5/6/2013 11:15 PM ET|
How a plan can get you out of debt
If you're deep in debt, perhaps getting help from professionals is the smart way to go.
Are you drowning in credit card debt? Stressed and not sure how you’re going to afford to keep your head above water and make your next payment?
You’re not alone. I’ve been there, too — and I survived. The first step is realizing that no matter how bad it is, you do have options and there is a way out.
There’s debt settlement, debt consolidation, and even bankruptcy. But before you decide on any of these options, there’s another one to consider — a Debt Management Plan, or DMP.
A DMP is a debt repayment plan that is negotiated, arranged and administered through a consumer credit counseling service or a debt management company. Depending on how much debt you carry, a DMP typically takes 4-5 years to pay off. With a DMP, your service provider works directly with each of your creditors on your behalf to lower your interest rates, cut your monthly payments to an amount that you can realistically afford each month, and stops any over-limit or late fees.
Once the repayment terms are negotiated, you pay one monthly payment to the DMP service provider and they distribute the funds to your creditors for you. The service provider will charge a fee to manage the DMP and disperse the funds each month. The fee will vary from provider to provider, but for me the fee was about $10 a month, which more than covered the money they saved me in interest.
Choosing a DMP service provider
If you choose to go through a debt management or settlement company, be careful and do your homework on them. I chose a nonprofit consumer credit counseling service that was a member of the National Foundation for Credit Counseling. My reasoning for doing so was twofold: A) knowing that they were legit and members of the NFCC gave me peace of mind, and B) for the most part, nonprofit consumer credit counseling services have no ulterior motives other than helping you get out of debt. It’s not about them making a profit from your situation.
If you opt to go with a debt settlement or debt management company, I’d highly recommend that you read and ask the 14 Questions to Ask a Debt Settlement Company before you hire them.
How does a DMP affect your credit?
Another reason I chose to go with a Consumer Credit Counseling Service (CCCS) was because I wanted to minimize the impact on my credit. In my case, I hadn’t yet fallen behind, but I was close. I was overwhelmed and even though I was paying $200 to $300 on each account every month, my balances weren’t moving. It was being eaten by the never-ending accumulating interest. I was fortunate enough to have worked for one of the top credit scoring companies in the business, so I knew how credit scores worked — what hurt, and what hurt more. So I knew that while a DMP wouldn’t hurt my credit while I was in the program, it wouldn’t be all roses.
While you’re in a DMP
When you enter into a DMP there are a few things you’re agreeing to up front. One, you won’t open any new credit cards or take out any new loans while you’re in the program. If you do apply for credit, the lender or card issuer will decline your application because your credit report will tell them that you’re in a DMP. Don’t let this give you heart palpitations. It’s not a big bold scarlet letter “A” on the front page of your credit report. In reality, the only time the DMP notation would even be seen is if you were to apply for credit, which you shouldn’t be doing anyway because it’s part of the agreement — at least until you get out of debt and back on track.
You also agree not to take on any more debt on your existing accounts while you’re in the program. Your creditors, who have agreed to waive your fees, reduce your interest and reduce your payment, take your commitment seriously and won’t allow you to charge any more. The kicker, and the reason why many people balk at the idea of a DMP — the creditor will most likely close the account once the debt is paid. It’s the nature of the beast, but it’s not the end of the world. Yes, it’s bad for your credit to close accounts — which is why I said DMPs won’t hurt your scores while you’re in them. However, the reason why it’s bad to close credit card accounts is because it can negatively affect your total revolving utilization percentage if you’re carrying balances on other cards. But if you’ve just completed a DMP it means you just finished paying off all those credit cards, so it won’t have the same effect that it would on those carrying other cards with balances.
The other downside to closing accounts is that you eventually lose the credit history on them because they will eventually fall off your credit reports — and that’s where your credit and credit scores could suffer. But only if you never open another line of credit or credit card again. It’s actually healthy to have a credit card or two (if managed wisely) for your credit scores. And this leads me to my next piece of advice.
The road ahead: Leveraging your credit scores
When you commit to a DMP, if there is any way possible, keep one account out of the program. You have a choice. You don’t have to put every account you have into the program, but you need to be careful here. Because I knew going in that I would not have access to the 6 credit card accounts or the history I’d built with them over the years, and that they would be closed at the end of the program, I wanted to keep one card out to help leverage my credit and get back on solid footing (without starting from scratch) when the program ended.
I had one credit card from my credit union. It had a very low interest rate and fortunately, I didn’t owe very much on that particular card so I chose to keep it out of the program and pay it off separately. Just one card — and only if it has a low enough balance that you can handle the payment along with your DMP payment obligations. If you can do this, it’s something to consider. If not, you can always start with a new credit card when you finish the program and have a clean slate.
Once you’re out of the plan and have paid off all your debt, you’ll begin seeing offers (from the same companies you just finished paying off, if you can believe it), to sign back up and open a new credit card account. A word of caution, these offers will not be great and the interest rates will be high. But hopefully after five years of repaying and digging yourself out, you’ll have learned a few things about how to better manage credit cards so that you don’t fall into the same trap. The sole purpose of opening a new account would be to leverage your credit scores.
