Add this to the fact that many companies are cutting the hours of their employees and some two earner households are having their finances cut in half because one party has been laid off and you have a recipe for financial disaster on your hands.  Having to live solely on what the individuals are paid by their company in each paycheck will result in a large reduction in the amount of money that they are able to spend each month.

The only way to keep them from spiraling into insurmountable debt is to create a strict budget and stick with it.  This will ensure that the person is not spending more money each month than they can afford.  While this can be hard for a person that was used to buying whatever they wanted with a swipe of a credit card, the reality is that many people are going to have to monitor their spending and start living within their means.

What Do I Need To Do To Create A Budget?

Creating a budget that will help a person manage their finances is not as difficult as many people may think.  The first step in the process is determining how much is spent each month and what that money is spent on.  For two months or more, a careful record should be kept of all of the things that the person has spent money on that month, including all bills, personal purchases, and even items purchased out of vending machines.  All receipts for this time period should be kept as well to provide a cross reference for the record.  This provides a better picture than attempting to remember everything purchased during the month.

After determining what the person is spending money on each month, it is time to eliminate the items that they are wasting money on.  Many people make unnecessary purchases without thinking because they were never concerned about the money spent on these items before.  These unnecessary items need to be eliminated from spending and the money that went towards these purchases should be put toward paying down debt.

Now, it is time to create the monthly budget.  The goal is to have less money going out than you have coming in from your paycheck and any other income sources. The large the gap is between them, the better it will be for your financial future.  By detailing each expense and the amount, you can create a budget that accounts for all monthly spending.

The most important part of creating a budget is sticking to the budget.  Training the mind to pass up certain types of purchases may be hard, but it is possible to create a budget and stick to it until all debts have been repaid if the person is determined to do so.

People that were living beyond their means and financing their lifestyle with credit cards are now finding their credit cards maxed out and no other financing options available to them.  Others that were using the equity in their home to finance a higher quality of life are now finding that they owe more on the home than it would be worth if they were to sell it.  If a person is drowning in debt, it can be very difficult to extract themselves from the situation if the person does not know where they should begin.  By following a few simple steps, the person can reduce the amount of debt that they are carrying by a significant amount in a matter of months. 

Thinking Positive
The first step in reducing your debt is believing that getting out of debt is possible.  Although the process may be long and difficult, getting out of debt is possible and to be able to stick to the program long enough to free you from your debt, you have to believe that the process will work.  It will take time to produce the results that you are looking for, but signs that the process is working will appear over time, reducing your debt by a significant amount. 

Stop Spending
One of the hardest things to do when trying to get out of debt is changing your spending habits to stop debt creation.  Every dollar spent is a dollar that is not going towards paying off debt and the person will have to remain in that mindset if they are going to accomplish their goal of debt elimination.  Determining which purchases are unnecessary and cutting them out of the budget is one of the fastest ways to save on monthly expenses and pay off excessive debt quickly.
 
No More Credit Card Use
Purchasing items with a credit card is much more expensive than paying for them with cash.  Each credit purchase is subject to interest charges and finance charges, which can dramatically increase the price of the purchase over time, and placing the purchase on the credit card increases the risk of a late payment charge or an over limit charge on the account.  It would be better to pay cash for all of your purchases or use a debit card that is linked to a checking account.

Save Money For An Emergency
The biggest reason that people begin to drown in debt is because they had to borrow money, either through their credit cards or from a loan, to pay for a financial emergency.  By having savings to use in these situations, the person will not be forced to place a large balance on their credit card or take out a loan to be able to handle the situation

By following these simple steps for dramatically reducing debt, financial control can be regained and the debt can be eliminated over time.  There are no quick solutions for people that are deeply in debt, but these simple steps will stop the person from taking on more debt and will begin the process of reducing the amount of money owed to creditors, bringing the total to a much more manageable level.

Avoid Overpaying For Purchases
There are many purchases that people make everyday that are overpriced when compared to making the purchase at the grocery store or taking the time to prepare an item themselves.  For example, buying the typical six pack of beer at the local grocery store costs around $5.00, but those same beers purchased at a bar cost around $18.00, an increase of 260%.  Specialty coffees are also items that are cheaper to make yourself as coffee made at home costs about 1/8 of the price.

