Having trouble paying your bills? Receiving notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car? You’re not alone. Many people face a financial crisis at some point in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. But often, it can be overcome. Your financial situation doesn’t have to go from bad to worse.
Credit should really only be used to help people obtain the important things in life; like a mortgage, auto and an education. All other debt is considered a luxury and not required for everyday life. Marketing, convenience and spending habits build our unsecured debt. Learning to control your spending and start planning out purchases can keep you from debt.
Before you can create a plan to be debt free, you need to find out why you’re in debt in the first place. Chances are it’s found in your budget, or more likely you’re lack of a budget. Do you find yourself paying your bills, then putting groceries or gas on the credit card? This is a common mistake that will grow over time. Supplementing your income with debt is a recipe for disaster. The only way to stop this is to create a workable monthly budget. Please click on: Own your life – Financing goals and start there.
There is no magic answer to debt; nor any government program that forces lenders to work with you when you’re in trouble. We like to think that our creditors would help us when we have financial troubles but that’s not the business they’re in. Over years of practicing lending, the one common theme is “People are creatures of habit and will follow simple instructions.” Most people just look at the minimum payment and due date. They base their monthly budget on the minimum payment, allocating any extra funds to everyday survival, not thinking about how that extra money could save them interest costs.
Now that you have your personal budget available, are you paying more than the minimums on your debt? Does your income support this debt repayment plan? Do you have money left over or are you short every month? These are key questions to see if you have the room to raise your payments and reduce your debt quickly. If you don’t have the room, there are still other options to help. First, let’s understand what type of debt you’re dealing with.
Credit Card Debt
Credit cards have become the emergency savings fund of many family budgets over the past 35 years. We use these financial tools to take care of unexpected expenses and to supplement our income when we want to spend but do not have the funds available. That is not to say that credit cards are bad. There is nothing wrong with having a credit card as long as it is used properly. Balances should be paid in full every month. If that is not possible then no further charges should be made until it is. Keep in mind that your credit score is impacted by how much debt you carry, called Debt Weight. Debt weight is the balance divided by the limit. For example, if you owe $5,000.00 on your credit cards and your limit is $10,000. This gives you a 50% Debt Weight. Anything over 30% can hinder your credit score.
Paying only the minimum payments will take you years to pay off your credit card debt. For example, suppose when you’re 18, you charge $1,500 worth of clothes and DVDs on a credit card with a 19 percent interest rate. If your minimum payment is based on 2.5 percent of the outstanding balance, you’ll start with a payment of $37.50. You’ll be over 32 years old when you finally pay off that debt. That’s 174 payments, and you will have paid more than $2,166 in interest if you charge nothing else on the account and have no other fees.
If you’re wondering how long it will take to pay off your credit card debt? Based on the information you supply, this calculator estimates of how long it will take you to pay off your credit card balance and will open your eyes to this financial nightmare.
Installment Loans can come from a bank or a local finance company. Most require some form of collateral to cover the amount of debt. Some loans are unsecured but usually, have a higher interest rate attached. The big difference is the interest rate being charged for the loan. The interest rate you are offered will depend on your state usury laws, your credit standing, collateral, and reason for borrowing.
Most installment loans use pre-computed interest. A pre-computed loan is one in which the debt is expressed as a sum totaling the principal and the amount of the finance charge computed in advance. The total amount of each payment is subtracted from the balance which includes the principal and finance charges (interest). The majority of the interest is paid during the first half of the loan term. This is the main reason why they always want to refinance your loan, it starts the loan over again so they can capture the maximum amount of the interest.
Debt in collections can occur for a number of various reasons. In some cases, you don’t even know they exist. Medical debt often turns into a collection item with hyper speed. Most hospitals and Doctors don’t have time to collect so they assign the debt to a collection agency.
Not paying your debts on time can create the worst type of collection debt. If you become severely delinquent with debt your creditor will often send or sell it to a collection agency. These agencies generally use high-pressure tactics to try to recoup the outstanding debt accepting only the balance in full or in some cases a settlement to clear the debt off the books.
Payday Lenders is a 2 to 4 week temporary loan attached to your checking account. The fee is charged on top of the advance. On average the fee is about $15 per hundred you borrow. So if you borrow $500.00, your payback is $575.00. This is not an installment loan although if you can’t repay in the 2 to 4 weeks they will be happy to refinance you for another fee. This is how they keep making revenue. To read more about Payday loans please read our article Present Day Mafia.
Over the past few years, Bank Overdraft protection has become more of a debt than a help. If you choose to opt in for this protection, your checks will never bounce and your ATM card is never denied. But in return, you get charged a fee every time you use the overdraft protection. You have no money in your checking account, but several small charges hit your account: $4, $5, and $6. The total amount you’re short is $15. Your bank may charge 3 overdraft coverage fees of $35 each – one for each item. That’s $105 in fees to cover $15 in charges. To learn more about Bank Overdraft, please read Help With My Bank.
The Five Options to Erasing Debt
Contractual Repayment is paying your debt back as you agreed per the contract you signed. Repaying your debts according to the terms under which you borrowed the money will cost you the least and leave you with the best possible credit. This option does not mean “just make the minimum payments”. Always pay more than the minimum, based on your budget, to reduce your debt as fast as possible.
If all you can afford to do is pay the minimum or if savings are not part of your budget, then you are one emergency away from falling behind. If this is the case, I recommend calling A Debt Coach to help review your financial situation.
Budget Revision can hold the key to debt freedom. Having complete control of your expenses can open up income to pay down debt quicker. I can’t stress enough how important a workable budget is. Without one your spending will control you instead of you controlling your spending.
Asset Reallocation might be the answer. Do you have items of value that you could sell to help pay down the debt you have? The goal of this option is to liquidate assets that you have to pay down your debt. Do not spend your retirement on your debt. Most retirement assets are protected and cost money for early withdraw. You will need this asset later in life.
Credit Counseling has the tools to help lower interest rates, monthly payments and waive the late/over limited fees. In most cases, the lenders will bring the accounts current after 90 days in the program. This will help your credit score while you are getting debt free.
A Debt Coach (ADC) offers a full financial review, maximizing your income, setting up a budget and review the debts for a possible debt management plan that fits your budget. ADC works directly with your lenders to provide the best repayment plan for you.
Bankruptcy is your final option available. Before you can take this step, you must complete a credit counseling budget review by an agency approved by the US Trustees office. If bankruptcy is your best option, the credit counselor will issue a certificate for bankruptcy. So before you call an attorney, please call an approved credit counseling service first.
There are no other options available, no magic pills, or easy answers. You may use variations of the above options or a combination of them.
If you would like help figuring out what your options are please give A Debt Coach a call and, for free, our certified counselors will review your financial situation and will help you come up with a plan of action for resolving your debt.
A Debt Coach Credit Counseling Service. 888-767-9155, www.Adebtcoach.org