Don’t Raise Your Personal Debt CeilingWednesday, June 29, 2011

Tips from CredAbility help consumers manage, reduce debt

ATLANTA GA — As Congress debates the merits of raising our country’s debt ceiling, consumers everywhere are struggling with similar decisions, particularly as unemployment rates remain high and meeting monthly financial obligations becomes more challenging. Some have turned to using credit cards, borrowing against their home, or withdrawing from retirement accounts to keep things afloat.

“It is not surprising that consumers are tempted to turn to credit cards or look at their homes or retirement accounts for a quick fix of their finances,” said Mechel Glass, director of education for CredAbility. “Unfortunately, many don’t consider the long-term impact of these decisions.” CredAbility recommends that consumers forego raising their personal debt ceiling in favor of reducing expenses wherever possible.

Credit Cards
The average cardholder has about $5,100 in credit card debt (U.S. Census Bureau) and the interest paid o¬n that balance can be $800 or more a year (based on 18% interest rate). This number increases per household when there is more than one cardholder in the house. Just think of what you could do with an extra $75-$150 a month in your budget! Stop charging additional purchases today and make a commitment to yourself that once you have paid off your debt, you will not charge any purchases unless you have a plan in place to pay off the balance in 90 days or less. Sacrifices now will mean less stress and a better financial future.

Home Equity Loans
If you are fortunate enough to be in a home that is now worth more than you owe on it, borrowing against the equity to pay off credit cards, make a large purchase or meet monthly expenses might seem like an easy way to deal with temporary financial challenges. Instead, you are actually trading unsecured for secured debt and putting your home in jeopardy in the event you are unable to repay the loan. Reserve tapping into home equity for home maintenance and repair projects that are absolutely necessary, such as repairing a leaky roof or replacing a broken heating or air conditioning unit. Avoid using these funds to make cosmetic upgrades or buy furniture or other items.

Borrowing against Retirement
Withdrawals from your IRA or 401k accounts before reaching the age of 59½ are almost never a good idea. In addition to early withdrawal penalties and the fact that the amount you withdraw may also be taxable income, you also reduce the money you will have available to you at retirement time, which may mean retiring later. While there may be extreme circumstances under which borrowing against a retirement account balance might be appropriate, consumers need to carefully consider the long term costs and confirm the penalties that could be associated with this decision with the IRS or your financial advisor before making a final determination.

Alternatives to raising your personal debt ceiling
Small changes can make a big difference, particularly when it comes to spending less and saving more. Reducing monthly expenses may seem challenging, but making a few small changes can add up to big savings and can help consumers through this challenging financial time. Here are a few ways to get started:

Trade name brands for generics at the grocery store when possible. Compare prices at grocery and discount stores—splitting your shopping list between stores might help you save big
Swap eating out for eating in. Bring your lunch to work and skip the morning coffee stop. Trade an evening out for a romantic dinner in
Raise/lower the temperature at home – Raising the temperature in the summer and lowering it in the winter even just a few degrees can save you money every month. Consider swapping out your manual thermostats for programmable ones to make it even easier
Review your phone and cable bills. If you never use your land line, do you really need it? Do you really need unlimited minutes on your cell phone? Could you forego movie channels for basic cable?
Shop for the best prices on car insurance—rates can vary hundreds of dollars each year. Be sure to compare coverage amounts and check to see if your company is well rated by your state