NEW YORK -- Stephen Brobeck, executive director of the Consumer Federation of America, uses an analogy of the sea when he talks about how families handle their bills: About one-third are safely in a boat, paying on time and enjoying the cruise.
But another third are out of the boat and treading water, finding it harder and harder to make those monthly minimum payments. The final third, over their credit limit and collecting a rising number of late-payment charges, are slowly slipping below the waves.
With the Federal Reserve boosting interest rates, a growing number of families are likely to face the financial equivalent of drowning.
Rates are up on everything from credit cards to car loans and home-equity loans, and that means it's time to think about paying down some of that outstanding debt to avoid prolonged high-interest payments.
''If your consumer debt exceeds 20 percent of your income, it's time to address that -- and the sooner the better,'' Brobeck advises.
Just how indebted are we? Americans owed their creditors $1.43 trillion at the end of the first quarter, or more than $5,200 for every man, woman and child in the country, according to Federal Reserve figures. And that doesn't include mortgages.
Because of Fed action to try to slow the economy and head off inflation, the cost of carrying that debt has been rising fast. The interest rates on most consumer loans, including credit card balances, are about 2 percentage points higher than a year ago.
That doesn't sound like much until you apply it to your bills. A $5,000 loan that you intend to pay off over five years requires a $127 monthly payment at an 18 percent interest rate, and you pay a total of $2,618 in interest over the life of the loan. With the rate now closer to 20 percent, the monthly payment goes up to $132, and the total interest cost rises to $2,948.
Durant Abernethy, president of the National Foundation for Credit Counseling, says the first thing to do if you want to reduce your debt is, quite logically, ''stop using credit and start paying cash.'' If credit cards are too much of a temptation for you to spend, cut them up and throw them out.
Next, he says, make a list of what you owe and try to figure out what you can afford to pay each month, not only to cover the minimum charge but also enough extra to begin bringing down the principal.
''If you know you're going to have trouble meeting your payments, let your creditors know immediately,'' Abernethy adds. ''See if they'll do something to help you out -- like reducing the interest rate or extending the payment schedule.''
There are two schools of thought on which debts to try to pay off first. One suggests you take aim at the one carrying the highest rate of interest, then go after those with lower rates.
But both Brobeck and Steve Rhode, co-author of the book ''Get Out of Debt'' and president of the Myvesta.org online debt management site, advise that you go after the debt with the smallest balance first, then work your way through those with higher balances.
''It helps if people can see progress,'' Rhode says.
He also has an eye-opening formula on how a little bit goes a long way in paying off outstanding credit card balances:
Take that $5,000 loan balance, say at 16 percent interest, and make the minimum payment of $100 the first month. The next month, the required minimum payment will go down, say to $98, because you've paid off some of the principal. Rhode suggests, however, that you pay $100 again. And keep on paying that amount.
The payoff? If you make just the minimum monthly payment, it will take 35.6 years to clear the bill. With $100 monthly payments, the balance will be paid off in 6.9 years.
And Rhode goes a step further: ''When that bill is paid off, you've got $100 a month to start saving.''
Most financial advisers say one of the biggest traps people can fall into is trying to borrow their way out of debt.
Bill consolidation loans -- and even home-equity loans used to pay off other debts -- may promise the convenience of a single monthly payment. But families that take such loans, but continue going deeper into debt, are just increasing their risk of going under.
If you can't get a handle on your debt alone, there are scores of nonprofit consumer counseling services that can help. Check your local yellow pages or the Internet for names and addresses.
On the net: Consumer Federation of America, www.consumerfed.org
National Foundation for Credit Counseling, www.nfcc.org
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