Personally, I wanted to have solid scores in the event that I ever needed to purchase a new car or buy a home. I wanted the choice and the flexibility that credit provides. Not to run up credit card debt. I had no desire to put myself through that again. But for life’s bigger purchases that make more sense to finance? Yes. I didn’t want to go the route of ‘cash only’ that you hear some finance experts preach. If you like that lifestyle and prefer it, then more power to you. But for myself, and most people these days, we don’t have $300k to plunk down to pay for a house in cash. The same goes for a car — why would I pay $20-30k in cash when I could qualify for 0% financing with excellent credit? That’s why credit, regardless of what some people will say, can give you leverage and opportunities that you wouldn’t necessarily have otherwise. The key is how we manage it, of course.
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you don't need any of this, you just need to sacrifice, live on less than you make and put everything that's left on your debt and get it paid off as fast as possible
DEVELOP A BUDGET !
Oh wait, Many here think that if the Government won't do it, I don't need to.
AND THERE LIES THE PROBLEM WITH THIS 'MONKEY SEE, MONKEY DO' ATTITUDE !!
One cannot fix stupid, but you sure can stop feeding it. And that folks is the key to the whole credit program. Do not feed the bank. They are your buddy OK? They loan you cash values as needed for as long as you can pay. What you can pay is your personal problem with money management. Have a plan on purchases with a closure concept. Sure, credit buy that new frig or bike or whatever, just plan on how fast you pay it off is the key before the next credit buy. Don’t dig an endless hole of debt with one item after another purchased without closure concepts on each item purchased. Never have an open ended credit balance. That is budget yourself to the concept of net value. If you cannot sell personal treasures like jewelry or cars, tractors, tooling, trucks - anything to clear that debt in ONE payment – you have busted your personal bank. And are using the lucky buddy bank that has their hand out saying pay up stupid…….
If you are drowning in debt, won't paying a DMP and manipulating your numbers just aggravate your problem? There is plenty of free information and help available, and you can dig out of debt yourself with some planning and willpower.
1. Determine your short-term indebtedness. List all credit cards (and debts due within two years), along with the amounts you owe to each, their minimum payments, and their interest rates.
2. Take your monthly take-home pay and subtract your life maintenance expenses (food, utilities, mortgage or rent, etc.). Hopefully you’ll have something left over, to pay off your short-term debt. (By the way, after you do this exercise you can do a new exercise where you analyze maintenance expenses such as food and utilities to see if you can cut them down.)
3. From your money left, subtract the minimum payments each debt requires. You’ve got to make these minimum payments to avoid credit problems later.
4. Hopefully you’ve still got some money left over. Pick the debt that is closest to being paid off, and apply all of the leftover money to it every month until you pay it off. Meanwhile, stick that card in a drawer so you don’t rack up more charges on it. Others may suggest picking the debt with the highest interest rate, but I’ve had better results by paying off the lowest debt first because you will feel an accomplishment sooner (and so are more likely to stick with the program).
5. When you pay off one debt, add all of the money you were paying to it to your next lowest debt. Stick that card in a drawer and pay it off with your new higher payments.
6. When that card is paid, do the same thing to the next lowest debt on your list. This is the snowball effect. Your larger payments will retire a debt faster, you’ll feel the accomplishment, and you’ll cut down spending (at least somewhat).
You’ll be ahead paying down debt instead of saving or investing that money because usually credit card interest is higher than the interest you can earn with savings and is more stable than the stock market. When your short-term debt is paid off then you should save or invest your money. But until you have short-term debt under control you really can’t afford to save or invest. (Until then you’ll have to carefully treat your credit card limits as your “emergency fund”.) Hopefully this program won’t take really long (just a few years) so you won’t get impossibly “behind” in retirement / emergency fund planning.
Look into Dave Ramsey's "Financial Peace" classes. Read his book "The Total Money Makeover" (you can check it out from the library). It changed my life, and I will be totally debt free by next September. Use a written budget, and give every dollar a name (even your spending money). Anyone can follow his principles. You have to WANT it - - but you'll be so glad you did!!
It's hard to believe that there are still people who struggle with debt. The past five years there has been so much written about this subject. Perhaps it's young people who don't have this information.
Paying attention to the money that comes in, then the money going out, is the basic ingredient to success. Dropping instant gratification is the second step. I think the problems lie within the second step. We have created generation (s) of instant gratification.
Keep in mind that everything begins to deteriorate the minute it's made. Picture the item in 2 years. Do you really need it? Or maybe you don't want it for more than 2 years? Looking at items as disposable is also a problem for a budget.
Know what you need to survive. Purchase those items and have a line (in the budget) for wants.
It's so freeing to have no debt. It brings with it a sense of accomplishment and peace. I wish everyone could see this. When emergencies do come along, they aren't so earth shattering. Good luck to all.
You may have to get another job, you may have to go somewhere else to get a job that pays more, you will have to sacrifice and become uncomfortable. There is no easy way out, a bailout or a bankruptcy is admission of failure and teaches you nothing other than you will accept a handout.
That's YOU if you allow yourself to be enslaved to the bankers and their shills, the credit bureaus.
Best plan...do whatever it takes to liberate yourself from debt to those thieving bastards as soon as possible.
Ummm you worked for one of the top credit scoring companies yet you were in debt up to your
eyeballs///////////////////Can't fix stupid//////////////
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