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  • 7 Strategies to Reduce Credit Card Debt

    7 Strategies to Reduce Credit Card Debt

    We are a society of consumers.  The average American household is over $100,000 in debt. Gradually, the mentality has changed from ‘saving towards’ to ‘paying off’, allowing creditors to take advantage of individuals with eyes bigger than their wallets. We eat nice dinners, take luxurious trips, and add to our wardrobes.  But at what cost? I want to tell you the story of a man digging out of credit card debt.

    This is my story.  In less than five years, I have paid off $20,000 in principal debt to credit card companies and creditors.  My balance sheet still isn’t clear, but I am confident my experience will benefit other debtors. The nuances of credit and debt are complicated, but the basics can be digested in a matter of minutes.  Take the time to wrap your head around these seven strategies to reduce credit card debt.

    #1 Make a Debt Reduction Plan

    If you’re serious about freeing yourself from credit card debt, paying down debt has to be the priority.

    Calculate Your Timeline

    Unlike a loan, credit card debt doesn’t have a repayment timeline built in.  It is essential that you set one for yourself. Set your own minimum monthly payment (higher than the required one) and use a debt repayment calculator to project when you will be free of credit card debt. [Alternately, you can enter your $0 balance deadline and have the calculator show you how much to pay off every month.]

    Earmark Money from Each Paycheck

    It is a mistake to pay off your credit card after you have handled other expenses.  Once you have decided how much to pay each month, make your credit card payment an automatic deduction from your checking account.  You’ll be forced to budget around your debt-reduction priority.

    #2 Pay Off Debt Before You Save or Invest

    Financial strategy is ultimately up to you, but I advise against continuing serious savings/investment while you are trying to pay down your credit card debt.  It’s all about the math. If you’re earning 4% interest on $20,000 investments while simultaneously paying 12% interest on $20,000 debt, you’re losing money. Unless your investment has a specific purpose that requires immediate action, I suggest focusing your financial attention on paying off credit card debt.

    #3 Identify High Interest Balances (And Attack Them)

    In order to minimize interest payments (and ultimately how long you’re in debt), concentrate on paying off debtors that are charging you the most interest.

    Pay More Than Your Required Minimum

    Credit card monthly payment minimums are set slightly higher than the amount of interest charged that month, so paying them addresses very little of your principal debt (the balance you eventually need to decrease to 0). Increasing your monthly payment above the required minimum begins to drastically cut your total amount of interest paid.

    Focus on Credit Cards with High Interest Rates

    While it may be tempting to pay off credit cards with higher balances, you should focus on the ones with higher rates.  Assuming you’re going to make the same payment amount, hacking away at the principle that is charging a higher percentage will save you money.

    #4 Investigate any Penalty Interest Rates

    Like their credit report, most people don’t take the time to read their entire credit card statement.  You should.

    When you do, you may see various interest rates being charged to different portions of your balance (some much higher than others).  Often this is a result of penalties (from payments dates), overdrafts, or cash advances.  These penalty interest rates can be up to three times your normal purchase rate.

    It is critical to reduce this high-interest debt by paying more than your monthly minimum.  

    You will simultaneously reduce the amount of debt accruing interest and the aggregate (whole) interest rate you are being charged.

    #5 Consolidate Your Debt

    Debt consolidation can be a real ‘out-of-the-frying-pan’ proposition.  Read carefully to avoid getting in more financial heat than you were in before.

    Beware Credit Consolidation Offers

    If you’re in debt like me, you get a lot of mail from agencies who claim to be able to consolidate your debt and reduce your monthly payments.  Avoid these.  While they are probably not illegal and not necessarily a scam, they often come with hidden clauses than may affect what you owe (and your credit score) in ways that are not initially apparent.  Trusted financial institutions are more reputable sources of information regarding debt consolidation.

    Consider 0% APR Credit Cards

    Some credit cards entice borrowers with offers of 0% APR (interest) for an initial period of time.  This allows you a break from high interest to reduce the principal of your debt. Make sure to read the fine print regarding any balance transfer fees and the interest rate after the duration of the 0% promotion. Be aware that credit cards may decline you, even if they have previously sent you correspondence containing language like ‘You Are Approved’. Do your diligence and read up on some of the best credit cards from Chase and other reputable lenders.

