Debt Reduction

Debt reduction is something very different from other debt solutions. Here I want to talk about few realistic ways to achieve debt reduction, not some money grabbing techniques used by unsavory debt consolidators and credit counselors. I must stress in the very beginning that these few simple but effective ways to reduce debt should be utilized long before you sunk too deeply in debt and your credit got bad, so no bank would extend you an extra credit in one form or the other to assist in reduction of an existent debt.

If you wonder why someone with decent credit and no overwhelming debt would even care to look into debt reduction, understand that all the people with money and credit problems had good credit and no or little debt at some point, and then simply overextended themselves initially, and slowly got themselves into deeper waters. So it is very important to control your spending habits in early stages, and if you have to spend a lot, do it wisely.

Debt reduction  - what homeowners can do

Debt reduction for homeowners can be achieved in two ways. Debt reduction thru cash out refinance offers a good and inexpensive way out of debt. You can consolidate your credit cards, school loans, car payments by tapping into your house equity. Needless to say, your house must have enough equity you can borrow against. You take that cash and pay off the high interest debt. The biggest bonus is that your home mortgage is tax deductible and amortized over long period of time - 10, 15, 20, 30 or even 40 years, whatever you choose for your mortgage. It results in lower tax deductible payments. Basically you are paying back to yourself and government gives you tax break on the interest. Closing cost for refinancing can be covered by your mortgage broker. To read more details about this debt reduction tool, visit cash out refinance page.

The other way to debt reduction is home equity line of credit or HELOC. If you obtain one, your house will have the second lien or mortgage. You have pretty much the same benefits as with cash out, like tax deduction, but there are few important differences. The most important one is variable rate. Also there is very little if any upfront cost. Closing cost is usually paid by a bank. Go to home line of credit page to learn more.

Debt  reduction  - credit card swapping

This is something entirely different in debt reduction arsenal and doesn't require homeownership. However, good credit is a must and spending discipline is even more important. Everyone has at least one credit card. If you pay off your bill monthly and don't carry over any balance, credit card issuers get upset. Of course they still make money just by virtue of the credit card arrangements with stores, shops, restaurants that accept them. Credit card issuers get little cut, roughly 1.5  percent on each transaction where their credit cards are involved. But the real money are when we, the consumers start carrying balances and are being charged the interest, anywhere from 6 to 18 percent.

So suppose you got a generous line of credit, say $5,000 and you use your card quite a bit but paying it off monthly. What is the best way for your bank to get you where it wants you to be, in more sustained debt? That is right, extend your credit limit, say to $8.000, send you some checks that charge only 2% interest for the first three months and offer you a balance transfer from other cards with no interest for the next six months.

Then you are getting other "no interest till 6 month later" cards. Some will charge you 1 or 2 percent for 8 to 9 months or whatever but you got the picture. As long as credit card banks see that you use other bank cards and your credit is good - you never late, you will get those irresistible offers in mail every two weeks or so. My advice to you is take them sometimes but use very wisely.

To illustrate this debt reduction credit card swapping I give you this real life example. I bought a $28,000 car with $8,000 down payment. After I finished with salesman, I was dispatched to a financial guy which is typical. He wanted to loan the remaining $20,000 at 4 percent for 36 months. By the way do you know how much those financial directors make? Nice six figures. Anyway, I simply told him I'd pay cash. He rolled his eyes and tried to convince me to finance. I told him I didn't care to pay about $2,500 in interest.

I put the remaining $20,000 on two of my credit cards, $10,000 each. They made big fuss since they had to pay credit card fees but eventually accepted. One was interest free for 6 months. The other had 6 month introductory rate of 1.9 percent. Now I had my brand new car paid off with these two practically free credit cards. Of course the catch was to make sure I'd be clean within 6 months or so. I paid as much as I could on the second card and finished it within 8 months. The first one still had a balance of about $4,000 in the end of interest free period when I got another offer for account transfer. I paid $30 transfer fee and got another 6 months practically free. Altogether I paid around $230 in interest and fees. That was on $20,000 car loan. Just over 1 percent. That is debt reduction in my book.

Now I must emphasize that this is not for everyone. You must be able to make the payments and be secure at your work. If you loose your job, you may have to spend savings on everyday things, never mind new car, furniture, electronics or whatever. But with all the other things in place, this is not a bad way to reduce your debt.

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