Debt-Free Living:

How to Get Out and Stay Out of Debt!

Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any

legal action. The Meade County Public Library and it’s employees are not responsible for any losses, damages or claims that may result from your financial or legal decisions.

Snowballing Debt

Your financial future is up to you! Habits Changing lifestyle Learning to make decisions with

long-term goals in mind Momentum

Types of Debt

Secured Debts: those backed by an asset that can be repossessed. Examples: house, cars

Unsecured Debts: not backed by assets. Examples: credit card debt

“OK” Debt: has an interest rate well under 10%, preferably with some tax advantages. Examples: home mortgages, student loans Automobile loans are on the border: they often satisfy

the low-rate piece, but automobiles almost never appreciate in value.

“Bad” Debt is everything else, from your credit card to the 35% loan from a cash advance.

Limit debt payments including car payments and credit cards to no more than 10 to 15 percent of income

Step 1:Confront the Problem

Chart Your Debt How much debt do you have? What about

your spouse? Need to know how much debt you're carrying

and at what interest rates. Pull out all your bills and print out the chart to

see how much debt you really have.

Step 1: Get Your Credit Score Get Your Credit Score

You can get one free report each year from each of the three credit bureaus—so three total. The smart thing to do is to get one every four months, that way you can make sure (for free) that you haven't been a victim of ID theft.

To get a free report, go to the website set up by the Federal Trade Commission, www.annualcreditreport.com.

Print out the form, fill it out and mail it to:Annual Credit Report Request ServiceP.O. Box 105281Atlanta, GA 30348-5281Or call toll-free: 877-322-8228.

If you can't get a free report, buy one from one of the three credit-reporting agencies:

Equifax: 888-766-0008 or www.equifax.com Experian: 888-397-3742 or www.experian.com TransUnion: 800-680-7289 or www.transunion.com

Step 2: Track Your Spending

Reduce Unnecessary Expenses Every day, you may be needlessly spending

money on little things that you could be using to pay down your debt. If you save $10 a day for a year, you could put

$3600 towards your debt! Examples: coffee, cigarettes, bottled water or

fast food

Step 2: Ways to Reduce Spending

Brown bag 10 lunches per month. Have movies and popcorn at home instead of

going out. Use coupons for groceries and buy store

brands. Make pizza at home instead of ordering out. Buy in bulk and freeze dinner entrees. Give handmade cards and gifts. Shop at consignment, thrift and discount

stores.

Step 3: Escape Credit Card Debt Pay more than the minimum payments Lower your interest rates Not sure what to say?

"I have [name of card] with you and my interest rate is [X] percent. I received another offer in the mail from [other bank's name] for [X] percent, but before I take it, I want to see if you can lower my interest rate instead."

If the representative says they're not authorized to do that, you say:

"Look, you and I both know that if I transfer my balance today, next week your bank is going to send me an offer to come back at an even lower rate. Why don't you just save the bank the cost of that effort by giving me several points today?"

If the rep says it's not possible because your credit card is at a fixed interest rate, you say:

"Actually, that doesn't have anything to do with whether or not you have the ability to lower my interest rate. A fixed interest rate only means that my rate doesn't vary with fluctuations in the prime rate. In fact, the bank can raise it on my account at any time by just giving me 15 days written notice. And the bank can, if it chooses, lower the rate today."

If the rep still says they're not authorized to do that, you say:

"I'd like to speak to your supervisor."

Then speak to a supervisor and follow the above script again.

Step 3: Know Your Credit Card Look at your statement to find the interest rate Pay on time

Late fees may range from $15-$39, and some companies will up your interest rate on top of the fee

Call the company and see what options you have Read the fine print

Do you have a teaser offer that expires after a certain time period? Will you be charged a transfer fee if you try to reallocate your debt?

Annual Fees Can be as high as $2500 a year If you are in good standing with the company, you may be

able to call and get these eliminated Usually cards with frequent flyer miles or rebates won’t

waive the fee

Step 3: Which Card First?

Pay off the total balance every month if possible Enter each credit card purchase into your

checkbook as if you had written a check. When the bill comes in, you have already accounted for the payment required in your checkbook and can then write the check without wondering where the cash will come from.

Reduce the amount of debt you’re carrying as fast as possible

The fewer cards you have, the better! Create momentum by paying off the smallest

debts first Be patient and consistent

Step 3: “Dead On Last Payment” Make a list of the current outstanding balances on each of your

credit card accounts Divide each balance by the minimum payment that particular card

company wants from you. The result is that account's DOLP™ number Say your outstanding VISA balance is $500 and the minimum

payment due is $50. Dividing the total debt ($500) by the minimum payment ($50) gives you a DOLP™ number of 10

Once you have figured out the DOLP™ number for each account, rank them in reverse order, putting the account with the lowest number first

You now know the most efficient order in which you should pay off your various credit card balances. Take half of the money you are saving by reducing unnecessary expenses apply it to the card with the lowest DOLP™ number. For each of your other cards, you make only the minimum payment.

Cut up the card or keep it open? Make sure you have no annual fees on any cards you have left Continue until you've DOLPed your way to being debt-free!

