Excessive debt can be troubling. It may weigh heavily on your mind, cause tension in the family and dampen your quality of life. You don't have to endure a burden of debt. There are ways to effectively manage your debt repayment, but it will require patience as well as perseverance. Excessive debt does not magically appear in an instant, and it's not going to disappear overnight.
Credit is a two-way street
When you are extended credit by a bank, credit union or other financial entity, it's because they have decided you are creditworthy. They have confidence in your ability and willingness to pay back the money. You, in turn, commit to making repayments on an agreed-upon schedule.
The creditor has also decided that lending you money will be a profitable venture. The annual interest rate (APR) charged by the lender insures that, when you spread the debt over time, you will pay back an amount greater than the original principal. The longer you take to repay the debt, the more you will pay in interest.
Credit is an important tool. For major expenditures, it can be a necessity. Not many people have sufficient savings to purchase a home, or even an automobile, without using credit to spread the cost over several years. The same is true of a college education.
"Revolving" credit, like credit cards or payment cards, is more of a convenience than a necessity. It provides access to a fixed amount of money that you can spend as you wish. This type of credit is not "secured" by a piece of property, so it generally carries a higher interest rate than does a mortgage or car loan.
Does debt = trouble?
Debt is not inherently good or bad. It simply means that you owe something (usually money) to a person, business or other entity.
Few would question the wisdom of borrowing money for a home or college education, as long as the size of the monthly payment was one that the borrower could comfortably afford. And, there probably aren't many people that choose to live without a credit card.
Debt becomes problematic when a person fails to use credit wisely and can't or won't make their payments on time. While credit permits you to "buy today, pay back tomorrow," the challenge is to remember that you have a financial obligation to each debtor, every month, until the principal is repaid.
Ask Yourself: Am I in "over my head?"
There are warning signs that your debt level may be headed for trouble. To determine if that is the case, gather your checkbooks and your previous three months' statements for your credit card accounts, revolving lines of credit, mortgage loan, car loan and any other loans.
Review your financial statements and your recent payment history and then honestly ask yourself the following:
What is the total amount of money I owe?
Am I at or near the credit limit on any accounts?
Did I pay only the minimum or less each month?
Did I take cash advances from one credit card to make the monthly payment on another?
Did I take cash advances or use my credit card to cover routine living expenses (like groceries, gas, utilities)?
Did I skip credit card payments because I lacked the funds to make even the minimum payment?
Do my charges exceed the monthly payments that I make?
Was I late with my payments?
Other warning signs that you may be approaching an excessive debt level include:
Calls from collection agencies or creditors about delinquent accounts;
Working overtime to keep up with spending;
Using your savings to cover daily expenses; and/or
Being denied credit when you applied for another loan.
Ask Yourself: How did I accumulate this much debt?
If you answered "yes" to any of the above questions, and if you recognize any of the warning signs, you are probably headed toward a debt problem, if you're not there already. It's also a safe bet that you and/or another family member are not using credit responsibly.
What led to this situation? Was it due to factors within your control or unexpected circumstances? Addressing these underlying causes will assist your efforts to pay down your debt.
Poor money management: Poor money management is usually at least partly to blame for excess debt. You're not managing your money well if you consistently spend more than you earn; if you fail to pay your bills on time; if you pay only the minimum amount due on your lines of credit; if you borrow more money than you can afford to repay; if you live beyond your means; and, if you do not have enough in savings to cover temporary financial emergencies. If your answer to every money worry is to borrow more money, you're in trouble.
Unexpected life events: Unexpected life events can throw you and your credit a curveball. These may include the death of a spouse or a divorce or separation, unforeseen medical expenses, or a change in employment (maternity or disability leave; being fired or laid off; or having to quit your job to care for a family member or to relocate). Those who have an adequate amount in savings can better weather unplanned changes to their financial situation.
Family miscommunication: It's often said that "opposites attract" and this is the case for every "spender" who marries a "saver." That in itself is not a problem if a couple communicates honestly and with regularity about family finances. Family members who are not open about their spending and bill-paying patterns, however, are going to find it doubly difficult to tackle debt issues.
Compulsive behavior: Compulsive behaviors, whether they involve addictions to gambling, drugs/alcohol, or other vices, invariably compound financial problems. It will be difficult to make any headway on reducing excessive debt if the addictive behavior is not addressed with the help of a professional.
Convince Yourself: It's important to pay down my debt
Heavy debt obligations can negatively impact your financial and emotional welfare.
From a financial perspective, excessive debt hinders your ability to borrow money. It can prevent you from qualifying for a loan to buy a house or car, or to fund your child's education. If you do qualify, you'll no doubt pay a higher interest rate than someone with little debt. Certain outstanding debts may even lead to a garnishment of your wages.
On the personal front, an ongoing debt burden can place a strain on family and personal relationships and lead to emotional stress. The constant worry, the arguments over money, and frequent phone calls from creditors can take a toll on your quality of life.
