Six Steps To Eliminate Non-Credit Card Consumer Debt

Quite often, I focus in on credit card debt as one of the biggest pieces of the puzzle for escaping a bad debt situation, and it is. One area, though, that I often overlook are other forms of consumer debt, particularly those where you purchase an item on a payment plan, then realize when you do the math that the interest rate is obscene.

I was once in this boat, paying off about $4,000 worth of furniture, a huge television, and a high-end computer all on payment plans. The payments seemed reasonable – about $120 a month – but when I first started realizing how bad my debt situation really was, I sat down and started looking at the real interest rates I was paying. Ouch. 30% interest for this computer? 18% interest on the furniture? That’s worse than a credit card!

What I found, though, is that there are different tactics you can use to escape this sort of debt. You don’t have the convenience of just flipping over a card and asking for an interest rate reduction because you’ve agreed to this plan, but you can take advantage of some other features to get rid of this absurd debt much more quickly.

First, read over your agreements carefully. Most agreements allow you to prepay the debt if you wish; in effect, it’s not really that different than a credit card, except the interest rate is tightly fixed and thus so is the payment plan (effectively the same as a minimum payment). If you’re not sure, call the phone number on your last bill and inquire about prepaying. You do not need the money in hand to do this – we’ll get there in a second.

Once you know which ones you can prepay, total up your outstanding balances on those debts. These are usually listed on your statement. You should also note the interest rate on each one – likely the rates are going to be fairly high (above 10%).

Once you have this master list and have added up the debts, collect your last statement on all of them and head to your local credit union. Inquire about a personal loan and ask to speak to a loan officer. When you’re discussing this, show that person the debts you wish to pay off with the personal loan and tell them that the reason you’re doing it is to get the debts paid off quicker. Unless your credit is in shambles, you’ll probably be able to get a personal loan up to a reasonable percentage of your salary quite easily, usually enough to pay off most of, if not all of your debts.

Now, deposit that check from the credit union and pay off those debts! Get rid of all of those debts from your life all at once, leaving you with only one debt to replace them – that to the credit union. This actually should help your credit, as it will show that you’ve paid off several loans.

You’re still left with that credit union debt, though, so don’t let that slide. I recommend taking the amount you were paying on all of those payments and channeling it into this credit union debt. What you’ll find is that since the credit union interest rate is much lower than the payment plans, you’ll be able to pay off this debt much quicker than you would have ever been able to finish off your payment plans.

When everything is paid off, breathe a big sigh of relief, but then take a look at your other debts. Could you not take most of that credit union repayment amount and apply it to your credit cards, your automobile, and so on to get them paid off quicker? Or, if they’re all low-interest debts, maybe you could dump that into your 401(k)?

There is hope, no matter what the situation.

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  1. Amber Yount says:

    What about putting it on an interest free credit card?

  2. Minimum Wage says:

    My credit is in shambles, and I earn minimum wage. What hope is there for THAT situation?

  3. The key is also staying OUT of debt once you get out. I find a good trick is to make sure that you have enough CASH to purchase whatever consumer item that you want to buy.

    FT

  4. DarkoBeta says:

    I agree with MillionDollarJourney. It’s best to institute the 49/50 rule. That is, if you have $49 dollars and you want something that costs $50, YOU CAN’T HAVE IT. Save up another dollar, cash.

  5. Mardee says:

    I think Amber’s idea is good – there are so many interest-free loans available from credit cards. You just have to keep track of when that 0% interest rate ends.

    Or if you own your own home, you may want to think about getting a home equity loan, rather than a personal loan. Generally, the interest rates are lower and you get to deduct them.

  6. Julia says:

    Amber, that might be okay if there are no cash advance fees. But he’s talking about loans at retailers and to roll the balance onto a credit card would require a check – which the cc companies will treat as a cash advance. Thus charging advance fees and usually a higher rate than with a normal purchase.

    Probably not good for most folks.

  7. Trent Hamm Trent says:

    Julia is spot on. A credit card cash advance is likely not the wisest path for someone with a lot of payment plans, and also it’s not likely that the entire advance would be paid for in the introductory period.

  8. Benji Gonzalez says:

    Minimum wage. You obviously can’t be doing that bad if you have a computer and internet access. Hell, there are people fresh from Mexico that don’t speak English able to get a job making more than minimum wage – and work a side job for minimum wage.

