Getting Out of Debt (Part 3.5: More on Expenses)

My previous post in this series, Getting Out of Debt (Part 3: Reducing Expenses), covers some of the more obvious practices for reducing your expenses. The next piece of the puzzle involves some practices that are a bit more subtle. Usually, when I meet with new debt-coaching clients for the first time, I have them assemble all of their current credit card statements, bank account statements, and utility bills. Then, I go through each account, making note of interest rates on outstanding balances, late fees, and other surcharges. I’m amazed by how often I can spot hundreds of dollars in uneccesary expenses resulting from high interest rates, late fees, and over limit fees.

These expenses are the natural and predictable result of living in a state of hope and denial and waiting to be rescued, which I talked about back in the first installment of this series. These expenses are the equivalent of paying $100 for a cup of coffee and then leaving without your change because you simply can’t be bothered with the inconvenience of holding your hand out to collect it. I know it sounds absurd, but most of the people I’ve coached out of situations like this just don’t see it as something that simple, when in fact, it is entirely that simple. The subtle side of expense reduction requires you to pay careful attention. Banks, credit cards, and other institutions are counting on you to be oblivious or lazy so they can make more money off of you!

Here’s what you need to know:

• When you miss payments, your interest rates will go up.
• When your payments are late, your interest rates will go up and late fees will be assessed to your account.
• When you go over your credit limit, your interest rates will go up and over-limit fees will be assessed to your account.
• All of this affects your credit score, which determines the interest rates lenders will give you. (Higher interest rates on loans will increase your regular, monthly expenses while lower rates will reduce them).

If this scenario sounds familiar to you, you’re not alone! Countless multitudes of people are in the same boat. The good news is, you CAN do something about it! It starts with paying careful attention, and taking action to avoid these types of expenses.

Here’s what you need to do:

• Tend to your over-limit accounts first. Pool any resources you can to pay down these balances until you’re no longer paying over-limit fees. If this means eating peanut butter and jelly all month, then do it anyway. Do it NOW! The longer you avoid it, the worse it will get and the longer it will take to dig out.
• Tend to your high interest accounts next. Call each institution and ask them if they will lower your interest rate. Sometimes they will, sometimes they’ll tell you they need to see 6 months of consistent, on time payments first. Do whatever is required to lower your rates.
• Going forward, make sure you know all the due dates for all of your open accounts. Make ALL of your payments five days early, ALL of the time, without exception. This is particularly important when it comes to your credit score. Credit bureaus like to see consistent, responsible behavior. Even one blip will affect your credit rating. Paying early, as opposed to on time, has a positive affect on your credit rating.

These steps may sound sound simple, but they require discipline, practice, and sometimes major sacrifices. You have to be willing to spend the time and energy it takes to manage these subtle expenses. Depending on your situation, it could take years of consistent behavior and careful planning before you actually experience the reward of taking these actions. Never-the-less, these three steps are the holy grail of subtle expense management, and following them consistently can save you hundreds of dollars each month.

This series is continued in Getting Out of Debt (part 4).

getting out of debt

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