My friend Stacy recently took some steps to reduce her debt. She discussed her situation with me and we also talked about steps for her to take. She had both credit card debt, an auto loan and a mortgage. I thought I would share with you the steps she took to formulating her debt reduction plan as I felt she was really tackling it from all angles.

1. Check Credit Report

The first thing Stacy did was to actually check her credit report. She decided to subscribe to FICO® Deluxe so she can not only get her credit report and also her credit scores. The reason for this is to check for any errors in her report that may be artificially suppressing her scores and to also constantly monitor her reports for suspicious activities. Fortunately, she detected no errors.

2. Refinance Your Exisiting Debt

The next step Stacy did was to look for opportunities to refinance her existing debt. There were 2 things she could essentially do. Firstly, she could take a HELOC and consolidate all he exisiting debts (excluding mortgage). Or she could look for refinancing opportunities for every debt that she had. Using a HELOC meant that she was trading an unsecured debt for a secured debt. In the event that she is late on her HELOC, there is a chance she might lose her home. That is something she is not comfortable with.

However, she shopped around to get a lower rate on her auto loan. Her mortgage was a little tougher because she already has a low rate. With regards to her credit card debt, I suggested she check out cards that offered 0% teaser APR for at least 12 months. I also went through with her how to choose a balance transfer credit card. Choosing a balance transfer card with no balance transfer fee for the introductory offer, as well as making sure the credit card allowed you to write a balance transfer check was important. Stacy ended up with two cards, the Citi® Home Rebate Platinum Select® MasterCard® and the Bank of America Rewards™ American Express® Card. Both had 0% APR on balance transfers for 12 months, no balance transfer fees and allows you to write a balance transfer check. She chose the Citicard also because you could earn rebates that are automatically used to pay her mortgage principle.

By refinancing her auto loan and transferring some balance to 0% balance transfer credit cards, Stacy managed to save a few humdred dollars from her debt monthly payment. She can then use the savings to start paying off her credit card debt with the highest interest rates.

Stacy decided not to consolidate her debt with a HELOC because she felt she did not want to have any secured debt.

3. Time for Garage Sale

But Stacy did not stop there. Instead, she decided to clear her house and sell off any items that she had bought on impulse and did not use them. Things like designer shoes and handbag that sit in the closet, DVDs that are watched only once, kitchen utensils bought from late night informercials!. She managed to actually raise over a thousand dollars, which she used to pay down her credit card debt.

4. Tighten her Budget

Stacy went a step further and really tightened her budget. Out went cable TV, a gym membership. Taking lunch to work and cooking every evening became the norm rather than the exception. Out went her verizon wireline phone and in came her new Vonage, at $24.99 a month, about $27+ after tax. Overall, she managed to shave off a couple of hundred dollars from her monthly expenses.

5. Work Towards Getting a Raise

But Stacy’s plan also went further. She told me that she will be working hard to get a good raise this year. She is doing all she can to advance in her career. What is the point of being frugal your whole life? She flelt the only way to be able to spend more without going into debt is to also earn much more! Way to go.

With these steps that she is taking, I’m pretty sure she will get out of debt ahead of time. What I find interesting in Stacy’s approach is that she does not just “budget” or get a couple of “0% APR credit cards”. Instead, she approached her debt reduction plan holistically from every angle. And I think this is something we can all learn.

This entry was posted on Wednesday, February 7th, 2007 at 8:04 pm and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.