Step 4: Stop Spending

Don't carry credit cards in your purse (only debit/ATM)

Write checks, pay cash Turn down credit line increases Create specific funds for special occasions, like

holiday presents, vacations, anniversaries, etc. Tell friends what you're trying to do to rally support Don't run up bills you can't pay in full at the end of the

month Pay credit card bills on time to avoid late fees Make no more than one ATM visit a week Don't be seduced by credit card offers such as airline

miles

Step 5: Create a Spending Plan

If you don’t manage your money, your money will manage you Take a look at your calendar and note any special events that

may cost money Complete your spending plan by making the best estimate of

your upcoming bills and other needs for the month Don't forget to include an amount for your savings cushion so

you have a resource available for emergencies Calculate your cash flow. What is the amount left over after

you subtract the total expenses from the net income you will have for the month?

Include the "Murphy's law factor," which means anything that can go wrong will. Add an extra 10 percent to the spending plan once it's done

Apply remaining cash to your debts

Step 6: Tough Decisions

If you still can’t make progress paying down your debts after the first 5 steps, it may be time to reevaluate your situation

Is your house an asset or liability? Go carless Move the children to public school Sell assets you can do without Increase your income with a second job or

ask for a raise

Step 7: Prioritize Debts

Your secured debts need to be at the top of your priority list.

Debts for which your wages can be garnished. These include your student loans and any child support payments.

Any services you need to continue using. If you are not paying your doctor bills, that particular doctor is not going to be willing to see you again, right? That's a problem if you're relying on that doctor for care for a chronic condition.

Unsecured debts, like credit cards. Once you've satisfied all of these urgent debts, you can begin to really focus on making headway with your credit cards.

Family and friends. Hopefully your family and friends are the most understanding of your creditors. Confirm your commitment to repay the debts, but make them a lower priority and choose accounts that can improve your credit score first.

Step 7: Prioritize Debts Necessities first: These are the things that you absolutely need to live.

Examples: house, utilities, child support

Uncle Sam second: If you have the money to pay your taxes immediately, the IRS will generally work with you to come up with a schedule of payments. Be sure to file your taxes when they are due. Not filing can result in penalties and interest of up to 25 percent of what you owe.

Most student loans are backed by the government. That means that, like back taxes, the government is allowed to come after these loans in a way that other creditors aren't. If you're delinquent in paying your back taxes or student loans, the government can seize your tax refunds and garnish your wages and, in some cases, your Social Security benefits.

Everything else third: All of your other debts—bank-card debt, department store debts, payments for furniture and appliances—are back-burner debts. That doesn't mean you shouldn't pay them. You borrowed the money; of course, you should try to pay them. But if you're in a situation where you know that not every creditor is going to get paid, these are the ones you put on hold.

Crisis Resources The Rainy Day Fund Your Roth IRA

Your contribution can be withdrawn at any time or age with no penalty or tax bill. However, you can't touch the earnings before you're 59 without incurring the 10 percent penalty and income tax.

A 60 day loan from a traditional IRA In a short-term jam, you can withdraw funds from your IRA

for up to 60 days without penalty. However, you must replenish the account during that period. If you don't, you'll be hit with income tax on the money you took out as well as the 10 percent penalty if you're not 59 or older.

A low-rate credit card Home equity line of credit

Take out a line of credit before you need it, but don’t touch the money unless it’s a last resort. You aren’t charged interest until you start using the money

When to Seek Professional Help Be honest with yourself Credit counselors can provide general budgeting and money

management advice and negotiate with your creditors. The counselor may encourage you to enter into a debt

repayment plan requiring you to pay a set amount to the agency each month, which they then pay to your creditors.

Find out which credit counseling agencies near you are members of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA)

You can find a list of agencies near you in your local phone book yellow pages or online

Now you're ready to call the consumer credit counseling agencies and ask them a few questions such as:

Call one or two agencies and ask questions about their services, fees, training and accreditation of counselors, and oversight of the agency.

Step 8: Understand Your Spending

Why do you shop? Entertainment

How to resist: Put items on hold, slow down the buying process “Retail Therapy”

How to resist: Ask yourself, “Why am I here? How do I feel? Do I need this? What if I wait? How will I pay for it? Where will I put it?”

Habit How to resist: Make a change in your behavior patterns

Impulse How to resist: Don’t shop when tired, upset, or when you know

you aren’t at your best Compulsive Behavior

How to resist: Seek help to work on tolerating distress in other areas of life

Step 8: Start Saving

Pay yourself first! Start an emergency fund equivalent to 3-6

months salary Earn interest on your emergency funds with a

money market account Start investing your additional savings in a

portfolio of stocks and mutual funds

Teens and Money

1 in 5 bankruptcy filings last year were by college students

Encourage summer jobs If you decide your teen needs a credit card, open an

account, let your teen use it, then help them understand and pay the bill

Set boundaries and standards for them to be able to use credit cards

Use debit cards as an alternative Teach your child about investing, diversification and

equity Help your child to understand "wants" versus "needs” Be a good role model by using your money wisely

References

Oprah’s Debt Diet Expect the Unexpected by Suze Orman DaveRamsey.com Consumer Credit Counseling Service