Quote Originally Posted by berlinsmommy View Post
  1. Get it all together – the good, the bad, and the ugly. Make a list of ALL your debts that includes the total amount owed, the interest rate, the minimum payment, the due date, and any other terms (such as 0% interest until a certain date, declining interest for on time payments, etc.). Include only the debts you are tackling. For example if you have thousands in credit card debts that are at high interest rates, putting a mortgage at 6% or a car at 7% on the list doesn’t make sense. However, something like a high rate car loan or second mortgage should be on the list.
  2. Start negotiating. Look over your list and start making phone calls/visits. For example, if you have a medical bill for $300, call and ask if they will settle for $150 if you pay today (assuming you can). Any accounts in collections, try your best to settle with. On all accounts you can ask for them to reduce interest rates, waive late fees, waive annual fees, refund over the limit fees, extend the terms on low rate financing (such as 0% deals), etc. depending on the account. On some of the lower interest rate accounts, you can also ask for permission to skip a payment without penalty. Negotiate as best you can on each and every account, you may not get something from every one, but you should contact and attempt to negotiate with each and every account. Also use this opportunity to clear up any incorrect charges or information on your bills. Having a little bit of money available at the time to entice your creditors to negotiate with you can be a large help too, such as the medical bill example.
  3. Revise your list with any results of the negotiations. Keep careful track of who you spoke to and when. Occasionally mistakes are made and you may negotiate something, such as a lower interest rate, and somehow it never gets applied.
  4. Prioritize the list. There are two schools of thought here. The first is to organize them by interest rates – highest to lowest and to start throwing money at the highest. The second is to tackle small balances first so the minimum payments are gone and you have more money to send to the larger balances. I see the merit in both ways, so I recommend examining your own situation and deciding what is best for you. You may even combine the two methods, such as paying off any small balances that have somewhat high rates, even if they are not your highest rates, but not paying off small balances with low interest rates.
  5. Make a plan, but be realistic. Figure out where else in the family budget you can cut spending and/or get extra money to free up money to tackle debt. This is where I see many families fail. In the planning stages they are all gung-ho that the rest of the budget will look like this: mortgage/rent, car payment, insurance, utilities, groceries. Then they will chuck the rest at debt. One month later when the dog needs to go to the vet and the car needs brakes they don’t make their goal and just give up. Make a REALISTIC plan for how much your family can allocate towards paying down debt. This plan can take a variety of forms such as cutting spending, someone getting another job or working overtime, selling extra items, etc.
  6. Track your progress and update the plan often. The plan should not be something set in stone, it is fluid and will change many times in the process. For example, if you get a raise, it’s possible you can pay down debt faster. You may have rising or unexpected expenses that delay your progress, but don’t give up.
  7. Renegotiate often. Just because one of your creditors refused to lower your interest rate back when you set on your plan does not mean they will not lower it later on. I would recommend making contact with every single one of your creditors at least monthly to try to renegotiate. The worst they can do is say no, and they may say yes! Also, once you get a few things paid off or down, or get a few more on time payments under your belt, you may have increased your chances to get more favorable terms. Also, by increasing your creditworthiness, you may be able to shift your debt around. For example, by paying off a high interest, low balance credit card, its possible that the issuer of that card may then offer you more favorable terms, such as 0% interest for 6 months, to get your business back. Then you can shift some of the other high rate debt to that card with 0% interest. So renegotiate with everyone, even credit cards that you have paid off. Also, depending on your situation, you may even apply for new loans or credit cards that have better terms than your current ones, but be VERY careful with this, you don’t want to dig yourself even further into debt just because you got a new credit card. Stick with the plan!!!


A few notes:
I know many experts recommend first building a small emergency fund. For example, Dave Ramsey recommends getting together $1,000 in emergency money, and then tackling your debt. I strongly disagree and here is why: That savings is costing you money!! Let’s say your highest interest rate on debt is 25% and that $1,000 in savings is earning 5%. In effect, that savings is costing you 20% interest, which is $200/year!! What I’m saying is, by putting that $1,000 towards your debt, you will not earn the $50 a year in interest (a little over $4/month) you would have if you kept that money in savings, but you will avoid paying $250 a year (close to $21/month) in interest.

Second, unless they have an annual fee, I do not recommend closing cards after you pay them off. In most cases this hurts your credit score, which will affect your ability to secure better terms on your other debt. It also makes you unable to negotiate with them for lower rates and better terms after they are paid off, which could help you dramatically. Also, if you take my advice and forgo having any emergency savings, at least you will have available credit in case of an emergency.

Edit to add: I want this to be an open discussion, so feel free to discuss and ask questions. Also, if you want to ask a question but don't want to post it here, feel free to PM me and I can either answer via PM or post your question (without saying where the question came from) and answer it, so others can learn from it.


Well, great work! You have helped me to improve my knowledge about this field. Thank you so much for sharing.