    Credit Cards with Rewards

    Many credit cards also offer members rewards like travel benefits and cash back.  Since you’re focused on debt reduction, I don’t recommend lavish personal spending.  However, if you make reimbursable charges for work, certain personal credit cards can generate benefits that will help you save money and pay down balances.

    #6 Monitor Your Credit

    The G.I. Joe cartoons that I grew up watching taught me that ‘Knowing is Half the Battle’.  I can attest to the fact that knowledge (in this case self-knowledge) is your most powerful tool for financial salvation.

    Study up on Your Credit Report

    Your credit report is way more than your score.  Your credit report has a lot of substance to inform your journey out of credit card debt.

    While debt usually has a negative affect on your credit score, debt and credit do not necessarily have an inverse relationship. I had a lot of credit card debt but a pretty decent credit score because I was making my monthly minimum payments.  Your credit score is a measure of ‘how you handle debt’. Put another way ‘are you a good borrower’?

    One of the biggest credit score factors is the percent of your total revolving (e.g. credit card) credit you are currently utilizing.  For example, someone with $20,000 total credit and a $5,000 balance (25% utilization) looks much better to potential lenders than someone with $10,000 total credit and a $5,000 balance (50% utilization).  For more info on credit scores and reporting, read up on some bonafide financial journals.

    Don’t Pay for Credit Monitoring

    There are plenty of great free credit monitoring services.  Don’t use a site that charges you a monthly fee.

    #7 Don’t Backslide  

    Don’t Confuse Credit with Money

    It is a big mistake to think of a credit card with a $10,000 limit the same way you’d think of $10,000 in your checking account.  Don’t get excited about freeing up credit and then spend it. Keep on track.

    Downshift Your Lifestyle

    It’s time to pay the proverbial Piper.  If you’re like me, you indulged in some luxuries above your pay grade when you were racking up that credit card debt.  While you’re focused on reducing your debt, you won’t be able to spend the same. Fear not, there are plenty of free and cheap distractions to keep you busy between scrupulous analyzing your credit reports and credit card statements.

    The Take-Away: Avoid Credit Card Debt

    In my experience money might not be able to make you happy, but debt sure can make you miserable. Since paying off over half of my credit card debt, I feel better.  I’m confident about the financial future of my family and generally more optimistic.

    I’m not saying don’t use credit cards.  Credit cards can be a fantastic tool for making specific purchases as long as those purchases are within your budget to pay off.  Keep in mind that a balance on your credit card only accrues interest if you fail to pay the card off entirely every month.

    Take some advice from a Prodigal Son and stay out of credit card debt.  If you do find yourself there, do your homework and start chipping away at the balance.  Debt reduction can be a lot of work, but it’s always attainable with the right attitude and coaching.

    A firm believer that freedom of information improves business, travel and life, freelance writer Ben Lovell is committed to sharing best practices.  Read more of his articles at the Gothic Optimist.

  • Importance of credit management during economic growth

    Importance of credit management during economic growth

    Why overdue debtor levels increase during times of economic growth, and 3 steps management can take to avoid the negative consequences.

    It’s a little known credit management fact that outstanding debtor levels increase during times of economic growth!

    But 3 credit and debt collection practices can keep cash-flow strong and reduce business risks.

    Introduction

    Managing working capital is vital in both periods of economic growth, and many countries such as Australia are forecast to enter a period of economic growth.

    Cash flow stresses on businesses are caused by management getting distracted away from credit management during, and immediately following, periods of change in economic growth.

    Outstanding debtor levels increase in both situations of economic slow-down and economic growth, and the negative effects are many – working capital comes under significant pressure, bad debts increase, paying your own bills becomes difficult, business risks increase.

    Businesses should review their credit policies and increasing management focus on collections early in a shift to economic growth to prevent an impending increase in outstanding debtors.

    Debtors increase during slow-downs, and during growth

    The importance of tight management of cash flow and outstanding debtors during economic slow-down is widely known. Debtor payments slow down and bad debts grow during periods of decline in economic growth, as debtors’ businesses suffer from falling sales and cash flow difficulties.

