The Best Strategies to Help You Reduce Your Debt

Finances

Large amounts of debt can be stressful and overwhelming. This is especially true if you have multiple sources of debt, several payment plans and a limited source of income to help you pay everything off.

Fortunately, there are a number of solutions to your debt problems. Numerous programs exist to help you with your financial situation so you can make payments to reduce your debt.

The right program for you will depend on how much debt you have, the income you earn and your overall personal situation. There are many different programs out there, so it’s important that you research and determine which solution is best for you. Some programs can hurt you more than they help

Thus, in order to choose the best option for yourself, you must learn about all of the different debt assistance programs available. Then, you can select a plan that suits your situation and needs.

Taking Stock of Your Debts

Before researching different debt assistance plans, you must review your debts and finances to have an understanding of your situation. This involves analyzing:

  • The type of debt you have.
  • How much you owe.
  • Your regular expenses.
  • How much you earn.

Understanding what you owe and how much you make will allow to get an idea of how much debt you can realistically pay off. Moreover, a review of your monthly income and expenses can better prepare you to make a realistic budget.

Additionally, you must take into account the length of time it will take to pay off your debts with your current income and expenses. In addition, it is essential to compare each debt solution to determine which one offers the greatest benefits.

For instance, interest rates are often high when it comes to debts, and you might decide that a plan with reduced interest rates will be the best solution for you. Then, you will have to choose the option that provides you with the type of solution you are looking for.

Debt Consolidation Plans

One way to pay down debts is to consolidate them.

This can be a useful strategy if you have multiple sources of debt from different creditors. By using this method, you may be able to pay off your debts faster while also saving money.

The process of debt consolidation involves combining your various sources of debt into one account. Having one account can be much more convenient and make debt easier to pay off.

Additionally, accounts created for the purpose of debt consolidation typically come with much lower interest rates and, thus, you will be saving money in the long term as your interest payments will be smaller.

Debt consolidation loans and balance transfer credit cards are both common methods for consolidating debt. A debt consolidation loan usually has a low interest rate.

Likewise, a balance transfer credit card can be a low-cost way to pay down debts, as long as you take advantage of the zero-interest rate promotional period.

However, it is essential to pay off your debt during the promotional period because balance transfer cards often come with high interest rates. This means that if you don’t pay off your debt before the interest rate kicks in, you might find yourself paying more than if you hadn’t consolidated.

Debt Management Plans

Debt management plans (DMPs) can also help you pay off your debts faster and give you access to lower interest rates. With this repayment method, a professional finance management company negotiates new payment terms with your various creditors.

If you take advantage of a DMP, you must cease making payments to your creditors. Instead, you need to put your monthly payments into an escrow account. Then, you will be able to pay all of your creditors with one large sum.

Different kinds of agencies offer debt management services. Examples of some companies that offer DMP services include the following:

However, it is important to keep in mind that you will likely be charged a fee for this service. Before you agree to work with a finance management company, make sure you understand if the fee is worth it to you. Although you will be saving on the interest rate, these additional fees may be higher than what you would have paid on interest.

Credit Counseling

If you need assistance to tackle your debt payments, you can also obtain credit counseling. This is usually a free service offered by a number of nonprofit organizations.

A credit counselor will review your debts and financial situation to help you come up with the best payment solution for you. In addition, he or she can assist you with making a budget and creating a plan that will help you pay off your debt over time. If you need help coming up with a plan, credit counseling might be the solution for you.

Debt Counseling Resources

Bankruptcy

Individuals who file for bankruptcy become fully or partially relieved of their eligible debts. Although bankruptcy allows you to have a financial restart, it can result in serious consequences as well.

These can negatively impact your credit for many years. Therefore, bankruptcy should not be one of your first options when trying to get rid of debt. Rather, it should be one of your last considerations.

After you file for bankruptcy, you can expect this decision to remain on your credit history for 10 years. As a result, it may become difficult for you to obtain any type of credit during that time. If you are approved for credit of any type, then it will likely have a high interest rate.

If you decide that filing for bankruptcy is the right option for you, then you must also learn which debts you can and cannot discharge. Credit card debt is one example of a debt that qualifies for this option.

However, student loans provided by the federal government do not qualify.

Options for Debt Settlement

Another relief option is debt settlement. If you opt for debt settlement, you may be able to reduce the total amount that you owe on your debts. To begin the process, you or a debt settlement company must negotiate with your creditors in order to reduce your total debt balance.

If your creditors agree to reduce your balance, then you will either need to pay the total in a lump sum or make larger monthly payments. Although you might be worried about coming up with the money to make larger payments, you will still likely be saving money, as your total debt owed will be reduced.

If creditors believe that you can pay off your full debt amount, then it is unlikely that they will agree to a debt settlement. However, allowing your accounts to become delinquent might show creditors that you cannot make their payments, and they will be more likely to agree to settle.

Keep in mind that doing this will negatively impact your credit score, and you will accumulate a number of late fees. Thus, while debt settlement can be helpful, it is also risky.

