In her report “Consumer Indebtedness and the Withering of the American Dream,” Teresa Sullivan, Provost and Executive Vice President for Academic Affairs at the University of Michigan, notes that from 2000 through 2008, consumer credit had grown by more than $1 trillion. Furthermore, Index Credit Cards reports that as of July 20, 2009, the average American household carried a credit card debt of $7,861.
Create a Plan to Pay off Bills and Expenses Early
When revolving debt like credit cards is combined with non-revolving debt like mortgage and car loan payments, utilities, telephone expenses and grocery bills, it is easy to see how a person or family could dig a hole of debt that would quickly eat away at their disposable income. Across the country, there are families that struggle to pay their bills even with both adults working. Let someone in that family be laid off and the situation can become dire within weeks.
A mindset change in regards to debt is a first step toward getting out of the arrears. To do this, adults should make purchase decisions based on their total net wages and not their gross income. For example, a person who has a disposable income (gross wages minus income taxes) of $60,000 a year should deduct all retirement investment, insurance and healthcare benefit contributions, revolving and other non-revolving debt from the $60,000 and set that bottom number as the amount of money they have to make new purchases against.
This encourages consumers to take into account existing monthly food expenses, retirement investment deductions and clothing and entertainment expenses before they go out and buy a new product or service. Adults can create a budget and set up a schedule to pay off at least half of their revolving debt within one year.
Eliminate Debt by Paying off Credit Cards Early
When it comes to credit cards, the sooner someone pays down their average daily or average monthly balance, the lower their interest rates will be. Lower average balances are multiplied against the person’s annual percentage rate (APR).
Some credit card companies charge higher APRs on accounts that carry a sizable or long term average balance. Clearly, the sooner consumers pay down their average balance, the sooner they will lower their minimum monthly payments.
Think of using a credit card like going into the bank and applying for a personal loan. Over time, this can help people to steer clear of the belief that the spending limit on their credit card is free money that has been given to them to pay off as and when they wish.
Review Account Balances and Interest Rates to Get Out of Debt
Pay an additional $100 a month on auto loans. This will lower a person’s debt by $1,183 for a five year payment plan on a $20,000 loan with a 9% annual interest rate. It also pays the loan off two months early.
Adults should review balances, including interest rates, on remaining debt at least once a month. Take advantage of specials that telephone service providers run. Bundle electronic and utility packages like Internet, telephone and cable services to reduce non-revolving debt by as much as $20 to $50 a month. Adults should review these packaged deals annually to ensure they always have the least expensive package.
Increase Disposable Income Amounts to Pay off Bills
Consider creating products or services that use inborn talents and passions to increase the total amount of one’s disposable income. For example, an artist could set up a website and take orders to sketch and paint pictures for family, friends, colleagues and other consumers to help them celebrate wedding anniversaries, birthdays and other special events. Secretaries can earn extra money typing term papers for college students.
It is possible to get out of debt. To do this people can create a budget and stick to an aggressive debt elimination payment plan. Regularly reviewing account balances and taking advantage of special package deals reduces non-revolving debt. Using inborn talents and passions to create and sell products and services increases a person’s total disposable income.
Additionally, by subtracting all non-revolving and revolving debt from their disposable income people can learn to make purchase decisions based on their true available income rather than going into debt because they keep making purchases based on their gross wages.
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