    Less well known is the fact that overdue debtor issues are also significant during economic growth. In both cases management tends to respond behind the curve, when the problem has already developed:

    • As economic slow-downs start to hit, typically management’s first response is to tackle the immediate and obvious symptoms of the slow-down, such as falling demand and falling sales.
    By the time management turns to chasing outstanding debts, the debtors are struggling with their own problems caused by the slow-down, and collecting the much needed cash is difficult and can be expensive.

    • During periods of increase in GDP growth, typically attention also diverts away from credit management, to the immediate and attractive pressures of increasing sales and the requirement for increased production and delivery.

    By the time attention turns to collecting outstanding debts, management finds that credit has been extended to debtors who are not creditworthy, and too much credit has been extended to other debtors, so collecting the much needed cash to fund growth is a slow and laborious drag.

    Practical steps to take in advance

    The good news is, there are practical steps management can take in advance, to protect their working capital and margins, for periods of growth and slow-down. Here are 3 steps to keep the cash rolling in and avoid unhappy business risks:

    1. Review credit policies
    • Set value and timing limits on all customers’ credit. E.g. no more than $20,000 credit, and no more than 30 days overdue.
    • Are credit checks made on all new customers?
    o Check each new customer and set credit limits accordingly
    o Catch slow payers early – make a diary note to review the payment pattern of each new client 90 days after their first purchase – ask slow payers to pay up to date and stay current – restrict further credit until paid up to date.
    • Regularly refresh credit checks on existing customers who pay late, and review their credit limits according to credit check results.

    2. Increase collection speed and effectiveness
    • Follow-up all outstanding accounts quickly to help Debtors to learn that they might be able to pay other creditors late, but they must pay you promptly.
    o Treat terms of trade as a fixed requirement, not a flexible guideline
    o Follow-up non-payment immediately its overdue
    o Apply a short-cycle follow-up regime, e.g. at 14 days a reminder, 7 days later a Final Notice, 7 days later a legal Letter of Demand.
    • With persistent late payers:
    o Send a reminder letter one week before the account is due for payment, reminding the debtor that payment is due in a week.
    o Send an overdue notice, email, or phone call, 2 days after debt is due for payment.
    o Send a Final Notice, 14 days after payment is due.
    • Act quickly to get priority payment:
    o Debtors priorities their payments according to which creditor chases them most firmly.
    o They usually pay Debt Collection Agencies before other creditors.
    o Get priority payment of your debts by engaging a Debt Collection Agency early, to get your troublesome debts paid first.
    • Switch to a Debt Collection firm that:
    o Offers free advice to resolve tricky debtor situations.
    o Provides Final Notice letters on their letterhead, which you can send directly to debtors, for zero debt collection commission on payments.
    o Has no fee-per-letter for sending demand letters on their solicitor’s letterhead.
    o Charges a flat-fee commission, around 10%.

    3. Make credit review a regular priority focus
    o Businesses benefit from making credit review part of their regular operating rhythm.
    o Monthly review is too low frequency – daily or weekly management focus on outstanding debtors is best practice.

    Summary

    Australia is forecast to be entering a period of economic growth. During economic growth, credit policy and collection disciplines tend to loosen, which results in excessive working capital being tied up in outstanding debtors.

    Loose credit policy and collection disciplines cause cash flow pressures that constrain funding for growth, cause increased bad debts and introduce more significant business risks.

    There are actions management can take to prevent an increase in outstanding debts and to collect outstanding debts more quickly and effectively.

    Management should consider taking those actions now, in advance of the growth forecast.

  • A Useful Questionnaire That Will Help You Choose The Right Debt Collection Agency

    A Useful Questionnaire That Will Help You Choose The Right Debt Collection Agency

    To save your business from drowning and recover your valuable money, debt collection agencies play an important role. The proven and effective strategies adopted by the advocates at these companies help you get your debt either in stepwise debt recovery models or instalment. If you are hiring the debt collection agency for the first time, then this article will provide you a sample questionnaire to find out the best debt collection agency.

    Ways to select the best collection agency

    Debt collection agencies can be found in varying sizes and experience to help debtors recover their debts. To find the most effective, cost-efficient and reliable debt collection agency is a tricky task. Below questions would help in narrow down your search and find the best one.

