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Burdened by tyrannical debt? Declare your independence

June 26, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Independence Day is an occasion to celebrate the Founding Fathers and the freedom from tyranny they helped earn for the nation. Yet millions of Americans today voluntarily subject themselves to another form of tyranny: the type caused by an excessive debt burden.

This Independence Day, resolve to win your freedom from this oppression. While there are no instant cures for debt problems, discipline and common sense can help you earn your independence from debt over time.

To begin, it's important to note that different types of debt require different approaches. Here are tips for overcoming three of the most common varieties.

1. Credit card debt

Consumers really lose out today when it comes to credit card interest rates. While the bank rates you earn on your deposits have dropped to a fraction of 1 percent in recent years, interest rates on credit cards have dropped barely half a percentage point since 2008, and are still above 13 percent on average. So if you carry a monthly balance on your credit cards, you are paying a high price for your debt. Here's how you can eliminate it:

  1. Stop the bleeding. If you've been racking up credit card debt, the first step to freeing yourself is to take the cards out of your wallet so they can't do any more damage. Forget the old commercial -- your new credit card slogan should be, "Don't leave home with it."
  2. Prioritize your debt. If you have multiple cards, find out which ones have the lowest interest rates, and transfer as much of your debt to those as you can (after you check for any balance transfer fees). If you can't take all the debt off your high-interest cards, at least start targeting the card with the highest rates for your largest monthly payments so you can pay down the most expensive balances first.
  3. Make more than the minimum payment. Minimum payment requirements are usually very reasonable, but this is a false comfort. The ability to make a small payment only prolongs your debt and thus makes it more expensive. Seek to exceed those minimum payments by as much as you can.

2. Auto loan debt

A big issue with auto loan debt is that loans are getting longer and longer, so people barely have time to pay off one loan before it's time to buy a new car. Try instead for a cycle in which you are free of auto loan debt for roughly half the time you own your car. Here's how:

  1. Borrow shorter than the useful life of your vehicle. Some auto loans now stretch out to eight years -- or roughly the useful life expectancy of a car. Borrowing shorter will mean higher payments, but this will cost you less over the life of the loan and you will be free of the debt before your car is ready for the junkyard.
  2. Maintain your vehicle. Sensible maintenance can prolong the life of your car, giving you the chance to own it free and clear for longer.
  3. Stay committed to your car. Don't give into the temptation to buy a new car every few years. It can be very rewarding to bond with a car and see just how many miles you can get out of it.

3. Mortgage debt

We have recently seen the lowest mortgage rates on record. But this may be a mixed blessing, as future home buyers will find homes far less affordable if rates return to normal. With rates already starting to rise, here's how you can make your mortgage burden more manageable:

  1. Compare mortgage quotes. Don't assume all rates are the same. Comparison shopping can make a difference, and when you are borrowing for 30 years, even a few basis points can add up to a lot.
  2. Pay attention to refinancing opportunities. Over the life of your loan, there is a good chance you will witness a dip in rates at some point, so don't let it pass you by.
  3. Use home equity sparingly. Home equity is something to be built up, not spent. Try to avoid home equity loans unless you are borrowing to improve the value of the property.

America's independence wasn't won in a single day, but the nation celebrates July Fourth because the signing of the Declaration of Independence represented a pledge to win that freedom. Similarly, earning your independence from debt may take some time, but you can make this Fourth of July the day you pledge to get started.

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