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Top Debt Tips in 2009 to Survive the Recession

Americans recently ushered in the New Year, hoping for a fresh start and an economic recovery from the previous year. Marred by foreclosures, 401(k) losses, and unemployment, 2008 was a difficult time. Unfortunately, the economic outlook for 2009 isn’t exactly promising, so Americans must prepare themselves for protracted recession conditions. One way to help stave off the deleterious effects of a recession is to end the debt habit. Proper debt management, especially in a seemingly perennial credit crunch, can make or break your finances. In this post, we’ll offer tips on how to become debt-free in the tough economy that lies ahead in 2009.

  1. Put the plastic down. If you have a habit of reaching for your credit card for virtually every purchase you make, try using cash whenever possible instead. A recent study found that consumers spend 12%-18% less when they pay in cash.
  2. Take a look at your credit habits. There are few types of debt more expensive than credit card debt. How you handle credit card debt, or your credit habits, can make it even more costly and dig you into an inescapable hole of debt. For example, making only the minimum payment each month is an example of a dangerous debt habit. Consider this: if you have a $5,000 balance and make just the minimum payment every month, it would take 351 months (close to 30 years) and $6,500 of interest to pay off the debt (assuming a 14% interest rate). By contrast, if you made payments of $120 every month on that same card, you would be debt-free in 58 months and would have saved $4,600 in interest.
  3. Negotiate lower rates. It is possible to negotiate lower interest rates with your creditors. In fact, about 50% of cardholders who call to negotiate a lower rate succeed. You have the best chance at succeeding if your rate is over 12%, you have made on-time payments for 6-12 months, and you keep your balances lower than 30% of your credit limit consistently.
  4. Make a budget and create goals. Adverse economic conditions require a solid financial plan to stay on track. First lay out your financial goals for the short term and long term. A short-term goal should be achievable within the next six months to one year. A long-term goal, on the other hand, might take anywhere from 1-50 years to accomplish. Next, you will need to create a budget that places limits on your spending and forces you to keep track of where your money goes.
  5. Pay off your debt aggressively. Another reason why a budget is so important is because it will help you figure out the maximum amount you can devote toward your credit card debt while still managing other expenses. The sooner you begin paying off your debt aggressively, the more money you will save on interest, so start now. Make the largest payment you can every single month.
  6. Don’t rely on credit for emergencies. Because of the credit crunch, you may not always be able to use the credit you depend on for emergencies. Rather than relying on credit that may or may not be available, start saving instead. Try to put away at least three to six months’ worth of living expenses.
  7. Go with automatic bill payment. The dreaded consequence of late payments is the universal default. If you forget to pay your bill just one month with some creditors, your rate could skyrocket to the universal default, which is sometimes as high as 30%. Instead of taking this risk, sign up for electronic or automated bill payment. These programs deduct the minimum required payment from your bank account on or before the due date, so you never have to worry about paying on time. As an added bonus, electronic bill payment can also reduce your vulnerability to identity theft.
  8. Think twice before cashing into your home equity. The housing crisis is far from over, and home values could plummet even further. Until home values have stabilized, you should avoid borrowing against home equity because you could end up owing more than your house is worth. If you already have a home equity line of credit (HELOC), remember that many lenders are now closing or reducing such credit lines. Before you use a HELOC check to pay a bill, make sure the funds are still available so the check doesn’t bounce.
  9. Order your credit reports. 80% of credit reports contain errors, some of which are damaging enough to affect your interest rates or ability to qualify for credit. To review your credit reports for errors, order your free annual copy from all three credit bureaus. You can do this on the bureaus’ websites. If you find any errors, you will need to dispute them in writing with the creditor and the appropriate credit bureau.
  10. Use dormant cards you’d like to keep. Many creditors have begun closing inactive accounts since the credit crunch hit in order to mitigate unprofitable and superfluous risk. If you have credit cards that you would like to keep but have not used in the last six months or more, you might want to make a purchase with them on occasion to keep the account active.
  11. Put windfalls to work. Consumers may have some extra cash coming to them in the first few months of the year in the form of tax refunds, bonuses, etc. Rather than blowing these windfalls on unnecessary purchases, devote it toward debt repayment. Granted, paying down your debt is not the most exciting use of a tax refund, but it will save you the most money in the long run. Alternatively, you might also put the money in savings to accumulate interest.
  12. Don’t co-sign. In times of economic hardship, it’s hard enough for you to maintain your credit rating and manage your debt without adding someone else’s burden to your shoulders. Co-signing for a friend or a relative seldom has a happy ending. You could get stuck with additional debt or a damaged credit rating.
  13. Don’t dismiss the power of coupons. You may dismiss coupons as a waste of time. After all, how worthwhile is a coupon that saves you a dollar when you buy three items? However, when money is tight, small savings add up. Using the right coupons wisely can add up to real savings over the course of the month. For instance, if you save just $10-$20 a week with coupons, you would have an extra $40-$80 each month that could go toward debt repayment.
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