FISCAL FITNESS: Getting Out of Debt

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FISCAL FITNESSGetting Out of Debt
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OBJECTIVES

• Discuss the advantages of reducing debt.
• Learn strategies for reducing debt.
• Discover Power Payments

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CREDIT IS A USEFUL TOOL

• Safe
• Convenient
• Widely accepted
• Easy to use

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Used wisely, credit helps you reach important
goals
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Credit can be a ball and chain
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TWO MAIN TYPES OF CREDIT

• Installment
• Fixed payment
• Fixed time period
• Usually secured by collateral

• Revolving
• Payment varies
• Open-ended time period
• Usually not secured

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SECURED vs. UNSECURED

• Debt is secured with collateral, i.e., a cosigner
  or property
• If you fail to make payments, the creditor seizes
  the collateral
• For this reason, secured debts are higher in
  priority

• Credit card, medical debt and other debts without
  collateral or a cosigner are unsecured
• Creditors have nothing to seize, and are
  typically more aggressive about collections

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CREDIT CARDS

• Revolving credit
• Interest rates vary for similar cards
• May charge annual and other fees
• Require monthly minimum payment
• Unsecured (unless deposit required)

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THE AVERAGE HOUSEHOLD

• Has 5.6 credit cards
• Owes 2,580.79 in credit card debt
• Pays as much as 1000 per year in finance charges

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AVERAGE BALANCE NUMBER OF CREDIT CARDS(1995)
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What you should know about...MINIMUM PAYMENTS

• Typically just 2 of outstanding balance
• Most of the payment is interest
• Extends the length of time for payback
• Increases finance charges

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An example

• ? You owe 1,000 on a credit card
• ? The minimum payment is 20
• ? The APR is 18

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• Pay only the required 2 minimum it will take
  19 years and 4 months, and cost you more than
  1,931 in interest.
• Pay 20 per month it will take 7 years and 2
  months to pay off the card, and cost more than
  860 in interest.
• Pay 50 per month it will take only 2 years to
  pay off the card, and cost less than 200
• in interest.

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Getting out of debt...

• Saves money
• Gives you more flexibility
• Frees up money for other purposes
• Is a good investment

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Keys to getting out of debt

• STOP using credit!
• Assess your situation. Do you need help?
• Consider options
• Use Power Payments

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STOP using credit!

• Leave credit cards at home
• Close accounts and cut up cards
• Keep a card for emergencies--and use it only when
  you must

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ASSESS YOUR SITUATION

• List all your debts (balance, minimum payment and
  APR)
• Can you afford your minimum payments?
• Can you afford to make extra payments?

If not, you may need help to repay your debt
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OPTIONS TO CONSIDER

• Ask creditors to reduce interest rates
• Consider transferring balances to lower-rate
  cards
• Think about using home equitybut beware!

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USE POWER PAYMENTS

• Make the minimum payment on all your debts BUT
  one.
• Add every extra penny to that one power
  payment.
• When that debt is paid, apply that payment to
  another debt until all debts are repaid.

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POWER PAY STRATEGIES

• Apply extra payment to
• Loan with highest interest rate
• Loan with lowest balance
• Loan with shortest term

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Complete the PowerPay Credit Payment Worksheet
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RETURN THE FORM
You will receive an analysis which shows for each
strategy

• How long to get out of debt
• How much you will pay in interest

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Use this information to develop your debt
reduction plan
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QUESTIONS?