How to Reorganize Debt

Reorganize your debt can help you pay off your debt more efficiently.

Reorganize your debt can help you pay off your debt more efficiently.

Gaining control of your debt is vital to your emotional health and financial future. Debt can quickly snowball into an overwhelming tangle of bills, but with some reorganization, you can minimize interest and penalties. A good debt reorganization strategy will also help you pay off your debt more quickly. By honestly assessing your current debt situation, advocating for yourself with credit card and loan companies, and making a few budget changes, you can get a handle on your debt.

Minimizing Interest Paid

Gather all the bills with revolving debt from the last month. Revolving debt means that you only pay part of the total sum owed. These may include credit cards, mortgage, student loan, car loan, medical bills and others. Add up the debt so you get a clear picture of the total debt owed.

Identify the bills with the highest interest. These are most likely to be credit card bills. The average American family carries more than $10,000 worth of credit card debt, and often pays as much as 29 percent interest. Minimizing the interest paid on your debt will put more money into your pocket and help you pay off your debt faster.

Call your credit card company and ask if they have any special offers on transfers. Credit card companies frequently allow you to transfer debt at a low interest rate onto a new or existing credit card. Also check credit card websites online for special offers. The goal is to transfer debt from the highest interest rate cards onto a credit card that has the lowest interest rate. Be sure to ask whether the transfer rate is for the duration of the debt or if it is an introductory rate applicable only for the first year.

Call your credit card company and negotiate lower interest rates. You can still lower your interest rates by speaking with your credit card companies. Explain to them that you are working to pay off your debt and ask if they would consider lowering the interest rate. Most credit card companies should be happy to work with you if you've paid your bills on time and had an open account with them for a number of years. Threatening to close the account may also motivate your credit card company to lower your interest.

Close credit card accounts which you no longer use and have transferred money out of, but make sure you don't hurt your credit score by closing accounts that you have had for several years. You generally want to leave your oldest credit cards open since credit scores take into account the length time you've had a credit card open. Having fewer credit card accounts also minimizes the number of bills received and potential confusion.

Pay off the highest interest rate cards first. Even after you've transferred balances and negotiated interest rates, it's likely that you will still have to pay some interest on your credit cards. Put more money toward the credit cards with the highest interest rates and pay the minimum balance required on the rest of your debt.

Mortgage Debt

Look at the kind of mortgage debt you carry, and the monthly payments and interest. Often, people have both a mortgage, initially acquired when first purchasing the house, and a home equity mortgage. Sometimes these two are charged at different rates. As with credit cards, you want to minimize the amount of interest paid to the mortgage company. Depending on whether you have a fixed rate mortgage or an adjustable rate mortgage, you could be paying too much interest.

Call your mortgage company and ask whether you can refinance your mortgage and your home equity mortgage, if you have one. Your chances for refinancing your mortgage will be better if you have a good credit score and have paid your mortgage bills on time in the past.

Consider whether refinancing is really a good idea before you commit. There are closing costs for refinancing a new mortgage. These can total thousands of dollars, so it only makes sense to refinance your mortgage if you plan to stay in your house for many years to come.

Personal Bank Loan and Budgeting

Call your bank and ask about interest rates on personal loans. Taking out a low interest loan from the bank to pay off higher interest loans makes sense, but only if you avoid reloading debt. A personal bank loan can be used to pay off high interest credit cards or car loans.

Create a budget that allocates money for all the monthly bills, including mortgage, credit cards, student loans, car loans, utilities, cable, telephone and any others. Paying off your bills should take priority, but also set aside a manageable amount to put into a savings account each month for emergencies.

Cull budget items as necessary to save money and pay off debt faster. Consider downgrading your cable television package or getting rid of your cell phone. Stick with your budget and your reorganized debt program, and enjoy the path back to financial security.

Items you will need

  • Bills
  • Calculator

Tip

  • Beware of "credit consolidation" and "debt settlement" companies. While they may work for some, remember that these companies are private entities that profit off of your debt and charge for their services. Your credit score will also take a major hit if you use the services of one of these companies.
 

About the Author

Based in Chicago, Annie Wang has been writing since 2008. Her work has appeared in World Architecture News and other online publications. She holds Bachelor of Arts degrees in English and art history from the University of California, Davis.

Photo Credits

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