Everything Finance

Tips for cutting interest and slashing debt

It almost always starts out small. Maybe your DVD player conks out, and you don't have cash in the bank to buy a new one.

That's what credit cards are for, right? Or there's a new CD you just have to have, and you don't have the 15 bucks with you. Put it on plastic. Gifts for your family at Christmas? Heck, it only comes once a year.

As Wilma and Betty on The Flintstones used to say, "Cha-a-a-a-rge it!"



Of course, if you're asking this question, you already know how to get into debt. What you want to know now is how to get out. Well, don't despair. It can be done.

The following advice will show you how to lighten your debt load and keep you from getting weighed down for good. Know what you owe. If your credit-card and other debt payments are getting in the way of important life goals, such as buying a house, saving for your children's education or contributing to your retirement plan, chances are that you owe too much.

Tackle your high-cost debt first

Figuring out what you owe is the first step toward getting your debt under control. The next thing you need to know is how much it costs you. For example, the average interest rate on credit cards is typically in the mid- to high teens. In late 2005 it was about 12 percent, not including introductory rates.

By comparison, the interest rate on an unsecured loan from a bank or a credit union or a new car loan is often close to half that. In dollars and cents, this means that: $5,000 in credit-card debt at 15 percent will cost you a total of $7,237, including interest, if you take five years to pay it off.

A $5,000 unsecured loan at 8 percent paid off over the same period will cost you $6,083. Obvious conclusion: You'll save the most by paying off your high-interest credit-card balances first.

Cut your credit-card cost

Not every credit card charges sky-high rates. Many lenders charge interest rates below 10 percent, and some offer super-low "teaser" rates that last two to six months (but be sure to read the fine print). On a $5,000 balance, those lower rates can save you a bundle.

The problem with teaser rates is that when they expire they are replaced by a rate that may be as high as or even higher than the one you had before.

So you need to make sure to pay off what you owe in full before the teaser rate expires - or move your balance to another low-rate card. An even simpler strategy is to call the toll-free customer service number on your credit-card bill and request a lower rate. In a nice but firm tone say that you are considering taking your business to a company that offers a lower interest rate.

If you've got a solid payment record, there's a good chance they'll lower your rate. If not, go ahead and look for a better deal.

Consolidate your student loans

Uncle Sam has made it easier for people with student loans to handle their payments and that in turn can free up more money to pay down your credit cards.

The Federal Direct Consolidation Loan Program lets you merge all of your federal loans into one big loan with an interest rate of 8.25 percent or less. So if you're paying more than that, get smart and consolidate.

If you're still having trouble making your payments, there's another step you can take. The consolidation program lets you extend the length of your payout from the standard 10 years to as long as 30 years. Your monthly payment will be lower on the long-term loan; however, because you keep paying longer, you will end up shelling out more interest over the life of the loan.

Extending your student-loan payments is a smart strategy if you have a lot of credit-card debt, because you can take the money you save each month on student loans and use it to pay down your much more expensive credit-card debt. Contact the Department of Education Loan Consolidation Center (www.loanconsolidation.ed.gov) for more information.

Maximize home equity

If you own your home, you may be able to borrow against the equity and use the proceeds to pay off your credit cards and other high-cost debt. The interest rates on home equity loans are far lower than the average credit-card finance charge.

So if you use a 7 percent home-equity loan to pay off a $10,000 balance on a 15 percent credit card, you'll save about $2,400 in interest payments over five years. Plus, if you itemize deductions on your tax return, you probably may deduct the interest payments on your home-equity loan.

If you're in the 25 percent tax bracket, that means you get back 25 cents in tax deductions for every dollar you pay in interest.

Seek help if you need it

If none of these debt-busting techniques seem like enough, contact the nonprofit National Foundation for Consumer Credit (www.nfcc.org). NFCC has credit counseling specialists at branches nationwide to help you plan a budget, trim your expenses and negotiate with creditors to lower your monthly payments.