The truth about being debt free

People have debts with many creditors and at different interest rates. Knowing how to become debt free can save you a great deal of money if you are willing to become a true master of the art and science of money management.

Realistically, there is NO magic formula for getting rid of debt. Review the debts you have: credit cards, car purchases, financial companies, remembering that loan charges may vary from year to year among financial institutions.

Auto loan interest rates have been known to vary by as much as 10 percent. Finance companies often charge much higher rates than banks and credit unions. Credit cards and department store accounts can be tricky ways to incur additional debt. That is, unless you use them correctly.

With regards to challenging all of your beliefs, it is a fact of the modern financial system that loans generally incur higher interest rates. For example, let’s say Ford Motor Company goes to your bank. The company pays interest that is a fraction above the prime rate, which is the lowest rate banks charge their favorite customers. Surely you are paying several points above the premium.

You may not be able to change the fact that the bank gives Ford a better interest rate than it gives you. But you can control, to some extent, the interest rate you pay based on the amount of money you borrow.

Look at the interest programs on your credit card bills. You’ll see information that tells you something like this: On balances up to $2,000, the finance charge is 18 percent per year, while on balances over $2,000, you pay 12 percent. Remember, these numbers are generalized.

You may owe $2,000 or more in credit card bills, but if that debt is spread across multiple cards with low but persistent balances, you’re paying 18 percent of every penny. And if you pay the minimum amount due to each creditor every month, you’ll carry 18 percent until all balances reach zero.

Mastering a debt-free plan can be achieved by strategically refinancing your debt. In fact, you can renegotiate and finance both small and large loans. However, be careful. Make sure you can benefit from refinancing before you renegotiate.

Suppose you have a car loan at 10 percent and your bank is willing to lend you the money to pay it off at 7 percent. Sounds like a good thing, right? Well maybe. If a large portion of the loan has been paid off, it may not be worth refinancing because the new debt is typically paid off over a longer period of time and will ultimately cost more.

Rule of thumb: The more recently the loan was made, the more likely refinancing will work for you. Take out the papers; go to your accounts online, view your loans today. Take a look to see if you can make some changes that will put your money in motion, working for you.

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