7/17/2013 7:15 PM ET|
5 ways to get out of debt
Getting yourself out of a big debt can seem like a daunting task before you start digging. Here are pros and cons to five ways of erasing debt.
Being in debt has a bigger impact on your financial future than you might realize. Bad debts can continue to haunt you and your credit report for years, especially if you don't deal with it now. The first step is knowing where you stand. You can monitor your credit easily using Credit.com's Free Credit Report Card. It provides you with your credit scores, and breaks down the various components of your credit file in an easy to understand way. When you're ready to do a deeper dive and look at your actual credit reports, go to AnnualCreditReport.com where you can pull each of your three credit reports once a year for free (though they can be tricky to read and you'll probably find our Credit Report Cheat Sheet useful).
Once you've set your goal to get out of debt, you have to figure out how to achieve that goal. But with so many different experts touting different solutions, how do you pick the one that will work for you? Here are five options:
DIY Debt Reduction
With the DIY approach, you make the minimum payments on all of your debts except the one you are targeting. There are two main variations on this strategy: the snowball method, and the avalanche approach. With the snowball method you pay off the account with the smallest balance first. With the avalanche approach, you pay off the credit card with the highest interest rate first. Either way, once the first debt is paid off, you apply the payment you were making to the next target debt, and so on until they are all gone.
DIY debt reduction may work for you if:
You have a clear plan and are committed to sticking with it; you are able to stop taking on new credit card debt for the duration of the program; and you have enough cash flow to pay off your balances in approximately 3 years or less. (Any longer than that and you increase the risk that unexpected expenses will derail your plan.)
To make it work:
Create a written plan using a program like SavvyMoney, ReadyForZero or Zilch, all of which will allow you to create a specific repayment plan and try out different scenarios. For some borrowers, for example, the avalanche method may represent significant savings over the snowball method. For others, it's not a big difference. But unless you run the numbers, you won't know that and you may leave money on the table by choosing the method that "feels right," rather than the one that will get you out of debt fastest.
Another tip: combine this approach with consolidation for maximum savings.
If you are able to consolidate your debts, you will get a new loan to pay off other debts. Then you will pay off the new loan as quickly as possible. You may be able to consolidate with a personal loan or by using balance transfers to low-rate or 0% credit cards. The danger? The new loan will make you feel like you solved the problem, and soon you'll be pulling out the plastic again.
Consolidation can work for you if:
You are able to significantly reduce your interest rates, and are able to pay off the new debt in roughly three years or less.
To make it work:
Combine consolidation with a DIY debt reduction plan. Put your credit cards somewhere that they won't be easy to get to, so you won't be tempted to run up new debt while you're still paying off this loan.
A reputable credit counseling organization will typically review your budget with you for free, and help you figure out if a Debt Management Plan can help you get out of debt faster. If you enroll in a DMP, your credit card issuers will typically reduce your interest rates, and you'll make one monthly payment to the counseling agency, which will then pay each of your creditors. According to the most recent Transparency Project report from Cambridge Credit Counseling, clients received interest rate reductions averaging 14.49%. As a result, the average new client's payment was $141.58 less than what they had been paying on their own.
A DMP may work for you if:
Your creditors lower your interest rates enough to provide breathing room in your budget, and you have enough income and cash flow to pay back your debts in five years or less.
To make it work:
Be realistic about your ability to make the payments required under the DMP for as long as it will take you to pay off your balances. Take advantage of the education and support programs offered by the counseling agency, and reach out to them immediately if you experience an unexpected financial setback.
If your balances are too high to pay them back within five years, or if you're dealing with significant debt that's been turned over to collections, you may want to consider trying to negotiate settlements with your creditors. With this approach, the creditor or collector agrees to accept less than the full balance to satisfy the debt.
Debt settlement may work for you if:
You are able to come up with enough money -- typically around 30–50% of what you owe -- to settle your debts in a relatively short period of time (usually 24 months or less). The funds to settle may come from savings or a gift from a family member, for example.
