Are you having a problem managing your debt? Do you feel overwhelmed by that pile of bills sitting there staring at you. While this may not make you feel any better, you’re not alone. Recent studies have revealed that debt is one of the biggest problems stressing Americans today. There can be any number of reasons why you’re in debt. It could be because you’re unemployed, suffered a medical emergency or the engine dropped out of your car. On the other hand, it could be your fault. Maybe you just didn’t handle your credit sensibly. But whatever the case it’s important that you take charge of your debt and here are tips that can help you do just that.
Scale back your spending
The first thing you need to do to better manage your debt is to scale back your spending. This means that if you don’t already have a budget you will need to create one by analyzing your income and expenses. Once you see where your money’s going you should be able to cut back your spending by eliminating your “leaks” or those expenses that are not really necessary. As an example of this, if you were to forgo that morning drive-through latte at $3.50 a day you would reduce your spending by $70 a month. Groceries are another area where most people can trim their spending. Do you buy a lot of pre-prepared meals and frozen vegetables, fruits or entrees? There’s no doubt but that you could scale back your spending on food by buying fresh produce and by preparing your meals.
Negotiate with your creditors
While many people never think about this you can negotiate with your lenders and especially your credit card companies to get lower interest rates. If you’re a hard bargainer you might actually be able to get your interest rates down to a single digit. The important thing is to call your creditors before things get out of control. You’ll find that lenders are more cooperative when you’re current in your payments. This is no small matter, either. If you’re currently paying 19% monthly on a $5000 debt it would take you 100 months to repay it (with $100 a month payments). If you were able to negotiate that down to 9%, you’d have the $5000 paid off in just 63 months.
Consolidate your debts
Why would you try to manage five, six or even more debts when you could consolidate them down to just one payment? You should be able to do this with a debt consolidation loan from your bank or credit union. The two types of debt consolidation loans are secured and unsecured. If you own your home and have some equity in it you could get a home equity loan or a homeowner’s equity line of credit and use the money to pay off your debts. Then in addition to having just one payment to make a month instead of multiple payments it’s very likely that the payment on the debt consolidation loan will be considerably less than the sum of the payments that you’re currently making. The reason for this that both these types of loans have longer terms. However this also means you’ll pay more interest over the long term.
If you don’t own your home you could at least consolidate your credit card debts by transferring them to a new card with a lower rate. An even better option is to transfer your credit card debts to a 0% interest balance transfer card – assuming you could qualify for one. This would give you anywhere from six to 18 months interest free so that all of your payments would go towards reducing your balance.
Prioritize your payments
If you find that you’re unable to pay all of your debts every month, sort them into two piles – one pile of secured debts like your mortgage and auto loans and your obligatory debts like utility bills and student loans. Make a second pile of your unsecured debts such as your credit card debts. Then focus all of your efforts on keeping current with those bills that are in the first pile. Also make a plan for managing your unsecured credit card debts. If you were making just the minimum 2% payment on a card with a balance of $2000 at 18%, it would take 24 years for you to pay it off. But if you were to increase your payments to 5%, you would have that debt paid off in just 6 1/2 years. The two ways to pay off unsecured debts are to first pay off the debt with the highest interest rate or to first pay off the debt with the lowest balance, which is often called the snowball method. There are pluses and minuses to both of these methods but what’s really important is to pick one and stick with it.
Get a credit-counseling agency
If you can find a reputable nonprofit credit counseling agency it will develop a debt management plan (DMP) for you and assign you a counselor that will negotiate with most of your creditors to get you lower interest rates and to eliminate any late fees and other penalties. The credit-counseling agency will then act as a consolidator meaning that it will collect one payment a month from you and then disperse the funds to your creditors. The better credit-counseling agencies belong to the National Foundation for Credit Counseling and charge a one-time setup fee of about $30. You may also be required to pay a monthly maintenance fee of around $20.
Consider filing for bankruptcy
This is generally considered to be the last resort or the final thing to do if all else fails. However, you shouldn’t consider filing for a chapter 7 bankruptcy unless you have a lot of unsecured debts. The reason for this is that not even a bankruptcy can discharge secured debts such as your auto loan or home mortgage. It also cannot discharge some unsecured debts including child support, spousal support, student loan debts, alimony and certain types of tax debts. With a chapter 7 bankruptcy you will be required to liquidate certain assets in order to pay your debts. However, you will be allowed to exempt some of your assets such as your home, your car and your personal belongings so that you may end up not having to liquidate anything.
If you’re wondering why bankruptcy is called the last resort it’s because of what it will do to your credit history. And to your credit score, which will probably drop by several hundred points. In addition, a bankruptcy will stay in your credit report for 10 years during which time you may find it almost impossible to buy a house. And you will have a difficult time getting new credit for the first two or three years after your bankruptcy and when you do it will have a very high interest rate.