“Dear Steve,

I have some extra money this month and wanted to know which was the best way to go. Pay on the cards with the smallest balances or highest or is the better route the one with highest interest?

Taylor”

The Answer:

Dear Taylor,

If you’ve come into some extra money I’d first suggest you save a third of it before you do anything if you don’t have a couple of thousand dollars at least in an emergency fund. Just put it in a boring savings account and keep it handy so unexpected future expenses don’t have to wind up on credit.

Then you may want to take the rest and apply it towards the lowest balance accounts and hopefully knock one out. You can then take those funds you would have sent each month on that debt you just killed and add it to your monthly payment you send your debt with the highest interest rate.

Getting out of debt is a slow and steady journey.

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

@GetOutOfDebtGuy

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

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Judy

“Dear Steve,

Should I save the amount after paying off a credit card debt or pay down another.

Help please.

Judy”

The Answer:

Dear Judy,

You asked a great question and one that seems easy but has different valid and possible answers.

If you are digging yourself out of a debt hole the initial knee jerk reaction is to devote all your extra money to paying down the next card but I don’t think that is the smartest thing to do.

You see life is unpredictable and we never know what the next financial surprise will be. Unless you have access to some liquid cash to get in a hurry those unexpected expenses could wind right back up on the plastic, eroding any debt reduction progress you previously made.

I think the better approach is to buildup your savings account at the same time that you are trying to reduce the debt. I’m assuming that we are starting from a position that you have little to no savings to begin with.

I would suggest that after you pay off your first credit card debt that you either put the extra into a savings account for a few months to build some cushion or put half of the amount into your savings account each and every month from that point forward and use the remainder for additional debt reduction.

This approach of rolling your payments forward is know as the debt snowball approach. There are two basic theories to accelerating debt repayment. Those that are diligently organized find that extra money applied to the card with the highest interest rate makes the most mathematical sense. The the rest and majority of the population finds that it is more emotionally rewarding to focus on paying off and sending your extra payment to the card with the lowest balance. By knocking off accounts quickly you get a greater emotional boost to keep going. That’s the debt snowball approach, simplified.

Thanks for writing in.

Big Hug!

@GetOutOfDebtGuy

The Answer:

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Terri wrote and asked her question through the GetOutOfDebt.org site. If you have a credit or debt question you’d like to ask, just visit this page and ask. My help is totally free.

“Dear Steve,

We have appox $50,000 in revolving debt, 2 vehicle payments, 1st and second mtg, we pay everything on time and have a small amount left over each month, but feel everything closing in and have fear starting to come over me about all of the debt.

Is there any way to get some help even if we are paying on time ….without ruining our credit?

Terri”

The Answer:

Dear Terri,

Yes, there is a way to get out of debt and improve your credit at the same time. The only problem is, it’s hard to do and requires perseverance.

The issue you are facing right now is that it feels like the walls are closing in. At times like that people often leap to solutions like credit counseling or debt settlement that they think will be quick and painless fixes, they are not.

You do have a lot of debt and now is the time to start to dig your way out. By making at least the minimum payments on your debts and then using whatever money you may be able to find as an extra monthly payment you can start your journey to eliminating your debt.

By paying down your debt with at least monthly minimum payments while focusing on eliminating one debt at a time your payment history on your credit report will show that you met your contractual obligations, were on time and not delinquent at all. All those factors will continue to increase your credit score and you reduce your debt.

It sounds to me like your debt to income ratio is pretty high, meaning that most of your income is pledged to debt repayments. That makes it harder to do a balance transfer of your highest interest rate debt to pay that one off interest free. That approach is wonderful as long as you can completely pay off the transferred balance before the introductory rate expires. I just wrote about my own recent experience in doing a balance transfer.

You can also easily adopt the debt snowball approach for effective emotional and financial debt reduction. It is an approach that works, and works well.

The key here is that you need to trust your instincts. Your subconscious is telling you, through fear and worry, that your financial life is out of balance. You should listen to to those warnings but there is no need to panic, just make a choice on which path you will follow to get out of debt and execute that plan.

If you feel like you just can’t do it on your own then look at a credit counseling program, it will screw up your credit but by sending one payment to them every month they will then take care of distributing your payment to your creditors.

