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Getting out from under load of debt

ALBUQUERQUE, N.M. — Americans hold an estimated $2.8 trillion in total consumer debt, according to the U.S. Federal Reserve, and that’s not including mortgages.

While that may make your own monthly bills look paltry in comparison, New Mexicans actually have some of the largest debts in the country, according to numbers from the website Credit Karma.

The website (www.creditkarma.com) – which based its findings on the 2.1 million members nationwide who checked their credit score in the last 90 days – found that, as of July, the average New Mexican owed:

• $19,871 in auto loan debt, compared with $16,773 nationally. That’s the fourth highest in the country.

• $4,705 in credit-card debt, compared with $4,511 nationally. That’s the 14th most in the U.S.

• $148,746 on their mortgage, compared with $162,300 nationally. That ranks 25th in the country.

• And $25,289 in student loans, compared with $28,524 nationally. That’s the seventh lowest nationwide.

So what should you do to tackle that kind of debt?

The Journal asked a few local experts for some pointers.

Know what you owe

Start by making a list of all of your debts, says Albuquerque CPA Juanita L. Johnson of Dynamic Business Solutions Inc. That means looking at the whole picture: the total balance remaining, the monthly repayment obligation and the interest rates.

It’s a basic step, but it’s often eye-opening.

“Many times people will have various credit cards, and they don’t have an understanding of what interest rates they’re paying, (thinking) as long as they pay minimum payment, they’ll be OK,” Johnson says. “But many times with credit cards, if you’re paying just the minimum, you’ll never pay them off.”

See if you can get a better deal

Vicki Van Horn, executive director of the New Mexico Project for Financial Literacy, says refinancing could be an option for homeowners.

“Mortgage rates are still close to historic lows, so if people have a higher interest rate … and their credit is good, they may look at refinancing and possibly getting a shorter term,” she says.

Even auto loans – where Van Horn says there tends to be more predatory lending – are worth a second look. It may be possible to get lower rates at your bank or credit union.

When it comes to credit cards, Johnson says she sometimes recommends rolling several debts onto a new card with a lower rate. But, she warns, be careful that you’re not paying any high fees to complete such transfers.

Pick a strategy

There are multiple ways to attack debt. Some people prefer eradicating smaller balances first. Others prioritize the debts with the highest interest rates. The tactics are often referred to as “snowball” and “avalanche,” respectively.

Van Horn says the snowball method is supposed to offer psychological benefits – there’s a sense of accomplishment by completely paying off a balance. The avalanche method, however, costs less in the long run.

(To find out how much interest you’ll pay over the life of any loan, multiply the monthly payment amount by the number of months left on the loan and then subtract the principal.)

“I think it’s extremely important that, whatever strategy you use, that you feel like you’re making progress and you keep persisting,” Van Horn says.

Think smart

Other things to consider when it comes to your personal debt situation:

n Don’t dig a deeper hole. As you make progress on your credit card debt, avoid charging everyday purchases.

If you’re unable to pay your total balance in full every month, keep the plastic in your wallet when you hit the fast-food joint or drug store, Johnson says. Pay for that hamburger, birthday card or other everyday purchase with available cash.

“Otherwise, what will happen is they’ll get right back into debt again,” she says.

n Don’t forget to pay yourself. A recent study by the FINRA Investor Education Foundation found that New Mexicans are among the nation’s worst for maintaining “rainy day savings” – defined as the amount to cover three months of living expenses. Having such a stash can help head off future debt in the event of an emergency, Van Horn says.

She says setting aside that kind of cash probably rates higher than applying extra funds to a car payment or mortgage.

n Consider taxes. Dumping extra money onto the mortgage payment every month doesn’t always make the most sense, Johnson says, especially when there are other debts in play.

“I think people have this fear (that) ‘I have to have my house paid off,'” she says.

While mortgages usually have the highest balance, they also tend to have the lowest interest rates – and the interest is tax deductible.

“Credit-card interest you can’t write off on taxes,” Johnson says.

DEBT OVERLOAD

New Mexicans carry among the nation’s largest burdens; here are some strategies

to help get out from under it

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