Get out of debt

  
     

Get Out of Debt the Smart Way

The Bottom Line: For anyone deep in debt, there are no easy ways out. It 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. If you need professional help to get out of debt, shop around for the right provider. Avoid anything that is too good to be true.

It isn’t difficult to fall into debt.  Getting out of debt may be easy for some, as simple as stopping some dysfunctional spending. For others, their debt may be a seemingly insurmountable hole. The best route out of debt varies; there is no one-size-fits-all solution. To choose the smartest way, find the solution that fits the details of your financial situation.

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, 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.  

Debt, in and of itself, is not bad. Taking on some debt may be the smartest way to increase your quality of life and improve your overall financial situation. A mortgage is a great example. Of course, you shouldn’t stretch yourself by taking out the biggest mortgage a lenders says you qualify for. But, an affordable mortgage debt taken on for the house you want can improve your lifestyle, be a smarter choice than renting, and will help you build equity.

There are a lot of people struggling with student loan debt, but that doesn’t change the fact that financing an education for the right kind of degree, increases your lifetime earning potential dramatically.

Putting a big purchase on a credit card and paying it off over a number of months could be your best choice, even accounting for the interest you pay the credit card company. Using a credit card or financing a big purchase may be the only way to buy an important, expensive item and give you an affordable monthly payments.

Sure, some people have lousy financial habits. They irresponsibly charge way too much on their credit cards to buy things they don’t need.

A lot of people in debt, however, take on debt to make ends meet. Running up credit card debt sometimes seems like the easiest solution. They make their payment on time each month, but fall into a trap of making only the minimum payment, inflating the cost of their purchases with a ton of interest.

As the balances rise and the card is about to max out, it’s clear that something needs to change. The situation may appear bleak, but not all is lost. There are many smart and safe ways to get out of debt.  

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?

A good place to start is by looking at your credit report. You can get a free credit report at www.annualcreditreport.com.  Also, review your bank and lender statements, including any credit card, mortgage, student, auto and personal loan statements.

Get out of Debt – Narrow Your Focus

An effective way to get out of debt is 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.

Here is a brief guideline to help you evaluate your get out of debt arsenal:

Credit: Your credit score is determined by the history of your past accounts. FICO scores are the most common scoring model. Your score’s main component is whether you have a history of making your monthly payments on time. Your score has a large influence on what choices are available to you for resolving your debt.

To qualify for an unsecured debt consolidation loan, you need very good to excellent credit.

It’s possible to be approved for a cash-out refinance with credit that’s only fair, because the loan is secured by the collateral of your home, although the best rates are available to borrowers with excellent credit.

Some solutions, such as bankruptcy and debt settlement, hurt your credit. People who choose either of these often have damaged credit already. They decide that the benefit of getting out of debt is more important than any harm to their credit.

Budget: 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 you have to pay your debts. It helps you focus on expenses you can cut (or maybe even savings you should cut savings) to pay off your debt.

Assets: Everyone should have an emergency fund (and we all should eat right, get plenty of rest, and exercise regularly). If you don’t, it should be a definite goal.

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.

Get out of Debt – Know Your Options

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.
  • Personal Loan: 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.
  • Cash-out Refinance: If you have equity in your home and a good credit score, look into a cash-out refinance. You may be able to lower the costs on both your mortgage and your existing debt. Don’t pay attention only to the reduction in your monthly costs. You’re stretching out the payments on any debt you consolidate for the length of the new loan which can add to your overall costs if you carry the loan until it is paid off.
  • 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.

Get Out of Debt – You Can Do It!

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. Choose the debt solution that best fits your personal financial solution.

One final piece of advice: before you decide on any solution, make sure that you work with a reputable firm and avoid falling for a scam.