Beth Kobliner’s 7-Step Plan for Financial Expertise

Debt management isn’t rocket science. In fact, by following a few simple steps, you can keep yourself from getting into serious debt and maintain a high credit score.

 1. Never miss a payment. The number one factor in determining your credit score is your record of timely payments. Just one missed payment could drop your credit score by as much as 100 points, which means you could get a higher rate on everything from a mortgage to a car loan to a student loan. Essentially one late payment could cost you tens of thousands of dollars in interest over the life of a home loan. So pay on time!

2. Automate. To stay on top of your bills, sign up for automatic billing and payment. By doing this, you’ll not only protect your credit score, but you’ll avoid late fees (which can reach $40 for a single overdue payment). Another reason to automate: if you pay late, banks can raise the interest rates on your existing balances, which typically double (or even triple) the interest you pay.  

3. Follow the interest rates. Ideally, you should pay off all your cards every month. If you can’t, your best plan is to attack your balances from highest interest rate to lowest. If you have savings, use that to pay off high-rate credit card debt. It sounds counterintuitive, but here’s an example: Say you have $1,000 in savings and a credit card balance of 1,000 with an interest rate of 16%. If you keep the money in the bank for a year, you’d be lucky to make $10. Over the course of the year, you’d pay $160 to your credit card, taking a net loss of $150 for the year. With me so far? But if you take that money out of savings and pay off your credit card, you’ll earn no interest but you will also pay no interest. If you look at it that way, you’re actually saving yourself $150.

4. Stretch out the terms of your student loans. Generally student loans have low interest rates. If you need to free up cash, ask your lender to stretch out the terms of your loan from say, ten years to 20 years. Another idea is to look into a new program called Income Based Repayment. This allows you to repay your federal student loans based on what you make rather than what you owe. For most people, it will reduce monthly payments compared to the standard plan. Another bonus: any remaining debt will be forgiven after 25 years. For more information, go to http://www.ibrinfo.org/.

5. Pay more than the minimum. Paying just a few dollars extra every month can make a huge difference. Say you owe $1,000 on a credit card (with a 16% interest rate). If, instead of making the minimum payments, you paid just $20 more each month, you’d save $260 in interest and you’d be out of debt four years faster. The point? Pay as much as you can.

6. Negotiate your rates. Try to get a lower rate on your credit cards, or get a lower-rate card by calling your card company and asking for the retention office.

7. Get help. If you’re having real trouble repaying your debts, you may need help. Try negotiating with your lenders, or, if you feel comfortable, consider borrowing from friends or family. (Get it all in writing with a contract from Nolo.com.)  If you need to talk to a financial expert, two places to start your search are the Association of Independent Consumer Credit Counseling Agencies (AICCCA) and the National Foundation for Credit Counseling (NFCC). Avoid for-profit counseling companies or anyone who tries to put you into a debt settlement or debt management program right away. (These programs can be expensive or even outright scams.)

For more tips from Beth Kobliner, visit http://www.bethkobliner.com/ or follow her on Twitter.