Getting Out of Debt
Diagnosis the Problem
• Common Causes of Debt:
– Emotional Spending: spending money to feel
good, powerful, or to show group identity.
Solution: find cheap ways to meet emotional
needs.
– Overspending: Buying “wants” instead of
“needs”. Solution: making and sticking to a
budget.
Steps for Recovery
1. Increase your Income:
•
Increasing your income while stabilizing expenses will help you
get out of debt faster.
2. Stop using credit cards: only use cash
–
–
Allows you to better track purchases
Slowly cancel credit card accounts (keeping 1 card)
3. Snowball Method:
–
–
–
–
Cut out some expenses to and use “extra” money to pay off
debt (not eating out on the weekends, or buying music off
iTunes.)
Pay more than the minimum amount on the credit debt with the
highest interest rate, or the smallest balance.
Continue to pay minimum on other credit card debt.
Once Card 1 has been paid off, roll over the amount you paid
each month from your first card to pay off this one. (Continue
until all the debt has been paid.)
Snowball in Action
Card 3
Card 2
Card 1
Debt Amount
Minimum Payment
Months of Payments
$4,000
50
80
$2,000
25
80
500
10
50
Roll Over Method
Debt Amount
Monthly Payment
Months of Payments
Card 3
Card 2
$4,000
50 + 25 + 40
39
$2,000
25 + 40
38
Card 1
500
10 + 30
13
Dealing with Creditors
•
Before you miss a payment:
– Call your creditors
– Explain your financial situation.
– Ask them to reduce your monthly payments
or the interest rate.
– Tell them you plan to pay off the debt.
If you stop communicating with and paying
the creditors they could get ugly.
Next Steps
• Credit Counseling
– Use with caution
– Many places will charge you for work you can do
yourself –such as talking to creditors or looking over
your credit report.
– Use agencies approved by the National Foundation for
Credit Counseling at www.nfcc.org
• Begin or keep a savings account
– Begin with something small
• By saving $5 every paycheck you’re creating a habit.
• Makes it easier to save in the future.