Getting rid of high interest rates first is key
Published 12:00 am Sunday, January 11, 2009
NATCHEZ — With the changing of the calendar year comes many resolutions. One of the most popular financial resolutions is to pay off or substantially reduce debt.
Experts say that resolution is more popular than in years past because of the current economic situation.
Local experts agree that paying off, or at least getting better control over current debt is critical.
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Chuck Caldwell, a partner at Silas Simmons LLP accounting firm, said taking on debt can impact individual for a lifetime.
“Debt is something I see that can hamstring a lot of people for life,” he said. “Unless people are able to get control of personal finances, it will continue to be a problem.”
Caldwell suggested that people attack paying off debt with a plan which includes an in-depth look at each credit account.
“First of all people need to look at the rates of interest on all loans,” he said. “They need to determine what loans have the highest (rate of interest) and try to reduce that one first.”
Kelley Pace, a professor in the department of finance at LSU said that an important first step in eliminating debt is to set up a budget to save money that can be devoted to debt relief.
“We all waste a fair amount of money, myself included, so there are always ways you can cut back and save enough to start working on some debt,” he said.
After determining what debt should be paid off first and developing a budget to do that, individuals should be prudent before taking on new debt or increasing the balances on current debt.
“People should take a hard look at what they are considering,” Caldwell said. “They have to make sure they need and can afford to pay back the money.
“And with the current economic climate, people need to take into consideration things like security of their income.”
Another debt relief option for some is to look into consolidation of loans or refinancing mortgages to free up home equity. But those aren’t fool-proof plans. They each have negatives and risk involved.
“Refinancing might be an option. While it isn’t exactly eliminating debt, people might be able to pay down higher rate debt with lower rate debt,” Pace said. “Then they can devote the savings to paying off other debt and be better in the long run.”
Economics instructor Kenneth Taylor from Co-Lin Natchez said consumers have to buy with discipline after consolidating debt.
“Some of the dangers with consolidation of several debts is that you end up with smaller payments, and you have to be disciplined enough to make sure you don’t open new accounts,” Taylor said. “It is in their best interest to use cash whenever possible.”
While getting out of debt is hard but not an impossible task, Martha Ratcliff, who teaches a Mississippi Cooperative Education class at Natchez High School, hopes her students never get bogged down by debt.
In her class she educates students on the way credit and interest rates work in an effort to curtail credit use.
She teaches 11th and 12th grade students and devotes a good amount of her class time to the proper use of credit.
“I teach my students that credit cards are only good if they can pay off the total balance of consumable goods,” Ratcliff said. “If it is going to take longer than a month to pay off, they need to wait on buying it.”
Ratcliff said her class catches students when they are beginning to get hit with credit card offers and hopes the lessons they learn in her class will have an impact on them.
“By the time they are seniors they are bombarded with credit card offers,” she said. “And many of them don’t have a working knowledge of credit.
“They think they can just pay the minimum payment and be OK.”
One thing Ratcliff does to debunk that myth is an illustration of how interest grows from month to month.
She takes a balance and simulates making only minimum payments to that balance over a several month long period of time. Ratcliff said seeing the numbers in print has a large impact on her students.
“Once they see that on the board in concrete evidence, they are amazed,” she said. “I think the leave the classroom they have more of an understanding of what they are getting into with credit.”