Automatic Savings Account Deposits
Many companies allow their employees to split their direct deposited paychecks into up to three different accounts.  People that take advantage of this benefit can have a percentage of their pay transferred into their savings account every payday.  Directly depositing this money into a savings account prevents the money from being spend on frivolous items and saves the person from having to physically transfer the money from checking to savings.

Document All Purchases
To learn what you are spending your money on, you should document all purchases, whether they were paid with money from your bank account or placed on your credit card.  This provides a good look at what percentage of your money you are spending and what you are spending large sums of money on.  This will also help to identify areas where spending could be trimmed to save money.  People that document all of their purchases rarely spend more than they intend because they are able to see how their spending is affecting them each month.

Round Purchase Amount To Whole Dollars
Want an easy way to have additional money in your checking account to ensure against small overdrafts or start savings?  Every time that you write a transaction in your ledger, round up the amount of the purchase to the nearest whole dollar.  This makes it easier to subtract purchases from the balance and over time the cents will add up to a significant amount of money in your checking account.

Check Your Credit Report On A Regular Basis
Experts estimate that many of the credit reports compiled by the three major credit bureaus contain mistakes that can be very costly to people using credit or attempting to obtain a loan.  By reviewing your credit report regularly, any mistakes will be noticed quickly and steps can be taken to correct the information before it begins to cost you money in higher interest rates and additional fees for loans.

The Importance Of A Good Payment History

When attempting to get credit for the first time, it is important to remember that every payment that you make on accounts has the ability to affect your credit history.  Even if you have never applied for credit from a lender or a bank, a credit history is still being created which details some of the choices that you have made.  Late or missed payments can have a great impact on your credit history and may stay on your records for as long as seven years.  Maintaining a good payment history is very important when getting credit for the first time.

Finding A Co-Signer

Another important tip for getting credit for the first time is to “piggyback” on someone else’s credit until you are able to establish your own credit.  This technique works by having a person with established credit and a good credit history co-sign for a loan or a credit card, allowing you to obtain credit to begin establishing your own credit history.  The person that co-signs the loan for you should be some one that you can trust and that knows that they can trust you, like a parent, a grandparent, or other close family member.

Obtaining a co-signer to help you obtain a credit card or loan is one of the fastest ways to obtain a credit history, but there are some risks involved with the technique as well.  If the person chosen as a co-signer has had credit problems in the past, then they may not be able to help you get a lower interest rate than you would have qualified for on your own.  Another danger with this method is the fact that any mistakes that you make when using the credit card, such as missing a payment or paying late, will be reflected in the co-signer’s credit report and may create a reduction in their credit score.

Getting credit for the first time does not have to be a difficult task, but there are a number of different ways that can be used to make the process easier.  By remembering that virtually any transaction that you make has the potential to affect your credit score, you will insure that your credit history is positive, which will make it easier for you to get the credit products that you desire.

Review Your Records

If a credit card charge that is not familiar shows up on your credit card statement, the first thing that the person should do is review their records to determine whether they may have forgotten that they have made the charge.  There is nothing more embarrassing than attempting to dispute an unauthorized charge and realizing that you were actually the one that made the purchase.  People that use their credit cards on a regular basis should especially be careful because it is very easy to forget about a charge or miss identifying a charge that shouldn’t be there.

Inform The Credit Card Company Of The Charge

If a charge that cannot be explained does appear on your credit card statement, it is important to inform the credit card company of the unauthorized charge as quickly as possible.  In many cases, the charge that is made on the credit card without your consent will be one with a high dollar value as the thief tries to obtain as much as they can from the account as quickly as they can before their actions are noticed.  If the credit card has only been used for purchases less than $100 in the past and all of a sudden a $600 charge on the credit card appears, this is a good indication to the credit card company that the purchase may have been fraudulent.

The faster the charge is reported to the credit card company, the easier the charge will be to remove from the account and the better chance the company will have of finding the thief and prosecuting them.  If more than a few days has passed since the charge to the account has been made, the credit card company may require that you send them a written statement attesting to the fact that you did not make the charge and that you do not know who charged the purchase to your account.  These written statements often have to include permission for the company to prosecute whichever person is found to have used the credit card or credit card number to make the purchase. 

Keeping Track Of The Issue

After the credit card company has been contacted about the unauthorized charges on the credit card account, it is important for you to continue to monitor the situation to make sure that it is taken care of.  You should save the credit card statement that includes the unauthorized charge until the next credit card statement arrives so that you can make sure that the charge has been taken off of the account and the account balance has been corrected.  If you have online access to your credit card account, you may want to monitor the account online to make sure that the representative at the credit card company has taken care of the problem.

