Bail Yourself Out

Debt-saddled Americans aren't going to get any life-altering cash out of the latest stimulus plan; it promises to put an additional $7.70 a week into most paychecks. But it's a sign of something bigger for many borrowers: The chance to build their own bailouts.

With some new debt-reducing tools, including a new foreclosure-relief program, and a bit of Washington-willed forbearance, it's time for cash-strapped folks to get on top of their bills. Make that just-in-time: households are spending almost 18 percent of their disposable income just making their monthly minimum payments, according to the Federal Reserve Board. Average household consumer debt tops $23,000, down 3.1 percent from year ago-levels, as consumers spent much of 2008 holding the line on their spending.

Digging out of that is a completely different exercise for folks who have the cash and credit ratings than it is for those who don't. That's especially true when it comes to mortgages, where if you don't need the money, it's there for the taking. With a credit score over 740, you can still get a 30-year fixed-rate loan in the neighborhood of 5 percent, according to Bankrate.com. That's a great long-term deal that can boost your monthly cash flow and lock in a low rate for decades to come.

Folks with less-than-stellar credit scores may soon get more help from the Obama administration's new plan to subsidize troubled mortgages, but they shouldn't just wait for it, says Keith Gumbinger of HSH Associates, a mortgage research firm. He tells homeowners who are upside down—when what you owe is more than your house is worth—or who aren't able to make their mortgage payments to get themselves "on the list" by writing to their mortgage lender as soon as possible so they are on record as needing assistance. "Help is coming but it may depend on your willingness to play, and paper trails will matter." National lenders like Countrywide have special departments where requests for mortgage modifications are sent, says spokeswoman Jumana Bauwens; you can find the correct mailing address by calling the customer service number on your mortgage statement. Most bankers require a laundry list of information before deciding whether to restructure your loan; that can include everything from your name, address and loan number to an accounting of your assets, liabilities and family income. They also look for a special hardship letter detailing why the mortgage payment has become an insurmountable obstacle.

Car loans can be refinanced, too, and often should be, says John Ulzheimer of Credit.com. If your car loan is over 8 percent, get quotes locally from credit unions and small banks--usually the most willing to write decent low-rate loans on cars that are under three years old.

If you're saddled with a high-rate loan on an expensive car, you may be able to improve your cash flow by buying another car, though that sounds suspiciously shopaholic.The new stimulus plan offers a refund of sales taxes paid for new cars. So sell the guzzler, use the tax to buy a smaller, fuel-efficient car, and do it at a dealer that will give you a zero percent interest rate.

Student loans offer the most opportunities for debt abatement. This year's seniors should wait until July, when rates are projected to fall, before they make a move, says Finaid.com's Mark Kantrowitz. Graduates who've been out of school long enough to despair about their starter salaries can renegotiate the length of their loans with their current lenders. Stretching loans out as long as 30 years will cut monthly payments (though with interest, you'll pay more in the long term). Altruistic graduates who are aiming for jobs in schools, libraries, police stations or nonprofits, can bring their whole package of loans to the Department of Education's Loanconsolidation.ed.gov, where it will begin to qualify them for public service loan forgiveness: If they stay in the field for 10 years, anything they still owe on the loans is wiped away, so it makes sense to go for the lowest monthly payment possible.

Credit card balances remain the biggest headache for most consumers, and they are hard to kill. One new Web site, Debtgoal.com, tells borrowers how much to pay on all of their bills, month by month, so they can burn their balances as quickly as possible. Again, folks with good credit scores have options: They can transfer their balances to low-rate cards (there are lists at indexcreditcards.com). Folks with poor credit scores are more boxed in. They can seek consumer credit counseling at debtadvice.org that can help them prioritize their loans. The stock advice still holds: Pay any extra you can afford to the highest-rate card and minimums to all others. When that balance dies, aim at the next highest rate card. It will take time, but your balances will come tumbling down.

And that $7.70 a week? It's not nothing. Anyone saddled with credit card debt should consider sending it directly to their card issuer. If you've got a $2,000 balance on a credit card charging 14 percent, it will take you six and a quarter years and $1,000 in interest to whittle it down. Add that extra $33 a month to your payment, and you'll burn it in less three years, at a total cost of $409 in interest. How's that for stimulus?

© 2009