Convince Yourself: I can take steps to manage my debt
Now that you have considered the extent of your debts; gained an understanding of what led to your financial predicament; and considered how excessive debt is impacting your life, it is time to take action.
Following are seven steps to help launch you on the road to an improved financial status and a better quality of life.
Step 1. Set up a household budget to guide your spending patterns. The budget should detail your monthly income, as well as your monthly expenses.
To begin, compile a list of all sources of income (paychecks, alimony or child support, interest and dividends) for your family. Next, compile a list of the bills you pay each month (mortgage or rent, car loan, credit cards and revolving lines of credit, utilities, insurance, cable TV, etc.) and your family's expenditures for food, child care, clothing, transportation, cell phones and other items. (To do this effectively, you should track all expenses over a period of several weeks.)
Look at the bottom-line totals for your Income and your Expenses. If your expenses exceed your Income, you'll have to either boost your income and/or cut expenses in order bring the totals in line. Not all expenses are for the necessities of life. Cut discretionary, optional spending, such as restaurants, entertainment and vacation/travel. Your budget should outline a spending plan which insures that your income will exceed your expenses each month.
For additional information on constructing a household budget, read tips on How to Develop a Working Budget.
Step 2. Don't go any deeper in debt! Put your credit cards away and make a concerted effort to refrain from accumulating any more debt in the coming months. Pay cash or use a debit card. If you must charge something in an emergency, use the card with the lowest interest rate.
Step 3. Use daily money-saving strategies to free up more money. Adopt the mindset that you will save a bit of money each day. The possibilities are endless: forgo the daily coffee; take public transportation; use money-saving coupons; eat more home-cooked meals; seek out lower-priced car insurance; cancel your cable TV; or switch your cell phone provider. Challenge family members to come up with other ways to save money.
With the freed-up money, you should build an emergency savings account, so you won't be forced to borrow money the next time your car needs repairs or you're hit with a medical emergency. You should also begin to tackle your high-interest debts.
Step 4. Prioritize debt repayments. Not all of your debt obligations carry equal weight. Start with the most expensive revolving types of credit.
Pay off high-interest rate balances first. Pull out your credit statements and review the interest rates and terms of payment. Which one carries the highest APR? Pay double or triple the minimum monthly payment each month on that credit card until its balance is paid off; then start directing that freed-up money toward the next highest rate balance. In the meantime, make sure to make the minimum due payments on your remaining cards.
Consider transferring balances to the lowest-rate card. You may qualify to transfer debt on one card with a high APR to another card that has a lower APR. Contact your credit card company to discuss your options, and make sure you read the fine print on any transfer offers (Will the low rate expire on a certain date? Is there a transfer fee?). If you are able to transfer balances from the higher interest accounts, close those accounts once the transfer takes effect.
If you have no other option than to miss a payment, carefully consider which debt is the most important. For instance, if you ignore your mortgage/rent obligation, you might well lose your home or shelter. Your car loan may be critical if you are dependent on transportation for your job. Review the terms of your credit card accounts and student loans before deciding whether to miss a payment. Will you suffer a financial penalty?
Step 5. Ask your creditors to reduce interest rates. It doesn't hurt to contact your creditors to request an interest rate reduction or a new payment schedule. Be honest about the challenges you are facing trying to reduce your debts and assure them that you'd like to remain a loyal customer. Sometimes a creditor will decide to reduce the rate rather than risk your defaulting on the loan or switching to a lower-rate credit card.
Step 6. Make extra payments, whenever possible. Put money you saved in Step 3 toward making extra or larger payments on your high interest loans. Do the same whenever you find yourself with unexpected cash (from a gift, a raise at work, an income tax refund). Extra payments can dramatically shorten the amount of time it takes to pay down a balance and save on interest fees.
Step 7. Contact a credit counseling agency, if your efforts are not successful. If you can't seem to make any headway adhering to a workable budget or paying down your debt, there is another step to consider. You can seek professional guidance from a non-profit credit counseling agency. Certified credit counselors are trained to offer objective advice and can provide a no-obligation evaluation of your financial situation. Read tips on Choosing a Credit Counseling Agency can help you select a reputable agency.
Don't delay; begin to repay your debts today. Even tiny steps can move you forward and boost your confidence. You're in charge of your financial future, so chart your course of action and steer your family ship toward an island of financial security.
About ClearPoint (www.clearpointcreditcounselingsolutions.org )
ClearPoint Financial Solutions is a national 501c3 nonprofit credit counseling agency licensed to operate in all 50 states. ClearPoint’s mission is to help people who are struggling with debt regain financial control over their lives through education. Our accredited financial specialists provide budget, housing and bankruptcy counseling in person, over the phone or via the Internet to over 50,000 people a year. They teach consumers how to manage their money better, pay down debt, and save for a secure financial future. ClearPoint is a system-wide Accredited Business of the Better Business Bureau. We are a member agency of the National Foundation for Credit Counseling, and meet the highest standards of the Council on Accreditation
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