# Gail's Annual Lecture on Paying Down Debt

Hard to believe it's January 2003. Made any resolutions? In addition to the annual pledge to shed the extra pounds we put on over the holidays, I'd like to suggest another weight-loss plan: let's make an honest and concerted effort to lose the weight of credit card debt. (Confession: I'm not a saint in this area, myself.)

Let's face it: how many of us really set a limit on how much we're going to spend on gifts and other holiday-related expenses (decorations, food, etc.)? Most of us buy on impulse and then worry about the bills later.

Since we can all use a support system, I'd like to suggest you check out a free Web site which will give you the tools to take a serious dent in your debt: www.profina.org. You'll find calculators that will create a schedule that will tell you which debts to pay down first and how much you should pay toward all your outstanding bills. Another will tell you how long it will take to pay off a certain amount of debt based on how much you pay each month. You'd be surprised how big an impact you can have if you just pay a little more.

Here's an eye-opener: Assume you owe \$10,000 and your annual interest rate is 18% (the "average" these days.) Though terms can vary, typically the "minimum" amount you have to pay each month is 2% of the outstanding balance. In this case, that would be \$200/month. According to the Profina calculator, if you take the bait and just pay the monthly minimum, guess how long it will take you to pay off this bill?... MORE THAN 30 YEARS! And on top of the \$10,000, you will have paid \$25,113 in INTEREST.

By altering the monthly payment amount on the profina calculator, you can see how the payoff period is affected. For instance, given the same parameters as above, paying an extra \$100/month -- a total of \$300 -- means you will wipe out this debt in just UNDER 4 YEARS! And the interest you will pay over and above the \$10,000 you owe, comes to \$3,967.

In other words, you've not only gotten the debt monkey off your back DECADES sooner, you've also saved \$21,146! Can't afford an extra \$100/month? Then enter \$25 or \$50 into the Profina calculator and see how this affects the payoff. The point is, you've got control. Whenever possible, always try to pay more than the minimum. You might not think an extra \$10 or \$30 a month will really matter. But it can make a huge difference.

David Jones heads up the non-profit debt management agency which sponsors the Profina Web site. He's also the president of the Association of Independent Consumer Credit Counseling Agencies. AICCCA and the National Foundation for Credit Counseling represent the two largest associations for non-profit credit counseling services.* This is important. If you feel like you're drowning in debt, if the threatening letters and phone calls are keeping you up at night, get help.

But make sure you use an agency affiliated with one of these associations. They have standards which affiliated companies have to meet. There are some unscrupulous businesses which claim to help you get out of debt, but charge significant fees -- often up front. Some will charge as much as the first month's payment, says Jones. You'll end up lining their pockets faster than you're paying off your I.O.U.s.

Before you enter into any agreement, make sure you have a solid understanding -- in writing -- of the fees involved. Legitimate debt management agencies get a good portion of their funding from credit issuers who know it costs less to get their money back a bit more slowly than it will if they have to take legal action against someone who has fallen behind in their payments.

But this doesn't cover all the expenses a debt service agency has. Monthly fees are usually minimal -- in the range of \$10-\$20 a month. Check the laws in your state by calling your state attorney general's office or department of consumer affairs. By law, Virginia and California prohibit fees in excess of \$20 per month. In Florida, it's illegal for a debt management service to charge a monthly fee. However, they can ask for a "donation."

In addition to excessive fees, ask if the counselors employed by the agency are independently certified by the Institute for Personal Finance or similar body. "You don't want to be talking to a telemarketer," says Jones.

Jones is particularly worried about folks who jumped at the chance of a "low-cost debt consolidation loan." These are actually second mortgages secured by your home. He points out that the highest amount of second mortgages in history were issued in 2002. In some cases, loans were made for more than 100% of the value of the home! If you start falling behind on these payments, you could lose your house.

Another warning sign: after zeroing out your credit card balances and other debt by consolidating them all into a single loan, you are once again running up balances on your credit cards. Don't wait. Get help before it's too late.

Ashamed to admit you need help? Don't be. Debt is an equal opportunity condition. Doctors, lawyers and other professionals are no strangers to debt management agencies. Having a diploma doesn't mean you're any better at resisting temptation than the plumber who fixed your sink last week.

And it probably comes as no surprise that women represent 70% of the people who turn to a debt management service. Hold the snickers, guys. It's not because we can't resist the latest outfit in the department store window. Women tend to be the ones who handle the day-to-day finances and thus have a better handle on the family's situation. They're also less reluctant to ask for help. (Now what was that joke about men not asking for directions....)

If you decide to seek help, be prepared to bare your financial soul. And go cold turkey on the plastic. In exchange for reducing or suspending the interest charges on your debt, your creditors will freeze your account. Once you graduate, your credit cards can be reinstated.

A debt management agency will not only set up a re-payment schedule, you should also expect to receive educational materials and counseling so you can learn how to avoid getting into similar problems in the future. And you should get regular statements showing how your debt is being paid down.

Wiping out, or at least significantly reducing, your debt is not only a financial relief. It's also a huge psychological relief. Says Jones, "If people are having trouble, you don't have to live in that kind of pain. You ought to avail yourself of help and get good advice."

Couldn't have said it better myself.

Happy New Year,

Gail

* www.aiccca.org and www.nfcc.org list member agencies. You can search for those in your area. Lots of other helpful information as well.

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