How Much Debt Do We Have?
The discussion of national debt problems in the media should prompt American families to take a look at their own balance sheets. An important part of this process entails measuring current debt levels and considering appropriate debt relief options.
Debt can be like a snowball rolling downhill -- it just gets larger and uncontrollable if left unchecked. As debt accumulates, your credit score may deteriorate. This means you will be charged higher interest rates and balances can pile up even faster. Taking the right steps can help you reverse this process, reduce high payments, and ultimately avoid bankruptcy.
Taking Stock of Debt
To get control of debt, make 2 lists of all your liabilities -- one of all the unsecured debts, like credit card balances, and the other containing all the debts secured by collateral, like mortgages, car loans, etc. For each item, note the amount owed, the monthly payment, and the interest rate.
Rank your unsecured debts by how high the interest rate is -- most likely the highest interest rates will be on some credit card balances. Then rank the secured items by how essential they are (your home is probably at the top of this list). Secured loans should take top priority every month -- first, because late payments to secured creditors damage your credit report more than late payments to unsecured creditors, and second because you don't want your car repossessed or your home foreclosed on. In fact, most lenders consider a home foreclosure the worst thing you can possibly have on a credit report.
Debt Relief Options
Once you have prioritized your debts, consider a range of debt relief options. Some you can do yourself and others require outside help.
Steps you can take yourself:
- Cut up the credit cards with the highest interest rates.
- Where possible, shift high interest rate debt to low interest rate debt. If you have equity in your home, consider using a home equity loan or a cash-out mortgage refinance to consolidate debt, but be sure to budget carefully for the monthly payments -- while missing payments to your credit card company isn't good, missing payments to your mortgage lender can be ruinous and cost you your home.
- Direct discretionary income toward paying off the highest interest debt first, then shift those payments to the next highest, and so on. Paying more than the minimum required is crucial for retiring high interest debt within a reasonable time frame.
- Consider selling off non-essential secured items (how many times did you actually take the boat out, anyway?).
Next, determine if your income is sufficient to repay the debts and take care of essentials like food, utilities and medical expenses. If not, it's time to turn to outside debt help such as credit counseling or a formal debt management plan:
- Credit counseling involves having an expert look at your finances and give you advice on debt relief, budgeting, and improving your credit score. Many not-for-profit services offer some level of credit counseling; just be sure it's a reputable agency.
- Credit counselors may also be able to negotiate lower interest rates with your creditors on your behalf, allowing you to repay your most burdensome obligations faster.
- A debt management plan may entail making payments to an agent who in turn negotiates with your creditors and manages the monthly payments. Read your debt management plan disclosures carefully -- make sure that most of your payments are going to creditors, and be advised that any debt that is negotiated away can be noted on your credit report and adversely affect your credit score.
Obtaining debt relief is likely to involve some level of sacrifice, but in the long run you will find it worthwhile to avoid bankruptcy and the endless cycle of high payments.