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Control Your Debt: Maintaining Your Credit in a Down Economy

July 1, 2009

By: Jim Oosterman
Melrose Bank

If you feel like you need to get your debt under control, you are not alone. According to the Federal Reserve Board, consumer debt in the United States totals over $955 billion. In a down economy, it is increasingly important to learn how to manage your debt before it spirals out of control. There are several steps and resources to help you control your debt, improve your credit record and proactively handle your finances.

Get your credit report.
Request free copies of your credit report once every 12 months from Equifax, Experian and TransUnion at www.annualcreditreport.com. Examine your credit report closely for errors, and contact each of the three bureaus to correct any errors you find.

Consolidate your credit cards.
If your credit is good enough to qualify for a low interest, high limit credit card, consolidate your credit card debt onto that card. Consolidation can reduce monthly payments, interest charges, and the frustration factor of dealing with multiple companies.

Figure out how much you owe and develop a budget.
Gather your most recent billing statements and make a list of what you owe. Make sure to include credit cards, student or vehicle loans, mortgage and personal debts. Then make a realistic budget, taking into account your actual income and expenses. Check out free budgeting services on the internet, such as cnnmoney.com and Mint.com.

Pay more than the minimum.
If you only pay the minimum due on each credit card bill, you could end up making it harder to pay off your balance while your interest builds up. Always pay some principal whenever possible.

Remember that there is "good" and & "bad" debt.
Borrowing money to buy a house or pay for college can be considered "good" debt as it can build your credit record, as long as you can pay it off responsibly. For smaller investments and purchases, don’t use a credit card to buy anything you can’t afford to pay off in a month or two. Saving up and paying cash for "big ticket items" makes much more sense.

Increase your income.
Increasing your income is the fastest way to improve your debt situation. Do anything you can: get a second job, sell homemade goods or do yard work. Be creative! Use all extra income to pay down your debt.

Be aware that the government is trying to help you.br />With the Making Work Pay provision of the American Recovery and Reinvestment Act, working individuals and married taxpayers filing joint returns will receive a tax credit (up to $400 for individuals and $800 for joint filers) in 2009 and 2010. The credit will be calculated at a rate of 6.2 percent of earned income and is phased out at a modified adjusted gross income of $75,000 for individuals or $150,000 for married couples. If you receive a paycheck and are subject to withholding, your employer will automatically adjust the withholdings, resulting in an increase in take-home pay. Taxpayers who do not have taxes withheld by an employer can claim the credit on their 2009 tax return. Visit www.irs.gov.

Take out a personal loan.
If you are looking for better rates than those credit cards offer or are looking to consolidate different types of debt, check with your local bank to see if they offer personal loans.Personal loans can be secured, backed by an asset you own, or they can be unsecured. Unsecured loans are typically more difficult to qualify for. Generally the interest rates on secured loans are lower than unsecured loans. This is because the bank is taking less of a risk by loaning you money with collateral attached to the loan.

Borrow against your 401(k).
If you borrow against your 401(k) you get to pay yourself back at a very low interest rate. There's no credit check and repaying the loan through payroll deductions is a snap. Experts agree that this option should only be used as one of your last resorts because this money should be saved for its original purpose - retirement. In addition, if the borrower fails to repay the loan, there are severe consequences, such as the entire principal amount being subjected to both federal and state income taxes. Keep in mind loan repayments are snatched from paychecks after taxes, not before.

Ask for help.
Credit counselors can put you on a payment plan and help negotiate decreasing your interest rates and other aspects of your loan contracts. Visit the National Foundation for Credit Counseling at www.nfcc.com to find reputable counselors near you.

Without action, the accumulation of debt can have a drastic effect on your life. Particularly with the recent economic uncertainties, it pays to take the time to determine ways to proactively handle your finances before they become an unmanageable problem. Although some of these steps may require hard work and sacrifice, it is important to take control of your debt and maintain your credit before it spirals out of control. The hard work and diligence it takes to control your debt and maintain your credit will more than pay off in the long run.

James Oosterman is the Vice President of Melrose Bank. He can be reached by telephone 781-665-2500, online at melrosebank.com or on Facebook at facebook.com/MelroseBank.


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