Most personal finance and debt management issues start to unfold when you have too much credit, versus income. With that said, our debt management process should be intact prior to getting overloaded with personal debts.
Debt has a way of creeping up on us if we let it. It’s important to keep debt at a reasonable and manageable level, or we could end up incurring insane interest charges and scraping to make our payments. Even for those who manage debt well, unexpected life changes can result in difficulty making ends meet.
When we find ourselves having problems with debt, the first course of action is to take a look at the budget. Finding ways to cut back on unnecessary expenses can help us pay down debts and keep monthly bills current. But what happens when we can’t solve our debt problems with budgeting?
Sometimes we need outside help with our personal finance and debt management. It’s hard to go to someone else when you are having money troubles, but if you do not gain control over your debts, your credit rating will suffer. So it is important to take charge before it gets too late.
Some individuals turn to debt consolidation as an answer to debt problems. They transfer high-interest debts to a lower interest credit card, or they put up the equity in their homes to get the money to pay them off. While these options can provide lower payments, they are not without drawbacks. Closing numerous accounts and putting all of your debt into one account can negatively affect your ratio of debt to available credit, lowering your credit score, depending upon the choices you make. And if you use your home equity to secure the money needed to pay off debt, you’re putting your home at risk also.
What You Should Know About Credit Counseling
Another popular option for some with debt problems is credit counseling. There are drawbacks for this also, but sometimes you have no other choices. Credit counseling agencies offer help with budgeting, and in some cases, they will set you up with a debt management plan. A debt management plan involves negotiation with creditors to obtain lower interest rates and lower payments. The debtor makes one monthly payment to the credit counseling agency and the agent forwards payments to each creditor.
A debt management plan can help you get out of debt, but it can also impact your credit. A note is added to your credit report stating that you are undergoing credit counseling. This means that you can’t get new credit. However, the notation is removed once you’ve paid off your debts. *Note: I do not officially recommend this type of credit management, I would prefer a credit assistance program as shown below. When you are paying lower payments and if not set up correctly with the debt management company; your payments may show a default or late payments.
This Credit Assistance Network has an A+ rating – Check it out! They work with you to help you get your credit in line.
It’s also important to make sure you’re dealing with a reputable credit counseling agency. Some charge high fees or fail to make payments to creditors on time. There have also been some that were found to be outright scams, keeping the money that debtors sent them to pay their bills with. When considering credit counseling agencies, make sure they’re members of the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or the National Foundation of Credit Counseling (NFCC). These organizations regulate and monitor member agencies, making sure that they operate legally and ethically.
An overabundance of debt can wreak havoc on finances and credit scores. It can also be the cause of undue stress. By seeking help at the first sign of trouble, it can often prevent our debts from spiraling out of control.
Some Ways to Pay off Your Credit Card Debt
If you are disgusted with credit card debt, or several installment loans, it makes sense that you want to pay it off. The faster it is paid off, the better. It is not a fast process, but the faster it is paid off, the quicker you can focus on saving money. When it is paid off, you can enjoy one less stress. However, paying it down fast may not be your primary goal. You may, instead, look to pay it down one step at a time.
The best way to pay off your credit card debt isn’t the same for everyone. It depends on your balance, and the funds you have left over after paying your necessities. It depends on your interest rates. Finally, the best way to pay off your credit card debt also depends on your ability to make extra payments to the principal of the loans you are paying off. Let’s take a look at a few possibilities.
To Use Your Savings or Not To Use Your Savings
Not every individual will agree to this, but it makes a lot of sense. If you have a savings account, take a look at the amount of interest you’re earning on that money. Now take a look at the amount of interest you’re paying on your debt. If you’re paying more than you’re earning, consider cashing out some of your savings to pay off your debt. Wipe away your debt and then you can once again focus on building your savings. If you’re not making monthly credit card payments, you will be able to focus on rebuilding your savings even better than before.
I would never suggest liquidating your entire saving plan. You need savings to counter any issues that might pop up; such as being without one income. Reserves should be at least six months; if not more. In today’s economy, more than likely with the jobs market as they are, 12 months would be more sufficient.
Debt Consolidation With Installment Loan
Loan Payment Calculator – *Estimates only for rate, rate showing without collateral. If credit is excellent and you have a long-term relationship with your bank; the rate may be more within the lowest rates available.
Next you might want to see if your lending institution can get you qualified for a debt consolidation loan? If so, at what interest rate? Compare the interest rate of a loan compared with the interest rate you’re paying on your credit card debt. Compare the rate with other lending institutions. Most often you’re paying credit card companies much more than you’d be paying a bank. They would also give you a installment loan with a set payment of principal and interest. This will allow you to pay off your debt much quicker. That being said, make sure once you’ve paid off your credit card debt that you cut up those cards. If you run up a balance on them, then you’re paying back a loan and paying on your credit cards. You have defeated your purpose.
As you can see above, a fixed rate gives you an advantage over 20% +- credit card rates. Interest is drastically cut. The rate of 8.5% is only an estimate, as most banks will charge you a little over the normal rate if there is no collateral. This by-far is the best way to debt consolidation if you desire to make a loan
Additional Methods That Work Also….
Finally, consider cutting back on your daily expenses (eating out, movies etc.) and paying more than the minimum balance or a certain amount to the principal of the loan on your card each month. This is often the most effective and wisest way to pay off your credit card balance.
Get a second job, sell your extra car, or move into a cheaper apartment if you need to. The faster you pay off your credit card debt, the more freedom you will have financially.
P. S. I have 30+ years in credit, finance, mortgage lending and my experience is from those years of reviewing numerous individuals financials.
**all photos are labeled for re-use without restrictions.