University of Wisconsin - Extension

NEILLSVILLE, Wis.—Wisconsin consumers join the nation in rising levels of personal debt. Personal bankruptcies and mortgage foreclosures are at record highs, and many families now pay at least one bill late every month.

“It’s critical to get excessive debt under control as quickly as possible,” says Gayle Rose Martinez, University of Wisconsin-Extension Family Living educator for Clark County. “It not only sidetracks other personal financial goals, but it can damage your credit rating and even lead to financial disaster.”

Martinez offers these suggestions to help you pay off loans and get back on track:

1. Identify the debt you owe. List all your debt, including: creditor’s name, total amount owed, the interest rate and amount you pay each month.

2. Stop creating debt. Develop a strategy to decrease impulse spending. Don’t carry your credit cards with you. Make a plan before a purchase. List items you intend to buy, identify how much you will spend, and if you’re going to charge the items have a plan to repay this debt. Discuss your intent to use your credit card with another person to help you brainstorm other alternatives. Give yourself a 24-hour “cooling off” period before making a purchase.

3. Understand why you are in debt. You may be in debt because of unexpected loss of income. In that case, you need to decrease spending and increase income. Most people feel the only way to generate new income is by working overtime or a second job. But this may add stress to an already busy life. Consider charging for something you do now for free, like repairing cars, babysitting, or yard work. However, if your debt is the result of spending behaviors such as impulse buying, credit card use, lack of a spending plan, or gambling, then you will need to shift this pattern in order to become debt-free. If unable to change, seek out a counselor to help you.

4. Develop a monthly spending plan. Record your spending for a month. Review the record for ways to trim spending and free up cash to put toward decreasing your debt. Create savings strategies for non-monthly expenses. For example, car insurance or water bills may be paid quarterly. Set 1/2 to 1/3 of the quarterly bill aside each month, depending on when you get paid. A key to success is having an emergency fund for unexpected expenses.

5. Identify how much money you have each month for debt repayment. Determine the amount to put towards debt repayment by subtracting the amount needed for total monthly expenses (not including debt) from your total net monthly income (after payroll deductions). If you have additional monthly saving goals, subtract this amount from the total net monthly income. The remaining amount is what you have available for debt repayment.

Total Monthly Income $1200.00 – Total monthly expenses $1000.00 = $200 (for monthly debt repayment)

6. Apply one or more of the following Debt Repayment Strategies:

-- Strategy #1 - The power of negotiation. Find an alternate creditor with a lower rate, not just six-month offers but a permanent rate for the life of the loan or credit card. Tell your creditor that you may transfer your balance to another creditor and ask if they would decrease your interest rate to keep you as a customer? It won’t hurt to make the call, even if they say no.

-- Strategy #2 - Maintain the same level of payment even when the total amount due decreases. For example, if your payment is $80 a month, keep paying $80 a month even when minimum payments decrease to $65 a month. The tool Power Pay utilizes this strategy and is accessible on the web at http://extension.usu.edu/cooperative/powerpay//.

-- Strategy #3 - Consistently pay a little extra each month. This can make a big impact on your debt over time. Mortgage loans work this way (see www.choosetosave.org for online calculators). Power Pay also shows the impact of adding monthly or annual amounts.

-- Strategy #4 - Freeze your credit cards. Transfer the balance from higher-interest-rate accounts to a single, lower-rate card. Cancel cards you pay off and don't charge new items on the card you keep.

7. Talk to your creditors. If you can’t make minimum payments on your loans, talk to your creditors, including the IRS. They may be willing to temporarily suspend payments, let you pay in smaller installments or renegotiate loan terms. They would rather receive some money than nothing at all.

Remember that paying off debt is difficult. It takes time, courage and discipline. Give yourself credit for any progress that you make. If after employing these strategies you still need assistance, seek the help of a credit counselor.