In Over Your Head – How to Drive Down Your Debt

When the economy was at its peak, many consumers were spending beyond their means and piling on debt. By the time the financial markets began stumbling in 2008, Americans had accumulated over $12 trillion in debt. This fiscal suicide was propelled, in most part, by the credit crisis of that period. Homeowners had signed their life savings away for oversized homes and excessive credit card purchases.

Since that time, household debt has fallen by $1.4 trillion. According to a recent Federal Reserve report, not only have overall mortgage balances dropped, but so have the number of delinquencies and foreclosures. While Americans seem to be paying down their mortgages, they have amassed more school loans, purchased additional cars and increased their credit card debt.

Debt is not always bad, so long as buyers learn to manage their finances and make sound purchasing decisions. If they’re already over their heads, they can still turn things around. Here are a few steps they can take to manage their finances and avoid sinking further in a pool of credit:

• Credit Cards. To avoid needless extra charges, pay your balances in full every month. What many people are not aware of is that interest rates are compounded on unpaid balances. If your credit cards have already been maxed out or you’re paying the minimum amount, find a credit card that offers low interest rates and consolidate your balances to reduce your monthly payments.

• School Loans: Make your payments timely. If you have extra money on hand, use it to make an additional payment to principal. If you work for an employer who reimburses tuition costs, take advantage of that opportunity. Consult your lender about alternative payment options and negotiate the interest rate.

• Home Purchases. There are many tools available online that help buyers calculate an affordable price range for home purchases. These tools rely on factors such as salary, outstanding debt, and standard of living. Existing homeowners can make payments toward the principle to reduce their home price. Finally, consider refinancing when interest rates are low and reducing the length of the loan. Avoid purchasing extra points to reduce your interest rate though. In the long run, the savings don’t really add up.

• Buying a Car: First, ask yourself: How important is it to buy a new car? Keep in mind that vehicles depreciate by about 70 percent in value once they leave the dealership. Consider buying a later model, a used car or try leasing. Do your research and compare the benefits and setbacks of each purchase and then make your decision.

If you are in serious debt, seek credit counseling. The U.S. Trustee Program provides a state-wide listing of qualified counselors on their site. Because no one should have to suffer in credit.