Getting Out of Debt

For many people, responsibly using credit is a normal part of managing their finances. For others, using credit can lead to uncontrolled spending, anxiety, unpleasantness or even bankruptcy. Here are some ideas that may help you reduce your debt load:

Develop an overall debt strategy.
Borrow money for things that provide long-term and lasting value. For example, borrowing money for college costs is a good use of debt because the end result is a college education.

Credit Cards
Decide on a credit card strategy. Remember that every time you charge something on a credit card, you will have to pay for it. Don't charge things you can't afford. Try to pay your entire balance in full each month to avoid finance charges. Be sure to make payments promptly to avoid any late payment fees.

Choose a credit card that offers the right combination of fees, rates and benefits. If you pay every credit card bill in full each month and don't incur any finance charges, it may be OK to have a card that has a high interest rate but offers rewards for use (like miles or money back) or has no annual fee. If you carry monthly balances and pay finance charges, the interest rate becomes a more important factor.

If you find that credit cards are too tempting, get rid of them. Checks or a debit card can eliminate the risk of making purchases that you can't afford. Using cash to pay for purchases is also a good strategy.

Mortgages
If considering a mortgage for a new home purchase, first identify the type of mortgage that matches you goals. If you only plan to stay in your home for a few years, an Adjustable Rate Mortgage (ARM), with a lower interest rate, may be more appropriate for you. If you do not plan to sell your home in a few years, or if you can't afford the larger mortgage payment that rising interest rates would bring, consider a long-term fixed rate mortgage.

With the relatively low interest rates available, you may want to consider refinancing your mortgage to get a lower rate. You should also consider switching to a shorter-term mortgage. You may be able to keep your monthly payments about the same and still switch from a 30-year mortgage to a 15-year mortgage. This would result in you being debt free much sooner.

Examine the rates
Eliminate high cost borrowing. Determine if you can convert high interest rate debt to lower rates. If you are paying high interest rates on credit card balances, find a card with a lower rate. But, watch out for "teaser" rates - zero percent or very low rates that are in effect for only a short period of time. If you have equity in your home, consider a home equity loan to consolidate your debts at a lower rate.

Getting help
What if you can't pay your bills? This is when you should get help. Your first step should be to stop incurring more debt - quit using or destroy your credit cards. Contact your creditors to work out a payment schedule. Explain your situation and communicate that you want to pay what you owe. They may be able to help.

Don't bounce checks. In some states, it is a worse offense to write a bad check than it is to not pay your debt. In addition, you may be charged a fee for the bad check.

Get professional help if you need it. MCU has partnered with Balance, a financial fitness program that makes it easy for you to get on top of your situation. Through this partnership, you have access to Balance's free and confidential services. Click here to find out more.