(WLTX) - News19 is On Your Side helping you to get out of debt.
Do you have a lot of debt and are concerned that you'll never pay it off? You're not alone. The average credit card debt per household is over $14,000 with an average annual percentage rate of over 13.4%, so it is not surprising that many Americans are overwhelmed by their debt burden.
Luckily, financial planner Laura Scharr-Bykowsky stopped by News19 at 5:00 a.m. Monday with some great tips on paying off debt. Here are some of her pointers.
- There is good debt and bad debt. A home mortgage that you can deduct and a student loan for an investment in your education are considered good debt as long as they are not too excessive. Credit card and auto loans are in the bad debt category. We can't deduct the interest and interest rates are high.
- The first step to debt reduction is to take a hard look at your budget to see if you can free up some money to put towards your payments. A general rule of thumb is that if you can pay minimum payments +20% more you will likely be able to pay off your "bad debt" without taking on new debt. If you are not able to free up money from your budget to pay these back or it will take you five years or more even with an increase in payments, than you should probably think about seeing a bankruptcy attorney and or getting credit counseling.
- A good resource for you to check out is www.nfcc.org national foundation for credit counseling
- The best way to reduce debt is called a debt snowball. A debt snowball is when you apply extra money that you free up from your budget to your loans one at a time to reduce the term of the loan and save money on interest.
In general, you start with the loan with the highest interest rate and continue until you are left with the loan with the lowest interest rate.
Here are the steps:
• First determine how much you can save each month to apply to pay off your debt payments
• Continue to make the minimum payments to all of your loans
• Apply your extra amount saved to the loan with the highest interest rate
• Continue until that loan has been paid off
• Apply the extra payment to the loan with next highest interest rate
• Continue until your debt is paid off.
- For a great tool to help you see how quickly you can get out of debt go to www.whatsthecost.com, If you can't pay these off within three to five years you will likely need to seek credit counseling or talk to a bankruptcy attorney.
- Many employees who are pressed for cash take out loans from their retirement plans at work. Is this a good idea?
Nearly 28% of active participants had loans out at the end of 2010
Here is why that is not such a good idea:
• Your contributions stop until you repay.
• You pay back the loan with after tax dollars.
• The amount is fully taxed with an additional 10% penalty if not paid back.
• Retirement plans are protected from creditors
• You derail your retirement plans.