To make it work:
Educate yourself on how settlement works. You may have a stressful few months as you try to negotiate with the companies to whom you owe money. Before you go this route, it's a good idea to also talk with a bankruptcy attorney to find out whether that might be a better option. Also make sure you investigate upfront whether you will owe taxes on canceled debt.
If you file for bankruptcy, you may be able to eliminate most or all of your debts very quickly (in a Chapter 7 Plan) or over five years or less (in a Chapter 13 Plan). If you are being threatened with debt collection lawsuits, if your income has been to reduced to the point where you can't make your payments, or if you are simply feeling overwhelmed with your debt, it's a good idea to talk with a bankruptcy attorney to find out whether it may provide the relief you need.
Bankruptcy may work for you if:
You have significant debts that can be discharged (eliminated), and your income does not prevent you from doing that.
To make it work:
Talk with a qualified bankruptcy attorney, one whose practice is largely devoted to bankruptcy and helping consumers in debt. Ask for referrals from financial professionals you trust, or visit NACBA.org. When you do meet with an attorney, bring all the documentation he or she instructs you to bring, and be completely honest about your situation. And don't wait until you've been sued or you raided your retirement accounts to talk to an attorney.
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Good article: Best ever safety net? Don't be fooled by the word "credit". You are not getting credit; you are getting the ability to create debt for yourself. Banks make around 46% overall on debt. You buy a shirt on sale and use your credit card; kiss the sale savings goodbye. Do you get interest on the money the banks give you on credit? Nope, they don't give you anything but the ability to create debt. If you want the money for your debt creation, you have to pay interest for it, a big interest. And for collectors: let them take you to court. The court must determine your "disposable" revenue, and a creditor can only take 25% of what is disposable. That means, under Federal and State law, you have the right to keep the money you have for support, for food, for rent or house payments, and for other needful costs. You will find that many collectors and banks will offer you "settlement" terms; but be darned sure you get it in writing, on company stationery, signed by someone who has the authority to do the deal. My best advice is don't use "credit" for anything. If you can't afford to pay for it outright, then don't buy it. Instead, use thrift stores and yard sales. I fill my closet with top quality top name products, and my house as well, for pennies on the dollar and when I get tired of the items I sell them at my own yard sale or online, or donate them to Amvets or the Salvation Army. Don't be a bank sucker or a bank slave. DON'T USE CREDIT (DEBT) to survive.
Getting out of debt is a worthwhile goal and a big challenge. I have had success with the snowball method, and have used balance transfer a little. Bravo to all who pay down their debt.
But it's all for naught if you can't keep yourself out of debt. A big problem is impulse buying. No wonder, with the onslaught of commercials and come-ons we face all day.
How I reduce impulse buying is to calculate how hard I have to work in order to pay for that item.
Start with your actual take-home pay, and divide it by the number of hours for that pay period. That's how much you get to spend for an hour of your labors. Then consider how hard you work and how well you like your job. When you're about to buy something, divide it's cost by your take-home hourly rate. If you are going to charge the item, don't forget to add in interest. Is that item worth that many hours of work to you? Yes or no, this consideration can temper many impulse buys, and save you money in the long run.
Define Irony: The credit bureaus selling us identity theft products to protect us from the very people they sell our information to in the first place.
What kind of confidential information is available?
Bank account numbers. This is the new hot item for creditors!
Employment history. Ever had a bad review or fired?
Marital history. Ever had a bad marriage or divorce?
Medical history. Becoming a valuable tool for employers!
Religious affiliations. Still in demand.
Salary information. This too is now available.
Sexual preferences. Readily available!
Social Security#. The key to your tax and bank records.
Is this the type of information that you and your family want available to the masses?
The debtor is a slave to the lender.
I have been in debt for over 5 years with credit dept in $80,000 and 24.95% interest. I should have filed for bankruptcy, but I did not. Instead of I decided to pay it off and I am more that half way done. Now I have $36,000 to go and I am expecting to finish in 1 year. I wrote a blog on how I did it at Blog.Teckdriven.com
Hope it helps
Shift to the left! Shift to the right! Pop up, push down, slide here or sign there, CHARGE! CHARGE! CHARGE!
I say, Spend enough time confirming the need and the need will disappear.
Well now here is the Discover IT CARD.
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