Managing and Getting Rid of Debt
Credit card debt can sometimes has a way of getting out of control and quickly piling up. The worst thing you can do is bury your head in the sand and hope your credit card debt goes away. It won’t and, in fact, it will get worse if ignored. When you have credit card debt that is piling up or if you have reached the limit on several credit cards, these details begin to appear on your credit report, which can cause problems for you in the future.
Here are a few things you can do to get control of your credit card debt before it starts to impact your credit score and credit report. Remember, before starting a credit card debt-reduction plan, you should consult with a financial advisor or accountant to discuss your specific financial needs.
Know how much you owe. – Don’t be surprised by how much you owe. Gather together all your credit card and loan statements and add up all the outstanding amounts you owe. Be sure to note what the Annual Percentage Rate (APR) is for each account and whether or not the payment is fixed (i.e., a car loan) or variable (i.e., credit cards).
Know how much you have. – How much money do you actually have to spend each month? Get your payment stubs and any other regular income and figure out how much income you have available each month.
Know your total monthly household expense. – Not everything can go toward paying debt. You still need to pay rent (if you don’t own a house), pay the electric bill, and buy groceries. Write down all your monthly household bills and add up how much you spend on them each month. Be sure to also include a cushion for buying clothes or other periodical expenses.
How much can you afford to pay? – Now, apply this simple formula to determine how much you can pay toward your debt:
Household income – Household expenses = Balance
The balance is how much you should have left each month. Now you need to determine how much of your balance should go toward paying off debt. Talk to your financial advisor if you need help with this.
Who should you pay first? – Take a look at the credit card accounts and see if any of them should be paid off before others. Credit card debt and small loans should probably be paid off before low-rate student loans and home loans. Some factors to consider in your prioritization:
Which debts have the highest interest rates?
Which accounts are above 50% of their credit limit?
Which debts are close to being paid off?
Which debts have the highest annual fees?
Negotiate and consolidate. — Start working on those high-interest credit card debts first. Call your creditors and negotiate lower interest rates or move your balances to less expensive credit cards. Accounts that are above 50% of the available line of credit can harm your credit score; therefore, pay off or move some of the balance on such cards to a different card.
Don’t keep adding debt. – Now that you have gone through the trouble to create a plan of action to reduce your debt, don’t blow it by continuing to add more debt to your credit cards. Save one or two credit cards with low balances so that you can have access to credit if you need it. It is better to have credit available when you really need it than it is to be left without access to any credit.
Getting out of debt and improving your credit report can be done. These suggestions are aimed toward helping you get on the right path. It is always best to work with a financial advisor or other professional to determine what the best plan of action is for your specific situation.
Your public library has information about budgeting and money management techniques. Low cost budget counseling services that can help you analyze your income and expenses and develop budget and spending plans also are available in most communities. Check your Yellow Pages or contact your local bank or consumer protection office for information.
Contact your creditors immediately if you cannot pay your bills and together, you may be able to work out a modified payment plan that reduces your payments to a more manageable level. Never wait for a debt collector to contact you.
The Fair Debt Collection Practices Act determines how and when a debt collector may contact you. A debt collector may not call you before 8 AM, after 9 PM, or at work if the collector knows that your employer doesn't approve of the calls. Collectors may not harass you, make false statements, or use unfair practices when they try to collect a debt. Debt collectors must honor a written request from you to cease further contact.
Consider contacting a credit counseling service. Your creditors may be willing to accept reduced payments if you enter a debt repayment plan with a reputable organization. In these plans, you deposit money each month with the credit counseling service and these funds reimburse your creditors according to a payment schedule developed by the counselor.
Ask the credit counseling service for an estimate of the time it will take to complete the plan. Some credit counseling services charge little or nothing for managing the plan; others charge a monthly fee that could add up to a significant charge over time. You are responsible for paying any creditors whose debts are not included in the plan.
A debt repayment plan does not erase your credit history. Under the Fair Credit Reporting Act, accurate information about your accounts remain on your credit report for up to seven years. In addition, your creditors will continue to report information about accounts that are handled through a debt repayment plan.
Debt repayment plans usually cover unsecured debt. Home and auto loans are secured debt and may not be included, so payments must be sent to these creditors directly. Most automobile financing agreements allow a creditor to repossess your car without advanced notice at any time you're in default.
If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you and may even reduce or suspend your payments for a short time. When you resume regular payments, you may have to pay an additional amount toward the past due total. If you and your lender cannot work out a plan, contact a housing counseling agency.
Consolidate debt through a second mortgage or a home equity line of credit. These loans require your home as collateral. Consolidation loans add up. You will pay both interest on the loan and points, which are contingent upon the percentage of the amount you borrow.
Personal bankruptcy is a last resort because the information stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance, or sometimes obtain a job. Individuals who follow the bankruptcy rules receive a discharge -- a court order that says they do not have to repay certain debts.
There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Chapter 13 allows persons with a steady income to keep property. The court approves a repayment plan that allows future income to pay off a default. After you have made all payments under the plan, you receive a discharge of your debts. Chapter 7 involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings.
Debt counseling and credit repair companies might seem like the ultimate rescuers, but they can end up costing a great deal of money. Many times they offer the same services that you can do yourself. If you decide to use the services of one of these organizations, check with your local consumer protection office and the Better Business Bureau first.
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Your financial situation is unique and our information and advice may not be appropriate for your situation. Accordingly, CreditCardXPO.com recommends that you get different opinions and seek the advice of your accountant and other financial advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.