But you really don’t need a credit counseling program at the moment since you can do this yourself and by doing so it will achieve your goal of getting out of debt and not harming your credit report or reducing your credit score.

There is hope.

Big Hug!

@GetOutOfDebtGuy

The Answer:

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Instead of researching which bank offers the highest interest rate, Dutch consumers can now put their money up for auction, getting banks to bid on their savings.

After registering with new online facilitator Spaarbod, consumers state how much money they’d like to put aside, for how long and on which terms. The website automatically calculates the best rates that are currently available to all. At that point, consumers can sign up for that offer. However, they can also wait and see what banks will bid at auction. Spaarbod sends their data—minus personal details—to participating banks, who make an offer in a sealed-bid auction. Within a day, a user receives an email listing the five highest bidders, and can pick the best offer. The service is free for consumers, and banks pay a commission for every bid that results in a savings deposit.

Spaarbod’s method is an interesting example of the intention economy at work. Buyers state a purchasing intention, and companies compete for their business. Which, in theory, turns selling into a buyer-oriented process, and alleviates the need for advertising. One to watch!

Story Source: Springwise

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“Dear Steve,

I do not know where to start other that I’m in debt. I want to pay all of my credit card debt starting with my lowest and working my way to the last but I can not accomplish this while I’m paying everyone and can not make any headway. Can I just send something to the others and concentrate on one credit till it’s paid for and move on to another?

On a good note I do own my home, so should I get a loan to pay off this cards. I could probably settle for less money that I owe but I also know that this will hurt my credit.

What do you suggest?

Thank You,

Robert”

The Answer:

Dear Robert,

Thank you for the question.

When I read your question to me I was filled with hope. There appears to be a clear and fairly painless way out of debt for you without hurting your credit. In fact I think it will help your credit.

Since you can probably get a mortgage against your home or refinance your current mortgage to take some cash out I would suggest that you think about doing that and if you can’t take out enough to repay all your debt, then take out enough to pay, in full, your highest interest rate debts. Don’t settle them. You are right, that will hurt your credit.

Once you pay off the highest interest rate debts with the cash from the house, that will give you the breathing room you need to focus on paying off the remaining debts using the debt snowball approach.

By paying all your debts off in full, it will improve your credit report and credit score. While debt settlement can be a good and valuable tool to use to eliminate debt in some situations, it is not a magic wand for all. Debt settlement will wound your credit report and lower your credit score.

Think of that new mortgage you are going to get just like a debt consolidation loan for credit card debt. After you’ve used the debt snowball approach to pay off your other debts, focus your efforts to pay off that debt consolidation mortgage that you took out for that credit card debt. Before you know it, you’ll have that paid off early as well.

If you execute this plan, you should be just fine, it will involve little pain, and as long as you don’t rush back into debt you will have a brand new financial future.

Big Hug!

@GetOutOfDebtGuy

The Answer:

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“Dear Steve,

I’m in debt really heavy from credit cards and other loans.

What should I do to get out of debt.

Lourdes”

Dearest Lourdes,

Wow, I really want to help you with some great advice and awesome guidance but gee-whiz a little more information would be really helpful. Maybe next time you write in you can share a bit more, please.

Based on what you told me, here are some things you can do that will cover the basics:

• Reduce Expenses – Use extra money saved to pay down your debt.
• Increase Income – Get a new job or a second job to help bring in more money to pay down the debt. Look on the job board or job bank page for a new job in your area.
• Maybe Consider a Debt Management Company – If you are just paying the minimums you might want to take a look at a debt management company to see what debt reductions they can offer you. Warning: It will hurt your credit.
• Save Extra Cash – Before you start sending all your extra cash to the credit cards and loans, save it up in a savings account so you’ve got emergency cash available. At the end of the year you can use some of your cash to then pay down the highest interest rate debts or smallest balance debts, whichever gives you the most emotional satisfaction.
• Bankruptcy – If you are unable to pay your debts and you’ve done all of the above, maybe now is the time to get a free bankruptcy review from a bankruptcy attorney in your area.

Keep us posted on what happens.

Big Hug!

@GetOutOfDebtGuy

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