MarketWatch: 6 Strategies to Pay Off Debt

Friday, 15 Aug 2014 07:17 AM

By Michelle Smith

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Americans owe around $11.74 trillion in debt, up 5 percent from last year. Many are trying to get out of the red, but they're going about it all wrong, experts tell MarketWatch.

Being mired in debt causes many people to panic and make big mistakes, Kathryn Davis, president and CEO of BALANCE, a subsidiary of the non-profit Consumer Credit Counseling Service of San Francisco, tells MarketWatch.

"When people sense that they're in a financial squeeze, they start putting Band-Aids on the problem," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

Editor’s Note:
New Warning - Stocks on Verge of Major Collapse

These mistakes, such as taking out payday loans or title loans, commonly result in bigger problems. Experts say it can be equally unwise to pull money from retirement accounts or get lured into transferring debt to credit cards with low introductory interests rates but fail to repay it before the real rate kicks in.

Payment rotation is another mistake. To pay one creditor and neglect others will eventually leave all the creditors unhappy.

MarketWatch lists six strategies to pay off debt:

1. Prioritize payoffs based on interest rates.
Many consumers make small payments, or even the minimum payment, on credit cards with the lowest interest rates and prioritize paying off high interest debt first.

"Most people will save paying off the highest interest rate first," though "it's a judgment call on the consumer's part" Lindsay Konsko, consumer credit specialist at NerdWallet.com, tells MarketWatch.

2. Treat your debt plan like a diet plan. Just like a diet plan, a debt repayment plan requires discipline and little treats along the way. In addition, it should target the one area that is most bothersome.

Start with a realistic payment plan, exercise discipline and don't become a problem borrower by missing payments if you're in good standing.

3. Don't miss any payments. A good payment history can be key in successfully negotiating double-digit interest rates to single digits, according to Lynnette Khalfani Cox, author of "Zero Debt: The Ultimate Guide to Financial Freedom."

"A bank would rather get some interest from you than get 0 percent by [you] defaulting," she notes.

4. Refinance debt to get lower interest rates. Kenneth Lin, CEO of CreditKarma.com, says that renegotiating financing terms can be an excellent way to address debt problems.

"Most people understand that you can refinance your mortgage, but they don't understand that you can refinance your auto loan," Lin says. "They only think about financing after they leave the dealer's lot," he tells MarketWatch.

5. Tread carefully around debt management and debt settlement. It's important to know the difference between a "debt management" organization and a "debt settlement" company, says Darryl Dahlheimer, program director at LSS (Lutheran Social Service) Financial Counseling in Minneapolis, Minn. Debt management organizations include non-profit organizations that belong to the National Foundation for Credit Counseling, while debt settlement companies are for-profit companies.

6. Student loan forgiveness for public employees. Certain public service, government and non-profit workers might be eligible for their student loans to be forgiven under the Public Service Loan Forgiveness Program.

According to a recent study from the Urban Institute, 35 percent of Americans have debt in collections, USA Today reports.

The research only includes data from Americans with a credit file, so lower-income consumers are underrepresented and alternative forms of debt such as payday loans aren't included, the researchers explain.

The share of American households with delinquent debt is "pretty disheartening," Josh Bivens, research and policy director at the Economic Policy Institute, tells USA Today.

"This is yet another really bad legacy of the Great Recession that we're just nowhere near climbing all the way out of," he adds.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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