By Rod Davis, BBB CEO Better Business Bureau Serving SEFL and the Caribbean
Being in debt can be overwhelming, and unfortunately, is on the rise and touches more and more people. According to Lending Tree, non-mortgage consumer debt will reach $4 trillion by the end of 2018. The same report indicates that student loan debt has doubled over the last ten years to almost $1.6 trillion. While it is easy to get into debt, it is hard to work your way out of debt. No matter what some people say, there are many ways to get into debt besides having bad financial habits. A job loss, cut in pay, obtaining a college degree, a big increase in mandatory monthly expenses, or large medical bills are a few reasons that even a responsible person’s debt can spiral out of control.
Getting out of debt requires establishing a solid, realistic financial game plan and then having the discipline and perseverance to achieve your goals. No matter the specific facts of your situation, focus on choosing a solution that fits your budget, assets, credit, and financial goals. You also need to be focused to avoid scammers and unethical businesses who offer solutions that are more likely to increase your debt as they pocket money from you without paying down your debts.
An effective way to get out of debt starts with having a clear understanding of your Credit, Budget, and Assets.
A combination of your ability to make monthly payments (budget), ability to refinance, consolidate, or restructure your debt (credit), and the ability to provide extra collateral and/or funds to pay off your debt (assets), will determine your path to financial freedom.
Know Your Debt
Are you keeping track of your debt?
Do you know how much you owe, your interest rates, and monthly payments? You can’t form the most effective plan when you don’t know the facts.
Are you making your payments on time, struggling to make your monthly payments, or falling behind in your payments?
Also, review your bank and lender statements, including any credit card, mortgage, student, auto, and personal loan statements. Compile a list of your weekly, monthly, quarterly, and annual bills. If debts are being paid in installments, include the interest rate for each so that you can evaluate if there are options available to you to lower the interest rate so that more money is directed to debt reduction.
One key to getting out of debt safely is to know how much you can afford to put towards your debt each month. Good intentions are not going to get you to the finish line if you commit to a solution with a payment too large for you to sustain for the number of months required to become debt free. The only way to be sure you’re not biting off more than you can chew is by keeping a budget. Your budget is your tool for monitoring your cash flow, including your earnings and your expenses. Your budget aids you in determining how much money is available to pay your debts. It also helps you focus on expenses you can cut to pay off your debt.
Whether they are limited or large, listing your major assets, including your savings plans, investment accounts, home, and retirement plans, is an important part of choosing the right debt relief strategy. While it isn’t always prudent to use an existing asset to help pay off debt, it is important to track your wealth. Paying off debt together with building an asset portfolio will offer long-term financial security. You may also be able to use some assets as short-term solutions to pay off debt if those assets provide a way to pay down debts at a lower interest rate. Once you have compiled your budget, the list of assets and the rates for any recurring payment on debts, the next step is to develop the strategy and plan to pay off your debt.
There are a few major ways to get out of debt. Here are the main choices you should review:
- DIY payment plan: You pay down your debts more aggressively. More money going to the principal gets you out of debt faster and at a lower overall cost. You may need to cut some non-essential expenses (e.g. high end cable, expensive coffee) to lower your monthly expenses enough to enable you to pay off your debt. Put your expenses, and income into a spreadsheet (or a list for the non-techies) so that you can make adjustments until you attain a reasonable plan. If you have credit card debt, talk to your credit card company about a lower rate. If you have multiple credit cards, you may want to consolidate your debt onto the card with the lowest rate.
You may also want to explore a personal loan or a cash out refinance of your mortgage if you have equity in the property. A personal loan is a great debt consolidation option if you have a high enough credit score to qualify for a rate that has a lower interest rate than your current debt. Most personal loans are for short-term period, between 3-5 years, and could increase the size of your monthly payment. If you have equity in your home and a good credit score you may be able to lower the costs on both your mortgage and your existing debt. Once you have the figures from your lender, you can compare the total amount you will pay on your mortgage and your debts to see if using this approach can help you pay off your debt more quickly and at a lower overall amount.
- Credit Counseling and a Debt Management Plan (DMP): A credit counseling service’s DMP consolidates your credit card bills into one payment. Depending on the creditors you owe and your current interest rates, a DMP could get you out of debt in 4-5 years at a reduced cost.
- Debt Settlement: A debt settlement plan is an option you should review if you are experiencing a serious financial hardship and are struggling to make your monthly payments or feel that you’re about to reach that point. While the debt settlement company negotiates your debt with the creditor, you make monthly payments into a secure bank account to pay your creditor, after the settlement is finalized. Make sure that the debt settlement company takes a fee only upon successfully negotiating a settlement. Avoid upfront fees.
- Student Debt: Student debt can be the biggest challenge since it can’t be forgiven even in bankruptcy and the amount of debt is often very high compared to earnings. Just as with other debt you can first attempt to reduce and pay off debt by yourself. The Consumer Financial Protection Bureau offers guidance to you on their website at www.ConsumerFinance.gov/Paying-For-College/Repay-Student-Debt/
There are many great solutions to help one get out of debt. However, make sure that you choose the right approach for your situation. Be thoughtful and methodical so you are properly prepared to take control of your debt. One final piece of advice: before you decide on any solution, if you seek outside assistance work with a reputable firm and avoid falling for a scam.