What Creates A Poor Credit Rating?

A poor credit rating usually occurs for one of two reasons.  The first is a number of missed payments or a pattern of late payments, which can lead to repossession and/or collection efforts directed toward the account holder.  The low credit rating will affect any purchases that require a line of credit and is a reason for the rejection of a credit application by most lenders.

The reason lenders deny credit applications based on a poor credit rating is because they gauge their risk of lending money to you based on your previous practices dealing with debt obligations.  By simply looking at your credit history, lenders can determine if you have abused your ability to obtain credit and your level of responsibility when handling your debts after receiving lines of credit.  If a lender has determined that you are a credit risk based on your credit history, they will most likely deny your application for any type of financial assistance that you seek.

The second reason that a poor credit rating can occur is too many open credit accounts or maxing out the credit that you have obtained.  Too many credit obligations can cause an individual to fall behind on payments or simply miss payments all together if some sort of financial hardship occurs.  If lenders believe that an individual is living on a circle of revolving credit rather than using credit to supplement their income, the lenders will determine that the person will not have the money to repay any additional lines of credit that they extend to the person.

It is important for every person to know where they stand with their credit rating. The credit market is more stringent today than it has ever been and it is vital to have a desirable credit profile if you need to use credit in the future.  If the person is aware of the standing of their credit rating, the easier it will be for them make the right financial decisions the future.

The Steps That Led To Disaster

For quite some time, many individuals have been living lifestyles that are beyond their financial means and financing their lifestyles with credit cards and home equity loans.  A number of people purchased new homes that they could barely afford, taking advantage of the lax lending standards prevalent at many banks and lending institutions.   People were rewarded with low interest loans on homes that were priced much higher than what they could actually afford.

Other people obtained high limit credit cards and spent recklessly, never thinking of the day when the balance would become due.  The credit card companies began to offer double and triple reward points for major purchases on credit cards and our nation’s leaders pushed people to spend money to stimulate a suffering economy as a patriotic act.  Many companies capitalized on this trend by convincing people that they needed their products and services, no matter if it was for the latest fashions, the newest cell phone with the best data plan, or acquiring the home of their dreams without having to prove that they could afford it.

These simple luxuries were the catalyst that started the trend of individuals slowly growing deeper in debt, gradually chipping away at the savings many of us had tucked away for a rainy day.  Our outlooks toward finances were changed from saving for the future to spending just to save our future.  Now, those days of easy credit are gone and the credit crunch is quickly cutting off the circulation of cash that people had used to support their lifestyles.  The lending standards and interest rates for home equity loans are at an all time high and many people are obtaining them to pay off the other lines of credit that they had relied on in order to maintain their lifestyles. 

What Must Be Done

Some people believe that in order for them to pull away from the hold of debt, they should eliminate that debt by paying it off quickly, which in theory is a good method of getting out of debt.  However, paying off loans with more credit based loans or home equity loans is not the answer.  Credit based loans and home equity loans will just transfer debt from one place to another, which does not solve the problem

The simplest and most effective solution for getting out from under mounds of debt is to monitor your spending and cut back on the extras. Take any extra money that you may have after paying your monthly obligations and apply it to your debt instead of spending it on frivolous items.  Personal restraint in your spending is the only way to truly become debt free and the more restraint that you exercise, the faster you can eliminate your debt and the headaches that come with it.

Planning for retirement is very important regardless of whether the economy is showing signs of strength or weakness.  What many people fail to understand is that the time that the person will be beginning retirement is growing nearer each day and each day that passes without any money going toward the growth of your retirement account cannot be recovered at a later date.  Most individuals know that time is of the essence when it comes to being able to save enough for retirement and yet still fail to place enough into their retirement accounts to be able to live comfortably in the future.

Elevate The Importance Of Saving For Retirement

Many individuals believe that saving for retirement should be put off during economic downturns, keeping the bulk of their income for the immediate financial needs at hand.  These people may decide to lower the amount of their monthly contributions to the retirement account, redirecting that money back into their paycheck where they will pay taxes on the higher amount before pocketing the additional amount.  Redirecting funds from a retirement account is one of the worst things that you can do during an economic downturn because you are taking money from your future to pay for your present.

