE100 PHOTOGRAPHY (BACKGROUND); CORBIS (SCISSORS)
7
|
TODAY ’ S FOCUS
WINTER
2005 |
on page 10
10
|
TODAY ’ S FOCUS
The lender pays all the bills, and you pay the bank a fixed amount for a set period of time. Since home equity interest rates are fairly low, • continued from page 7 you can end up with a lower monthly payment Many people find that using cash or a debit card to pay for these expenses and lower fees than on the original debt. Also, you enables them to spend only what they have on hand or in the bank. may feel that your finances are easier to control because you’re paying one bill instead of several. OR GAN I Z E YOU R D E BT R E PAYM E NTS Using your home’s equity to consolidate debt is If you feel overwhelmed by your debt, seek help from a credit successful only if you change your spending habits, counselor. Ask family and friends for references, or look for otherwise you’ll be back in trouble again, only with nonprofit groups affiliated with the National Foundation for less equity in your home, says Deborah L. Thomas, a Credit Counseling and the Association of Independent financial planner in Portland, Oregon. Consumer Credit Counseling Agencies. You can also check with your state banking division that licenses TAP I NTO YOU R LI FE I N S U RAN CE OR 401( K ) credit agencies. Be clear about fees, which run from $25 to several Borrowing against or taking money out of a hundred dollars. Check with the Better Business Bureau for any cash value life insurance policy is another option complaints against the credit-counseling agency for paying off your debt. The downside is that you’re considering. while you won’t have to replace the money, you If you prefer to go it alone, then make a list will have less to leave your heirs. of what you owe and pay off the debt with Many financial experts have mixed opinthe highest interest rate first, since it is ions when it comes to using your the most expensive. As you knock off retirement plan, however. Those one debt, take what you were who are not in favor of this paying and use that money to option say your tax-free eliminate your next debt, until appreciation will be lost you’re debt-free. forever if you tap into Take advantage of any extra money your 401(k). Also, if you that comes your way. Use your tax refund or year-end leave your job, you may have to bonus to pay off your debt. Or take on a second job and use pay back the money immediately or within a this income. short period of time, or suffer stiff penalties if you don’t. The advantage of using your 401(k), however, is that using your own money to pay down your high-interest debt is better CON S OLI DATE YOU R D E BT than borrowing from another lender.Then as soon as you’re debt For homeowners, debt consolidation in the form of a free, you can start paying yourself back. home equity loan or line of credit offers the ability to pay off several debts at once by combining them into one loan and using your home as collateral. TH I N K TWI CE B E F OR E D E CLAR I N G BAN K R U PTCY Seeking bankruptcy protection should be a consumer’s last resort, say credit advisers. Not only does bankruptcy remain on your record for seven years and preclude you from getting the most favorable interest rates, it could keep you from AVOID DEBT WITH THE getting a job, renting an apartment or opening a checking account. KEYMILES ® DEBIT CARD Is there life after debt? You bet, says Peggy Ruhlin, a financial planner in Columbus, Ohio. “You can’t imagine how great it is to ® Spend only what you have by using the KeyMiles Debit be debt free,” she says. “Not to be living paycheck to paycheck will card. You’ll be rewarded each time you use it by earning Continental Airlines OnePass® miles with every purchase. change your life.”
Calculate Your Debt Ratio
Add up the following monthly expenses. Ideally, your total debt ratio should be about .36 or 36% of your income. If your debt ratio is .55 or greater, you’ll need to review your finances and eliminate as much debt as possible.
• Car payments • Minimum payments on all credit cards • Minimum payments on all student loans • Child support or alimony you pay • Minimum payment on any other debt that appears on your credit report • Housing expenses Total expenses: Divide this by your total income: This is your debt-to-income ratio:
$ $ $ $ $ $ $ $
Warning Signs of a Credit Problem
You have borrowed up to your credit-card limit, and you’re sending in only the minimum payment. Failing to settle your bill in full is leading to large finance charges. An increasing amount of your income goes to paying debts. Only 10% – 15% of your salary should be spent on credit debt. You’re using one credit card to pay off another. Don’t fool yourself into thinking you are squaring away your debts. All you’re doing is borrowing more money. You decide that your next trip to the doctor will have to wait, and you are jeopardizing your health because of money. You are paying bills with money that was intended for other things. You are borrowing money or using it to pay for items that you previously bought with cash. You are using savings to pay current bills.
2005
WINTER
WINTER
2005 |
Key Can Help
Key Relationship Managers are on staff to help you come up with a plan to consolidate your bills into one affordable monthly payment. Key will provide you with a payment to fit your budget and still allow you to make substantial reductions in your outstanding balances. For more information, call 1.888.KEY.1234 or visit Key.com.
|
11
|
TODAY ’ S FOCUS
PHOTOGRAPH BY COMSTOCK IMAGES