Prosper Newsletter: April 2007 > Financial

You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.

Gaining Control

Chances are, like most Americans, you are swimming in debt. In fact, you are likely paying your bills late and you might even have creditors calling your or even knocking on your door. In order to fully enjoy life you must learn to free yourself from debt.

Many Americans look at their neighbors' new cars, boats, annual vacations and expensive lifestyles and think, "If I only made the same amount of money as the Jones family, I would be set." Most of us never stop to consider the fact that those people with the fancy cars and nice boats are on the same treadmill as ourselves. Most are living paycheck to paycheck, trying to figure out how to make their minimum payments.

The average American could be completely out of debt in five to seven years without increasing the income they currently make. Many people have a hard time believing this concept as they struggle to make ends meet. However, these principles have worked in the lives of many people and you can enjoy the same success.

Whether you realize it or not you are wasting thousands of dollars each year without knowing it. Many of the leaks go to products and services that you don't need or use. Chances are your closets and garages are filled with things that you absolutely had to have. Many of these items sit unused and forgotten. Meanwhile, the credit industry is collecting interest on these items because, like most people, you charged these items on a credit card. Most American homes are cluttered with unused merchandise.

Take a minute to think about products and services that you have that you just don't use or need. The costs add up. The first step down the road to financial independence is to find the leaks in your finances and to stop them. This does not mean that you have to stop enjoying life; it simply means that you will enjoy life more because the creditors will stop calling you to ask when you will give them their money.

To begin, let's look at some common leaks in the finances of many Americans. Many Americans eat out much of the time. The Department of Agriculture estimates that Americans spend 222 billion dollars in restaurants each year. That is about 41 percent of the money that Americans spend on food.

Another thing to consider is your television viewing habits. It is not uncommon for Americans to have satellite or cable bills that exceed 100 dollars. By eliminating the additional channels that are not viewed as frequently, you could save up to 50 percent or more on your cable bill.

The statistics show that 36 percent of retirement age people have to work to survive. Another 54 percent are dependant on family, friends or the government for their living. That means that only 10 percent are able to be self-sufficient during retirement. What group do you want to be a part of?

The second step to take to get out of debt is to find out whom you owe and how much you owe to them. Although this sounds simple, most people cannot accurately tell you how much they owe to each creditor.

Many people finance their lifestyle by floating bills. These people justify this habit by saying, "It's only 10 dollars." The fact is that if you pay 10 dollars to borrow 100 dollars for a week; that is the equivalent of paying 520 percent annually that you are paying. If you are paying late fees on debts or utility bills, stop today.

Once you know whom you owe and how much you owe them, the third step is to find out what your credit card company is charging in addition to the interest. Your credit card company could be charging you:

• Annual Fees
• Late Fees
• Penalties
• Over Limit Fees

These charges, combined with the interest charged can add up quickly. These costs can make it much harder to get out of debt and many Americans do not even realize they are paying them.

Now that you understand what you are paying, get on the phone and ask for a lower interest rate. Most people do not realize that they can do that. You know now. If you have annual fees, you can also ask for those to be lowered or removed altogether. It may take some work to find someone with the authority to lower your rates, but the time is well spent.

Many people are embarrassed to make the call. They worry what the person at the credit card company will think. The fact is, if you are kind and treat the representative with respect, you are more likely to get what you want and the representative will think highly of you. By making the call you can possibly save hundreds or thousands of dollars that you can use to be debt free for life.

The fourth step is to quit using your credit cards. This is really the most important step, but you need to understand why you need to quit before it makes sense. Destroy your credit cards. If you never stop using them, you will never eliminate your debts. Many people wonder how they can live without their credit cards. The answer is simple, the money that you stopped wasting in the first step you will use to pay the bills.

If you feel that you need to keep one card, try putting it in a metal coffee can full of water and freezing it. You may ask why you need to freeze it. The reason is simple, the next time that you see an infomercial for a knife that cuts cinder blocks; you will have to unfreeze your card first. Generally, you will realize that you do not need whatever item and forget about it before it makes its way into your closet.

The fifth step is to create an accelerator margin. Your accelerator margin is the money that you have left over once you have stopped wasting money and have paid your bills. You can now take the money and apply it to one card that you decided would be the first one to pay off. You should have stopped using this card by now. Focus on that card until it is paid off. Once you have paid off that card, the minimum payment from that card will be added to the accelerator margin, which you can focus on the next card and so on until all of your credit cards are paid off.

By following this pattern, in three to five years you will be out of debt, including your mortgage. Many people subscribe to the myth that it takes 30 years to pay off a mortgage. If you look at the loan you took out on your home, you are typically paying up to three times the amount of your home during the term of the mortgage. Many people never stay in a home for 30 years, so they start this process again and again.

CREDIT CARD BALANCE TRANSFER TRAPS

Many of us carry a balance on our credit cards. Hopefully, we all have a debt elimination system in place and are working toward eliminating personal consumer debt. Part of our debt elimination strategy should include lowering our interest rates on our cards. Sometimes, the credit card carrier will not be amenable to lowering our rates. Therefore, we may want to consider the option to transfer the balance to a card with a lower interest rate.

If this is a consideration, we have to beware of the fine print in the credit card agreements and avoid the following balance transfer traps:

TEASER RATES
Certain balance transfer rates last for only two to three months. We have to make sure that the introductory rate lasts for at least 9 months before transfer and that you can live with the annual percentage rate (APR) after the intro rate lapses. Check out www.cardratings.com to compare deals.

TRANSFER RATES
There may be a fee associated with the balance transfer. We are seeing rates as high as 4%. On a $2500 balance, this translates to $100. Part of our debt reduction strategy should be negotiating credit interest rates to a lower rate. Half of cardholders who ask for a better deal get one. If the credit card company agrees, then there is not need to transfer the balance and incur a transfer fee. Another alternative is to call the new credit card issuer and ask them for confirmation in writing that they will waive the transfer fee.

INCONSISTENT RATES
Typically, credit card companies charge a low intro interest rate for balance transfer, but a significantly higher rate for new purchases. This should not be an issue if you have a debt elimination system in place and are not adding to your current debt load.

UNIVERSAL DEFAULT
It is very likely that we may accidentally miss a payment or delay on a payment on our credit cards. These days, if we are late on a payment on any credit card or any other bill, we could exponentially increase the rates we are charged on all of our cards. At least half of credit card companies have a "Universal Default" clause in their fine print. We must be careful here because this clause gives the companies the right to raise interest rates when we miss a payment. The best idea to prevent this is to set up electronic bill pay so that we do not miss payments.

Remember that we want to pay our bills promptly, we want to keep our debt at 30% levels or our available credit, we want to shred the credit cards that we are not using - DO NOT CLOSE THEM, this may impact your credit score adversely.

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