Options To Be Debt Free and Their Cost

One of the biggest problems that people have before taking action is to accept that they have a problem.

Do you have a debt problem? You may say no. I will pay off my debt by myself. I don’t need a bailout from anyone. Or I am not a shopaholic. I just buy what I need. I don’t overspend.

In fact there are few people that end up en bankruptcy because of reckless spending. Most of the people end up in bankruptcy because of mounting medical bills… I guess now we know why we need a health reform.. but that is not what we are talking about.

If the amount of debt that you have equals to at least 35% of your gross income (before taxes) you have a problem. It is very difficult to pay that amount without making a radical life style change.

If you are in a situation of debt what options you have:

1. Pay it off by yourself – paying the minimum.

To make easier to understand how you can do this , let’s use a real life example: The smiths.

We will have them living in a regular city with normal housing expenses according to the government (31%), paying just 1 car ( $200) , paying a small health insurance copayment ($100) and regular bills ( water, electricity , tv and internet) for $ 200. Car insurance $100, and cellular phone for $70 a month .
They have just one kid in school and they spend $400 in the kid school and fixed activities

The smiths have a combine income of $70,000 before taxes
The take home check is $4,200
They have credit card debt of $20,000 or 28% or their monthly income. Interest rate of 9.9%
Their fixed expenses are:
Housing (mortgage or rent and house insurance) 31% or 1,808
Bills: $670
Kid expenses :$400
Total Fixed Expenses: 2,878

This will leave an extra income of $1,322 for food, clothing, entertainment and credit card bills.
If the smiths are a family like any other in America they will expend a 6% in food ($252). And an 11% on entertainment $462 ( going out to eat, movies, etc), clothing and miscellaneous. This will leave them $600 to pay the minimum on their credit card bills and keep their low 9.9% interest rate.

If they decide that they are going to pay off their credit card bills and stop making any additional purchase , they will need 156 months or 13 years.

The real cost of those $20,000 is $93,600 !!!! ( That is how much they will be giving to the credit card company) and this is without any late fee, over the limit fee, etc… Is keeping your credit score high this much?

2. Pay it off yourself – Adjusting Life Style so You Can Pay Credit Card Debt Faster:

This is a good option and one that many families can consider. In our case the smith can lower their housing expenses , move to a cheaper house if they rent or sell their house and move to a cheaper neighborhood if they own ( I know, the selling the house in this economy is almost impossible and many families even owe more than what their house is worth). The lower the housing expenses is not a realistic approach

They can try to lower their bills. They can switch cut cable and save some 40 dollars and downgrade their internet and pay just $19,99 a month. The savings generated here are minuscule but they will help a little.
They can cut their entertainment expenses: no more eating out , no more movies no more vacations. If they just expend 5% in entertainment they will free up $210. Every Month they will pay $810 to the credit card company

If we add those savings to the credit card payment the Smiths will pay off their credit card in 28 months or 2.3 years.

The real cost of those $20,000 is $22,680 !!!! ( That is how much they will be giving to the credit card company)

3. Debt Consolidation :

We are using a very conservative approach to the Smiths case. They have a very low interest rate, but if one day the Smiths are late in their payment or miss a payment their interest will raise and they will be penalize with fees. Just one payment missing and their credit will be blemished. In our case they already have big debt and their credit is probably no so good.

If the Smith use Debt Consolidation their balance will be cut from 40 to 70%. For our example we will again be conservative and say that they will save 50%.
The new balance will be $10,000 . Their debt consolidation company will charge a 13% fee for the process. The smith had the option of set up their own payment and they choose that it has to be lower than their minimum payment…

The new payment will be of $470 and they will pay off their debt in 24 months or 2 years.

The real cost of the $20,000 is $11,300 !!!! ( That is how much they will be paying for their credit card debt)

They have free up $125 in cash and if they decide to add that amount to the monthly payment they can accelerate the payment and be Debt Free in 19 months!

4. Take a Loan (HELOC) to Pay Credit Card Debt

This is other option that they smith have if they have good credit and equity in their home. In this time of economic crisis is the hardest one to get also.

If they take out a Loan for $20,000 at 6% per year and pay off their credit card debt, it will take them 36 months or 3 years if they pay the same amount they were paying as minimum $608. If that is too high for them and they want to pay less $382 it will take them 5 years.

The total cost of those $20,000 will be $22,920

Debt consolidation is the most realistic and cheapest way to solve a debt problem. And now the credit card companies are more generous than ever. Some are even contacting their customers and offering them to cut their balance.

If you have a debt problem don’t wait. Request a free debt consultation and see how soon can you be debt free, compare the fees that you are going to be charge and start immediately. Every day you wait is a day that you go deeper in debt