Understanding Debt Consolidation & How It Can Help You

Every financial circumstance is unique. This is especially true if you’re in debt and need an effective method to pay off what you owe quickly and conveniently.

One popular method you can use to manage your debts is debt consolidation. With this process, you can combine all your debt into a singular debt. If you struggle to keep track of the different payments you need to make each month, this method can be especially helpful.

However, keep in mind that debt consolidation is not effective for everyone. Therefore, it is crucial to understand the consolidation programs you can take advantage of. Furthermore, you need to familiarize yourself with the types of debt that can be combined. You also need to know who will benefit from consolidating their debt.

By developing an understanding of debt consolidation and the options available to you, you can make a better decision regarding how to effectively manage your debt.

What is debt consolidation?

Debt consolidation involves combining any outstanding debt you have and rolling it together into one single payment. With debt consolidation, you can combine high-interest debts so they are consolidated into one singular payment that comes with little to no interest for a set period of time.

There are multiple two main methods you can use for debt consolidation: acquiring a debt consolidation loan or using a balance-transfer credit card. If performed correctly, then the debt consolidation can help you pay off debt sooner while still saving money on interest costs.

However, consolidating your debt should only be an option for people who have a plan for how to get out of debt. Furthermore, this method is most advantageous for people who have a manageable amount of debt. This is because if you use a balance-transfer card, for example, you’ll have a set period of time when your balance won’t accrue interest.

Once this promotional period passes, you’ll be subject to higher interest rates on whatever balance you still have. Therefore, you should only consider debt consolidation if you have a concrete plan for when you’ll get out of debt.

Debt Consolidation Loans

You may use a debt consolidation loan to help you combine your eligible debts into one loan. With this method, you’ll need to take out a loan, pay off your debts and then start to pay off your loan over time.

Benefits of debt consolidation loan include:

  • A single monthly payment.
  • Lower interest rates.
  • Less interest you’re required to pay over time.

With a debt consolidation loan, you’ll probably need to pay interest on the amount you borrow. However, this rate is likely to be less than what you would have paid on your debts pre-consolidation. In any case, keep in mind that your interest rate will be based on other factors. This includes your credit history, income and other factors.

Balance-Transfer Credit Cards

Another way you can consolidate your debt is by using a balance-transfer credit card. This type of credit card usually comes with an initial promotional period with zero interest, then a higher interest rate when the promotional period has ended. The periods for promotion on zero-interest balance-transfer cards usually last between a few months and a year.

Similar to a debt consolidation loan, a balance-transfer credit card allows you to simplify your payments each month. However, this type of finance solution isn’t ideal for everyone.

While you can save money if you completely pay off debt during the zero-interest period, you may end up owing more money if you carry a balance after the promotional period ends. This usually happens because of the high interest that kicks in once the promotional period is over. Be sure to take this into account before you apply for a balance-transfer credit card.

Balance-Transfer Credit Cards

Is debt consolidation right for me?

Whenever you choose a debt management solution, it’s important that you take time to make your decision. If you’re considering debt consolidation, this method may be a good option for you if:

  • Aside from your mortgage, your entire debt is not more than 40 percent of your gross yearly income.
  • Your credit score is good enough to be eligible for a low-interest debt consolidation loan or a zero-percent interest balance-transfer card.
  • Your debt-to-income ratio lets you make payments every month to the consolidation loan.
  • You have debts with a higher interest rate that, when calculated, would be higher than the interest rate that you would pay through a debt consolidation loan.
  • You have a debt-avoidance plan so you do not fall into debt in the future.

When Debt Consolidation Is Not for You

As stated above, debt consolidation may not benefit every individual. If you have a large amount that totals more than half your gross annual income, you should probably consider another solution. Likewise, if you have no idea why you’re in debt and no plan to stay out of debt, debt consolidation probably won’t be effective for you.

It is also possible that debt consolidation can become even more expensive for you in the future. If the interest rate for your debt consolidation loan exceeds the interest rates of your current debts, then you will have to pay more in the long run.

Can student loans be consolidated?

You may be able to consolidate your student loans. However, this depends on several factors. Familiarize yourself with the type of loan you have so you know whether it can be consolidated or not. If you have questions about whether this process will be beneficial for you, speak to a financial advisor.

How to Make the Most of Your Debt Consolidation

If you decide that debt consolidation is the right option for you, here are three additional steps you can take to help ensure you keep your finances on track.

  1. Make a practical budget. If you want to use debt consolidation as a method to pay off your debts, you must first have an organized and practical budget in place to help you manage your funds. Your budget should include your household expenses, debt payment and whatever general expenses you have. You should also budget for emergencies, if possible.
  2. Avoid credit card usage. You must stop accumulating debt in order for your debt consolidation plan to be effective. To help you accomplish this, you must avoid using your credit card during this time.
  3. Establish financial goals. Want to save for a vacation or a down payment on your dream home? If you have clear goals in mind while you’re paying off your debt, you’ll be more likely to stick to your plan.