Top 7 Tips for Getting Out of Debt

1. Top 7 Tips For Getting Out of Debt

2. Debt Crisis Total consumer debt – that includes mortgages, car loans, credit cards, etc. – stands at about $11.4 trillion. The Great Recession forced many Americans to go deeper in debt to save their homes, keep their cars, and put their children through school. Although the economy is technically in recovery, few but the wealthiest are seeing any upside to their financial situation. Good debt management practices can help many consumers pay down debt and get their head above water. By making a few prudent moves, consumers can reduce their debt load, find more flexibility in their monthly budgets, and improve their credit scores.

3. Tip #1 Pay More Than The Minimum The more you kick into your monthly debt payments, the less interest you will pay, and the quicker you will discharge the debt. Start inching up how much you pay on your debt each month by eliminating unnecessary expenses and applying them to your financial obligations.

4. Tip #2 Consolidate Debts If you have a low interest credit card with enough available credit to take on the amount you have on a higher interest card, consider transferring the balance. Also inquire into consolidating student loans or consolidating high interest debt into one lower interest loan from a bank or a credit union.

5. Tip #3 Tap Your Home Equity Taking out a home equity loan may make your debt more manageable and reduce your interest rate. In many cases, you can reduce an 18 percent interest rate to 7 or 8 percent with a home equity loan. You can also deduct the interest from your income at tax time.

6. Tip #4 Cash Out Your Savings It may sound counter to all good financial advice, but if you can wipe out your debt with your savings, it may be the right long-term move. If your debt continues to accumulate interest, it’s going to cost you a lot. If you’re young and you can make a substantial dent or pay the whole debt off, cashing out and rebuilding later may be the smart move.

7. Tip #5 Borrow From Your 401K The federal government will allow you to borrow up to half of your 401K retirement savings or $50,000. The upside is that when you repay the loan, you’ll be repaying yourself. You even get to keep the interest. The downside: the loan must be repaid in five years to avoid penalties and you’ll be taxed on the interest later in life.

8. Tip #6 Borrow Against Your Life Insurance If your life insurance policy has cash value, you can borrow against that to repay your debt. The interest rates are low and you can take your time repaying the loan. The downside is that if you die before repaying the loan, the balance is subtracted from the payout to your heirs.

9. Tip #7 Bankruptcy This should be a last resort, as it will impact your credit score and may also impact your job prospects, but for consumers with insurmountable debt, bankruptcy may be the answer. Under a Chapter 7 bankruptcy, all your debts will be cleared. Under a Chapter 13, you’ll have to repay some of them over three to five years before the rest are cleared.

10. About Ilan Toledano Ilan Toledano is a respected engineer, having worked for the Israeli aerospace industry. You can learn more about him at www.ilantoledano.com