    Will you provide me assurance of debt collection?

    There are several agencies in the market that only charge you their fees when they help you recover your debts. Sometimes these policies are a way to deceive people. These agencies are whether or not recover your debt will still charge you a hefty upfront fee. So instead of recovering the money you have to pay more money to them.

    When you hire a debt collection agency always get things signed in writing. Like the guarantee of getting your money recovered and returned to you by way of a collected debt. If a company fails to give this assurance, then there is no point in dealing with them.

    Are you capable of taking up disputed debts cases?

    Trying to handle a disputed debt case on your own is not everyone’s cup of tea. It is a very complicated thing that not only puts a burden on you financially but also emotionally without assuring you the success of the case. Debt companies know this fact, and so some companies charge exorbitant fees for dealing with disputed debt cases.

    Luckily there are a few debt collection agencies that manage disputes at no extra charge. So prior to signing any legal agreement with a debt collection agency, you need to verify the way your disputed debt will be handled. It is advisable to deal with only those agencies that are equipped proper systems to deal with all types of disputes without charging any amount for it.

    Know about their methodology to recover the debt

    Before you finalize a debt collection agency, you need to learn about their methodologies by asking them a very important question. Different debt collection agencies employ different techniques to settle a debt case. Identifying the technology and work methodology will give you knowledge about their work ethics, code of conduct and behavior, etc. A typical debt collection program involves several parts as mentioned below:

    • Settlement of Debt
    • Reduction of Debt
    • Credit Counselling
    • Management of Debt
    • Foreclosure Relief

    To recover a business from huge debts is a difficult task. Taking assistance of a debt collection agency helps debtors by providing them valuable tips to come out of the debt and ensure the smooth running of their business.

  • Help Your Business Crawl out of Debt

    Help Your Business Crawl out of Debt

    DebtEven if you pay attention to every little detail in your business, it will be possible that you go into debt. Nevertheless, it does not mean that you should panic, rather, it is a good chance to revise your business and make sure that it does not happen again. Keep in mind that simple solutions are often the best, meaning that with simple tricks you can help get your business get out of debt fast.

    Revise Your Budget

    First things first, if you do not know where your money is being squandered, it is imperative that you check your budget. Perhaps it is time to think about setting up differently in order to ensure that you do not go into the red once again. Moreover, look into whether or not you are spending too much or if you need to direct your focus on ensuring that you can make more money.

    Cut Back on Business Costs

    image 1You should take a look at what you are spending your business’ money because it might be cheaper to cut back on some costs. However, before you try to do anything, be sure to inform your staff since they need to know what is going on, especially if you are really in the red. It is not advisable to cut back on expenses without a proper cause or reason because your workers might become enraged.. They deserve to know what is happening and how you can all work together to reduce the debt and get the business back on its feet as soon as possible.

    Look for Investors

    Although you cannot hope for anyone to come and pay back your debt, it is never a bad idea to attract new investors who might be able to help you out. Even then, try to avoid hiding the fact that you are not doing well financially because lying to your investors could end up badly. Nevertheless, if you have a good plan in mind, a bit of financial push can help you in the long run, and ensure that your business is back on track.

    Time to Cash in Your Debts

    image 2Chances are that some of your customers are owing you money, which can turn ugly if they do not plan on paying any back. Forcing your clients to pay back what they owe might seem unorthodox and often it is best to hire a debt collection agency to deal with it. They will have enough expertise and precise knowledge to handle any situation and ensure that you see your money.

    Time to Consolidate Some of Your Loans

    There are no shortcuts to quickly resolve the financial problems of your business, and you cannot hope that they will work themselves out.. If you have a number of loans you have to pay back, it is not a bad idea to look into what consolidating them can bring to the table. After all, it will be easier to find a smaller interest rate which could help your business deal with debt faster and without going into bankruptcy.

    Going into debt should not be considered as a failure for your business, rather, it will be a challenge you need to figure out how to overcome. Finding a solution will require careful planning and financial cutbacks, but be aware that it might cause some discomfort among your workers. Make sure that everyone in the company understands the risks of going into further debt and what needs to be done in order to crawl out of it as fast as possible. Sacrifices will need to be made, and unless everyone is willing to do so, your business might never recuperate.