Loretta Abrams, vice president of Consumer Affairs, HSBC-North America, offers some ways to help consumers accelerate debt reduction:
Repay in three: Take advantage of your salary increases and bonuses that companies give out at this time of year or an early tax refund to pay off all holiday debt by March 31 to avoid multiple cycles of credit card fees.
Pay more than the minimum when possible. If you can't pay off all debts, always pay more than the minimum balance due on your accounts.
Combine small balances into one account -- consider transferring balances, but make sure it works for you (be aware of transfer fees, low or zero teaser rates that may apply for only transferred balances or that may increase when you use the card or fall behind. Be aware of the impact on your credit score if you respond to too many applications for new credit cards).
Pay off your credit card debt...
1. If you choose to pay off accounts with small balances first, you'll reduce the number of checks you're writing every month and you'll be able to celebrate small successes sooner.
2. If you choose to pay off accounts with the highest interest rates first, you'll save more money because you'll be paying less in interest, but it may take longer to celebrate the first success.
Contact your card company regarding any special programs or lower interest rate products that may be available to you.
The month of January is also a great time for a "financial fitness" check-up and given all that's going on in the credit markets, it's never been more important for each of us to review and refresh our plans.
There are four important steps to beginning your Financial Makeover!
Take your pulse!
Review your credit score -- understand your starting point; remember we all want to have a score above 700
Know what you owe -- take a full assessment of all of your bills; know exactly how much you owe and to whom and how much you're paying in interest
Check your bank accounts -- make sure you are using the accounts that are best for you – "no fee" checking, high rate savings (Money Market rather than regular savings), CDs, etc.
Ramp up your savings -- Everybody should take advantage of salary increases, employer bonuses and tax refunds to save more for retirement and to add to their rainy day fund. Review your contributions to 401(K) accounts and start a 'rainy day' savings account.
Refresh your plan!
Take a look at and revise your short term goals (goals for the next 18 months).
Some of the goals to consider…
Improve your credit score -- It's not difficult to realize significant improvements in your score by making payments on time, limiting the use of your credit cards and opening no new accounts.
Reduce your debt -- Reducing the amount of credit card, personal loan or auto loan debt will free up funds for long-term goals (college tuition, retirement planning, home purchase down payment)
Pay off your car loan -- For many consumers, this may be a fairly large monthly obligation and paying it off earlier or "downsizing", will ease some of your budget pressure.
Accelerate mortgage loan payoff -- Making one extra mortgage payment a year can save can shave 7 years off a 30 year mortgage.
Plan for your future!
"Max out" your 401(K) contributions
Take full advantage of company matches -- if your company matches contributions up to 5% for example, make sure that you're contributing the full 5%.
Build your retirement fund -- make sure your allocations are appropriate for your plan; make sure that your fund is properly diversified based on your risk tolerance and your time horizon.
Save on taxes - contributions to a 401(K), 403(B) or IRA account are "pre-tax" income and can save you money on taxes.
Establish regular savings programs - start as soon as you can, save as much as you can
Long term savings -- the savings account that you establish for the purpose of accumulating assets.
Rainy Day Fund -- the savings account that has $1,000 to $1,5000 balance to draw on for those unexpected expenses (e.g., new tires, dental emergencies, leaky roof) that might otherwise cause you to use credit cards or more expensive short term borrowing options.
Christmas Account - if you can't resist the temptation and enjoyment of shopping during the holiday season, establish your very own Christmas Club account so that you can enjoy the season without the negative financial aftershocks.
Vacation Fund -- the account that allows you to reward yourself for your hard work and careful budget management throughout the year.
Go Digital!
Use commercial software programs at home to create and help manage your budget
Use on-line programs and calculators to generate "what if" scenarios to help with establishing your 18 month goals.
Put your savings and loan payments on "auto pilot" -- Arrange to have your employer automatically deposit amounts to your savings account and use automatic banking features available through your bank to make monthly payments and/or transfer set amounts to your savings accounts.
Now, the only thing left to do is to get started. And remember, check your credit score once each six months and take your financial pulls.
For more information, visit www.yourmoneycounts.com
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