You say you’re up to your eyeballs in debt? You owe $10,000 or even more? And you don’t have the slightest clue as to how you’re ever going to repay it? Well, congratulations. You’re a winner. You’re number one in the hearts and minds of your lenders, especially your credit card providers. Why is that? It’s because they can just keep piling interest on top of interest, which is how they make their money. If you don’t believe us here’s an example of what happens when interest compounds, which is the piling interest on top of interest.
Let’s say you have a credit card with a $10,000 balance and an interest rate of 14% that’s compounded monthly. This translates into a periodic interest rate of about 1.1667%. This means $116.67 in finance charges the first month. If you were to make a $200 minimum payment, only $83.33 of it would actually be applied to your principal. So, in month two your balance would be $9916.67. This would result in $115.69 in interest charges. Your minimum payment would then be $198.33 and only $82.64 of it would go towards reducing your balance. If you were to continue to do this, it would take you more than 36 years to pay off that $10,000 – assuming you charged nothing more to that card and made only the minimum payments.
Remain your lenders’ darling
If you have no problem with the idea of remaining in debt for the rest of your life, this isn’t very difficult. First, don’t pay any attention to where you stand financially. I mean who wants to spend all that time comparing your monthly spending with your monthly income. If you are $10,000 or more in debt it’s pretty clear that you’re spending more than you earn. You’re financing a lifestyle you can’t really afford. But don’t worry about it. Now, a person that wanted to get out of debt would act differently. They would order copies of their credit reports from the three credit-reporting agencies – Equifax, Experian and TransUnion. They would learn their FICA score so they would know whether or not they needed to work on improving it. They would develop a budget to get out of debt. But then that’s not you.
Pay no attention if you owe too much
People who are committed to the idea of becoming debt free would take the right steps when they have too much debt. For example, they might try to cut deals with their creditors. They could ask them to reduce their monthly payments on a temporary or permanent basis, reduce the interest rate on their debts or maybe allow them to make interest-only payments for a limited period of time. They would create a list of all of their assets and their debts with the relevant information regarding each one such as its interest rate, minimum monthly payment, payment due date and the last time they were able to make a payment so they would have this information on hand when they contacted their creditors. These people might borrow money to pay off their debts. This is called a debt consolidation loan and it can be a smart debt-management strategy. When you consolidate your debts you almost always end up with a lower monthly payment than the sum of the payments you’re currently making and probably a lower interest rate. But you wouldn’t want to swap those 19% or 20% interest rates you’re currently paying for a loan with a single monthly payment and a 12% or lower interest rate, would you?
Other people might choose to go to a credit-counseling agency. They would certainly find one that’s reputable, that’s a nonprofit and that charges little or nothing for their services. The debt counselors at these agencies are often able to negotiate better interest rates and even lower monthly payments and provide what’s called a debt management plan (DMP). People who sign up for one of these plans and stay with it are usually able to become debt free in five years or fewer. But then you wouldn’t want to do that, would you?
Ignore your most important debts
Another way to make sure you’ll remain in debt for the rest of your life is to ignore your most important debts. These are often called “high stake” debts and they deserve extra attention because if you fall behind in them it can have very serious consequences. Depending on the type of high-stakes debt, you could risk being evicted, lose a valuable asset, have your income tax refund seized or maybe even go to jail. What are these high-stakes debts? First and foremost is your mortgage – assuming you have one. Second, is your auto loan followed by your rent or utility bills then court-ordered child support, spousal support, medical bills, federal income taxes and federal student loans. Smart people will forestall this by talking with an attorney as soon as they are worried about their ability to keep up with their payments on one of these high state debts. This is because an attorney could help them figure out a way to avoid defaulting. In the event that you’re being threatened by a foreclosure, are in arrears, subject to repossession, a lawsuit or some other serious legal action, forget about it. After all, you’re not one of those smart people that want to get out of debt.
Avoid debt collectors
Boy! Those debt collectors can be really nasty. If you talk with them, they’ll probably try to pressure you into paying more than you want to. They may call you constantly, threaten you and use other abusive tactics. Some debt collectors have been known to call friends and relatives about the debt. Others have masqueraded as lawyers or promise to have peoples’ garnished. As you may have learned by now these people know no bounds and won’t take no for an answer. Most are paid on commission. This means if they don’t collect from you, they don’t earn anything. Plus, they may be on some sort of a quota basis meaning that if they fail to collect from you they can actually lose their jobs. But you don’t really want to have to deal with all this, do you? So your best strategy would be to just ignore or block those calls. You could try having your phone number changed but trust us when we say that the collector will find you again in probably two weeks or fewer. What a smart person would do is ask the debt collector for written proof that he or she owes the debt that he’s trying to collect. The collector is obligated by law to comply with this request. If that smart person thinks that he or she doesn’t really owe the debt or disagrees with the amount, they would dispute it in writing. That smart guy or gal would also write a letter to the debt collector informing him to not contact them again about that particular debt. When the collector gets that letter, he is barred from communicating with that person again except to say he will not be contacting him or her again or to inform them of some specific action he’s about to take in order to collect the money. Finally, the smart person would attempt to negotiate the amount of the debt. Debt collectors buy debts for pennies on the dollar. If a smart person were to default on a credit card with a balance of $1000 he or she could probably negotiate the debt down to $500 or less and get rid of that debt collector permanently.
So there it is. Don’t worry about where you stand financially, don’t give any thought to what to do when you owe too much, forget about those high state debts and ignore those debt collectors. Do all this and you’ll never get out of debt.