Do you close your eyes every time you walk past that stack of bills on your desk or the kitchen table because you just don’t want to have to come to grips with them? If you have multiple credit cards, an auto loan, a personal line of credit, student loans and a couple of revolving lines of credit, the odds are that you’re in a heap of trouble with debt.
Make a list
The first thing you need to do in debt management is make a list of all of those obligations with the amount owed on each and your due dates. You’ll probably find your biggest problems are your credit card debts. Most people don’t realize this but you can contact those credit card companies and negotiate reductions in your interest rates. We have seen instances where the interest rate on a $4000 balance was cut from 16% to 7% and another where the credit card had a balance of $2550 and the interest was cut from 24% to 6%.
If negotiating a reduction in your interest rates is not enough to get your debts managed you need to think seriously about consolidating your obligations. There are several ways to accomplish this. First, if your credit cards have high interest rates you could transfer all their balances to one with a lower interest rate. This would have a second benefit in that you would now have just one payment to make a month versus the multiple payments you’re currently making. If you could qualify – which might not be easy – a better option would be to transfer all those balances to a 0% interest balance transfer card. There are currently cards available that offer interest-free periods varying from six to 18 months. This would give you time to pay down or even pay off your balance.
Get a loan
A second way to consolidate your credit card debts, personal lines of credit, medical debts and so on would be to get a debt consolidation loan. If you own your home and have some equity in it you should be able to get a homeowner equity line of credit (HELOC) or a home equity loan. These are called secured loans because you’ve used your house as collateral to secure them. The downside to this is that you’re putting your house at risk. Alternately, you might be able to get a personal loan or signature loan where you would not have to provide any collateral.
Combine your student loans
If you graduated in 2011 you might have as much as $27,000 in student loan debts spread out among eight to 12 loans. You could make your life much easier by consolidating them. There is a federal loan program called a Direct Consolidation loan. The way this works is that all of your loans are combined into one new one at a new interest rate. That interest rate will be the weighted average of the interest rates you are currently paying rounded up to the nearest 1/8th of one percent but not to exceed 8.5%. There are several advantages to this type of loan. First, because it’s a federal loan you would be eligible for the same repayment options you currently enjoy including graduated repayment, extended repayment and the three income-driven repayment plans. You may have read about one of the income-driven repayment plans called Pay As You Earn. This made news last year when Pres. Obama issued an executive order that made millions more people eligible for it. It’s an excellent repayment program because it caps your payments at 10% of your discretionary income but never more than the 10-year Standard Repayment amount. One interesting quirk of this program is that if you are unemployed and have no discretionary income your payment would be zero.
Get a debt management plan
A fifth way to consolidate your obligations is by going to a consumer credit counseling agency. The best of these agencies are nonprofits and charge either very little or nothing for their services. When you do this you will have a counselor that will develop a debt management plan (DMP) based on not your current payments but what you could afford to pay. Your counselor will present this plan to your lenders. Assuming that all or most of your lenders sign off on it then you will no longer have to pay them. Instead, you will send one check a month to the credit counseling agency and it will distribute the money to your lenders. The one negative of a debt management plan is that you will be required to give up all of your credit cards that are in the program and not get any new credit until you’ve completed your DMP – which typically takes around five years. But it is a way to get your debts consolidated, managed and ultimately paid off.