The first thing that should be done to secure your finances during an economic downturn is to slash any non-essential spending from the monthly budget.  Sacrificing the luxuries now will ensure that we will be able to afford some luxuries later in life. Many people can save $15 to $20 dollars a month just from deleting extra services on our cell phone bill along, not to mention dialing back the “Super Hi-Speed Internet Connection”, or taking the time to cook a meal instead of going to a restaurant to eat. Once people can begin to audit their spending honestly and quit spending money on items that they really do not need, many of people start to see that they have much more money available than they previously thought.

Leave Your Nest Egg Alone

Any money that is already in your retirement fund should remain there untouched until you actually retire.  Why should a person resist dipping into retirement savings?  For the simple reason that it is very difficult to replace the money borrowed from a retirement savings account and even if the money is replaced, you will lose the money that you had to pay in taxes for taking the money out of the account and the interest that you would have earned if the money had been left alone.  Resisting the urge to borrow from your retirement savings and searching for alternative methods to come up with additional money is much easier that trying to replace the money that you have taken out of your retirement account.

Always Pay Off Your Credit Card Balance

There are a number of ways that a consumer can use to reduce the amount of money that they are paying to the credit card companies each month and the most effective way is to pay off the balance of the credit card each month.  Under the law, the credit card companies must give the person a grace period of at least 25 days to pay off the purchases that have been placed on the credit card before the balance of the card is subjected to interest and finance charges.  If the balance that has been placed on the credit card is paid off within that time limit, then the company cannot charge the person for placing the purchases on the credit card and the person gets a 25 to 30 day loan for free.

Use The Credit Card Sparingly

Although the temptation to place a majority of your purchases on your credit card and forget about them can be very high, going this route will cost the person a great amount of money in the long run.  In addition to the interest charges and finance charges, there is a good chance that the person will spend more with the credit card than they can afford to pay, will go over their credit limit triggering an over limit charge, or will carry a balance on the card which allows the company to charge higher fees for using the credit card.  The best way to use a credit card is to only use the credit card for emergency purchases and to pay cash for everything else.

Pay The Bill As Soon As It Arrives

A significant percentage of the profits that credit card companies bring in each month are due to the number of accounts that they have charged a late payment charge to.  These late payment charges can range anywhere from $25 to $39 per occurrence and are charged directly to the account, which will add to the balance amount that the person will be paying interest on.  In some cases, the late payment charge causes the person to go over their credit limit which can trigger another charge of up to $39 which will also be added to the balance of the credit card.  By paying the credit card bill as soon as it arrives, you will ensure that you will not forget about making the payment and the payment will not be mailed so late that the deadline is missed due to the pickup and delivery of the mail.

Understanding Expired Debt

A debt that has expired is a debt that has existed for more than seven years and has not any type of activity on the account throughout that time.  Legally, a person is not obligated to pay these debts due to a legal statute of limitations placed on collections of debts across the nation. These laws were put in to place in order to prevent the collection agencies from attempting to collect on debts that are virtually impossible to validate.

Even though this type of debt collection is illegal, there are some unethical debt collection agencies that still try to collect on these debts anyway. Why do they do it? Simply put, they are relying on a person’s lack of knowledge of the laws surrounding debt collection to collect money that they are not legally entitled to. These companies have nothing to lose due to the fact that all they have invested in the account that they are attempting to collect on is time, nothing else. 

The debt collection companies do not have any affiliation with the original account holder as they have typically purchased the debt from the original company for pennies on the dollar or have been assigned the account from another company. This means if they can collect any portion of the original debt it becomes nearly 100% profit for the debt collection agency.  For this reason, many of these companies use highly aggressive collection tactics that a legitimate collection agency would not use for fear of being held accountable for the tactics in court. These unscrupulous companies want to achieve a level of fear that would get the individual to pay the debt more quickly without asking too many questions about the transactions.

Can I Do Anything About It?

Yes.  If you know a company is trying to collect on a debt that is more than 7 years old and there has been no activity on the account, you can simply inform the debt collection agency that is attempting to collect the debt that you are fully aware of the laws surrounding the debt, and any further attempts to collect that debt will cause you to report them under the Fair Debt Collection Practices Act.  Sometimes alerting these companies just is not enough, as there have been cases where they have actually changed dates to reflect current activity on the debt, so they can extend the period of time to make the debt valid. If you find this to be the case, report them under the Fair Debt Collection Practice Act without hesitation. If you need to you can even take the collection agency to small claims court and have them pay you damages for harassing you about an expired debt.