Reduce Debt

It is extremely important to reduce debt whether you are getting divorced or not. The Bible warns us about debt and how it makes us a servant to the lender (Proverbs 22:7). Should we find ourselves with debt, we need to repay it and repay it as soon as possible (Psalm 37:21, Proverbs 3:28).

Debt puts a strain on a marriage not just financially but emotionally because of the stress it can cause. Financial issues are one of the biggest causes of divorce. Because financial issues can be so damaging, it is extremely important to reduce debt regardless of whether or not you plan to save your marriage, stay single, or are looking ahead to remarriage someday.

If you are going through a separation or filing for divorce, you will need to take stock of your assets and liabilities in order to come up with a fair way to divide everything. You will want to consider both joint and individual credit cards, loans and savings. If you maintained separate bank accounts and credit cards throughout the marriage, it may be as simple as continuing on with the already divided responsibilities. If you have joint debt and accounts, once you decide who is taking what, you will need to remove your spouse’s name from the accounts you are looking after as soon as possible.

Sometimes credit card companies are reluctant to remove one of the names on an account while there is still a balance owning, if at all, and even then, the account may need to be closed and a new individual one opened. You may find that by combining your debt, you can cancel all your joint cards right away.

Credit Cards are easy to use, often easy to get and very easy to rack up debt on. Your credit card should be a tool for you instead of it holding you in bondage. They have their place and can be beneficial ONLY if you are paying off the balance EVERY month. If you need to buy a large ticket item that you know you cannot pay off within the statement period, a low interest loan or a line of credit with a low interest would be a much wiser avenue to carry a balance on.

To give you an idea how a credit card can work for you instead of against you, let me share with you how I use mine. I have a MasterCard that has no annual fee. It charges a hefty interest rate of 19%. However, it is associated with a grocery store chain and I can earn $10 in free groceries for every $1000 I charge. I pay all my bills that accept MasterCard with my card, make all my purchases on it (staying within my budgeted amount for the month) and then pay the whole thing off with one cheque at the end of the month. I do not add purchases that I would not have normally made simply because I am using a credit card but instead use it like I would my bank account. My bill is pretty much the same each month and I end up earning a few hundred dollars in free groceries a year.

If I only made the minimum payment on what I charged in a month, it would take forever to pay it off at a 19% interest rate. Interestingly enough, the credit card company actually states on my monthly invoice that if I only pay the minimum payment each month and charge nothing else to the card, it would take me 22 years to pay back the $1200 I owe. Can you see how absurd that would be?

In order to reduce your debt, you have to know what your debt is. Download the Credit Card Spreadsheet here or print the PDF version here and fill in the information for each card you have. You will need to refer to your most recent statement and maybe your cardholder agreement to find out what your fees and rewards are if you cannot remember. In the "other" section, you can also add any loans you have for vehicles, student loans or lines of credit. Don’t worry about your mortgage for this exercise; we will look at how to reduce housing costs separately.

To begin, add up the required minimum monthly payment on each card. When you made up your budget, there was a place to list an amount for creditor payments and debt management. Hopefully, your total minimum payments are less than the amount you have to pay on debt so you have enough to begin paying down the balance owing not just maintaining the interest. If your total minimum payment is more than you can afford to pay, your first strategy to reduce debt will be to amalgamate some credit card balances.

Some ways you can combine credit card balances to help you reduce debt are:

• Get a low interest loan and combine all credit card debt into one monthly payment with no penalties for paying it off before the end of the term of the loan. Make sure that extra payments are applied directly to the principal and that interest owed is adjusted accordingly.

• Combine your credit card debt on a line of credit. Generally a secured line of credit will have a lower interest rate but an unsecured line of credit will still likely have a lower rate than any of your credit cards. The lower the interest rate, the faster you can reduce debt.

• Transfer balances from your high interest cards to your lower interest
card(s). Watch for transfer fees and special interest rates on balance transfers. I frequently receive transfer cheques from my credit card company with a short term (usually six months) rate on balance transfers ranging anywhere from .99% to 3.99%. That represents a huge savings on interest, especially if you are carrying balances on department store cards with rates as high as 278% or more.

• If none of those options are available, you can always call each of the companies that have issued you a credit card and ask them for a lower interest rate. Some companies will actually lower your rate if you ask. They will not, however, lower your rate if you don’t ask.

If you were unable to roll your high interest balances into a loan or a lower interest card, you will need to take a different strategy to reduce debt. One of the biggest obstacles that will hold you back from paying off your debt is high interest rates. Department store cards generally have the highest rates so you will want begin by paying those off first. Taking into account your monthly budgeted amount for paying debt, you will want to pay your minimum payment on your cards with the lower interest rates and put the rest on your card with the highest interest.

If you have several high interest cards, pay off the ones with lower balances first so you can see progress right away as you start paying off cards. Once a card is paid off, call the company and cancel the card. Don’t just cut it up because they will send you another one. You have to actually call and cancel the account. MOST IMPORTANTLY – DO NOT CHARGE ANYTHING ELSE TO YOUR CARDS!

As you recall, as we formulated your budget, we also discussed that any extra savings you were able to glean as you reduced your spending, was to be used to reduce debt. In addition, as you pay off each card, the minimum payment you were paying on that card is freed up to go to paying down your total debt.

Let’s look at an example so you can see the plan in action:

Our total monthly minimum payment due is $113. Let’s suppose our monthly budget to reduce debt is $200. In looking at the interest rates, we will want to pay off department stores 1, 2 & 3 first.

In month one, we will pay the minimum on all cards except department store 3 on which we will pay $97. Repeating that the second month, we will have paid off department store 3, called them and canceled the account.

In month 3, we are now paying the minimum payment on all cards except department store 2 on which we pay $107 per month for two months to reduce its debt. Then, the $20 that is left is paid on card 2 the following month and all the extra money will go to the card from department store 1 until it is paid.

We will then pay $130 per month on department store 1 until it is paid. Once it is paid off, the full $200 a month in our budget to reduce debt will be used to pay off the Visa.

Once all your credit cards are paid off and you have saved a couple of thousand dollars for an emergency fund, you can begin clearing up other debt like car loans, lines of credit, student loans and your mortgage.

With a concerted effort and a plan, you can successfully reduce debt and eliminate it altogether. The key is not to fall into the same habits that created the debt in the first place. Remember, you can do all things with God’s strength (Philippians 4:13).

Now that you have a plan to reduce debt, it is time to investigate how to reduce housing costs.

Know a Good Way to Reduce Debt?

Do you know a good way to reduce debt?
How have you been able to reduce your debt?
Share it!

Return from Reduce Debt to Financial Survival

Return to the Home Page

New! Comments