The first thing to do before paying off debt
It's hard to make a plan until you know exactly where you stand. So, before you try to come up with a strategy, there's a crucial step you should take.
This post comes from Gerri Detweiler at partner site Credit.com.
You've made up your mind: It's time to tackle your debt. You have researched ways to get out of debt, perhaps weighing the pros and cons of snowballs over avalanches to pay off your debt faster. Maybe you've thought about calling a credit counseling or debt settlement agency, or even a bankruptcy attorney, to see what they can offer.
Before you decide on your plan of attack, though, there's one crucial step you won't want to miss. It can make or break your efforts to get out of debt: Get your credit reports and scores.
Here are three reasons why this step is so essential to your success.
You'll have a starting point.
Any debt counselor will tell you that consumers struggling with debt often underestimate how much they owe. If that describes you, don't feel too badly. You've probably just been focused on making sure you can make the monthly payments. But in order to create a plan to get out of debt you'll need a list of all your creditors and what you owe. Your credit report can help you identify who you owe, along with recent balances. (You can get free copies of your credit reports each year at AnnualCreditReport.com.)
You may also find debts listed on your credit reports that you had forgotten about, such as collection accounts. Forget to include those in your plan, though, and your efforts may be derailed if those collectors suddenly decide to pursue you for payment but you can't afford to pay them.
Plus, no matter which approach you choose to get out of debt, you'll have to know what you owe. Your credit report can help you with that task.
You'll understand how your debt affects your credit.
If you've been making your monthly payments on time, you may assume your credit is "good." But, in fact, the balances you are carrying may be dragging down more than just your net worth; they may be hurting your credit scores.
You won't know that by looking at your credit reports, though. Your credit report just contains information about your accounts, balances and payment history. It won't analyze whether your debt may be too high.
Your credit score, on the other hand, will show you the impact of your debt means to your scores. For example, in Credit.com's free Credit Report Card, one of the five factors that make up your score is "debt usage." That factor takes into account how close your balances on your credit cards are to your limits, for example. As your balances on your cards approach the limits, your credit scores suffer.
Getting out of debt will usually help your credit scores in the long run. But in the immediate term, your goals -- get out of debt and build better credit, for example -- may be at odds. Take bankruptcy, for example; it's not great for your credit, but it may be the fastest way to become debt free. Understanding where you are now, as well as how debt relief options may affect your credit, can help you make a more informed decision about which approach is best for you.
You can track your progress.
Paying down debt is usually a marathon, not a sprint, and most of us are going to need encouragement along the way. Monitoring your credit score each month is one way to get that regular dose of motivation. Over time, as your balances decrease, your credit scores will hopefully increase. But even if your credit scores suffer because you choose to settle your debt or file for bankruptcy, keeping track of your score can help you monitor your progress as you work to rebuild your credit and your financial life.
More from Credit.com:
- Can you really get your credit score for free?
- The ultimate credit report cheat sheet
- How often does your credit report change?
Don't make life miserable for your kids but remember that if you don't disappoint them a little now their going to be extremely disappointed later.
Shop around for the lowest priced, good car insurance. If you need to get a car, get a small used one that gets 30 mpg or better unless some relative or friend gives you a tremendous deal.
I've been there and sometimes there's so much stress and you feel like you're up to your neck in alligators so that it's hard to focus. But you need to get mentally tough and do it and the experience will allow you to prosper more in the future than otherwise when you get back in the black.
My retirement income exceeds the avg. American workers' income. I'm wearing Dr. Scholl's padded athletic shoes, $25 from Wally World. I bought 4 cans of store brand sauerkraut for our family Christmas meal for 68 cents a can. Etc. Etc. These sorts of things are as good as spending more and they cut your expenses!
I still spend: I take nice vacations and I just spent a couple hundred to get our next-generation's 12-yr old's alto sax repaired. I picked up the check this week for a group of seven at Baltimore's best crab cake restaurant. But overall I get the biggest bang for the least buck.
This article and most other articles are written by idiots for idiots.
There is only one way to pay off debt. Spending less than you earn is the first and only requirement. However, for most people in debt up to their receding hairline, this is precisely the problem and they have little real intention of changing that habit. All they are looking for is a pain free solution, which short of default does not exist.
- if you are piling up debt but your income is falling, pile on more debt.
- DO NOT, BY ALL MEANS DO NOT differentiate using debt for investment vs consumption.
- increase stipends you are paying to your needy relatives.
- Arrange with your 5 year old (be sure to write it down) that you will take on more debt now for spending and your child will begin paying it off when he/she is 18.
You would be insane to reduce you debt, any main-stream "economist" will tell you....is so anti-keynesian.
In addition to all of that: Get a part time job and use that money to pay off the debts in reverse order and use the money allocated to go after the next one on the list. If one has children of working age make them work and use their earnings to buy things they want.
Working your way out of debt is faster and more rewarding than just scrimping and saving.
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