    I work for a company that provides financing for mom & pop stores as well as big-box retailers. This whole concept that retail sales financing is a “gotcha” game is plain wrong. For starters, retailers get charged for us to do their financing. It can range anywhere from 4%-8% of the financed amount depending on their volume of business and whether or not we provide “interest free” or “same as cash” in 3, 6, 12, 18, or 24 month time periods.

    A financed purchase is a benefit to a retailer. I have dozens of mom & pop customers throughout the Gulf Coast that could not compete without financing. They get to sell their merchandise and get paid usually within 24 hours. A debit/credit card purchase might cost that same retailer 4% of the purchase and he gets paid in installments. Plus, they don’t run the risk of loss trying to run a financing operation or lay-away program at their stores that costs them money by occupying usable space.

    As for the consumer, they get to use someone else’s money for a purchase and pay it back in a way that fits into their budget. If they follow the requirements for interest free or same-as-cash financing the purchase has no cost to them. Someone that needs a new transmission in their car, a root canal, or a new refrigerator definitely benefits. I’ll say this from my anecdotal experience that the people that usually overburden themselves are people with the highest levels of income. Their perception of their ability to repay debts is inflated and any financial stumble usually sends them ruin or bankruptcy and most of the time these same people have filed bankruptcy multiple times in their lives.

    What our company gets is the chance to build a relationship with a customer. Retail sales is considered a form of advertising for us. If we financed your refrigerator, maybe we can do a home equity loan for home improvements. Maybe an emergency happens and you can’t wait the 4-5 days it may take a bank.

    Most of the rules are very simple. You have to have the amount financed paid within a specified period, with no late payments, and you won’t be charged finance charges. Our delayed payment programs are an even bigger boost to retailers. No payment of finance charges as long as the balance is paid off before 18-24 months depending on the amount financed.

  9. Nobody’s responded to Minimum Wage yet, so here’s the first round of suggestions:

    –Stop using any credit you might have. Pay cash!

    –Volunteer to work extra hours at your job. If you’re at work, you’re not spending any more money.

    –Do your very best job at work, to prepare yourself for either a raise, or your next, better-paying job.

    –If you can’t make your payments, contact your creditors to set up a repayment plan.

    –Save! Even 1% of your take=home pay may seem laughable, but having any money at all tucked away can keep you from relying on debt for emergency expenses. A little bit of money is profoundly better than no money. You won’t miss 1% if you take it right out of your paycheck.

  10. yason says:

    Excuse me for possibly sounding arrogant and plain naivĂ© here but getting $4000 debt for a huge tv, computer and a piece of furniture when you don’t have that money is just plain ridiculous. None of the above items are necessities. Rent, food, and clothes are. If someone can’t distinguish between minimal survival expenses and luxury items, s/he has a far greater problem than fixing their consumer debt plans.

  11. Another option would be to refinance under a home equity loan to take advantage of lower interest rates. You just have to be VERY disciplined to not turn around and rack up the cards all over again.

  12. Rick says:

    Yason, you’re right, but this is about fixing past mistakes. You can’t go back and change the past. This is about fixing those mistakes and paying off debt from past mistakes.

  13. Moneymonk says:

    Im not a big advocate on moving debt just to save a few dollars. Change your habits. It has been said that more than half the people that consolidate debt get back into debt again. If you already have a high interest rate of these products it means that your credit is not the best. Therefore getting a loan at a bank will be hard also.

    Try to avoid consumer debt and stay discipline.

  14. sarah says:

    For peer-to-peer debt consolidation lending, check out prosper.com. I’m a lender on that site and see many borrowers cutting their interest rates in half or more by consolidation.

  15. Minimum Wage says:

    Angie –

    I don’t have any remaining credit, a health collapse (in hospital two months and unable to work for a year) also collapsed my credit.

    My dead-end job has no internal advancement opportunity and little room for raises. (It is widely believed here that the entire pay range runs from minimum wage to 20 cents above minimum wage.) Superior performance is not rewarded here, and mediocre performance won’t get you fired. (However, we did have one total slacker who did get fired.) Most employees are in a zombie-like comfort zone, where their performance is just good enopugh to stay on the job.

    No, I won’t miss 1% taken right out of my paycheck, at least not immediately. I was once recently down to $1.21 in my checking account, and if I had taken 1% out of my paycheck, it would have been very sorely missed!

  16. yason says:

    Rick, thanks for reminding me about the context. It all made sense then. Thank you also for putting me to enjoy a few good moments by myself thinking about what was it that made me write that comment in the first place.

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