Debt has a way of sneaking up on you. One minute you’re debt-free and the next, you’re drowning in it. If you are in debt and you want to get out for good, opt into a proven strategy for eliminating debt and establish a secondary game plan for staying out of debt. Best-case scenario is to do both without harming your credit.
Eliminating credit-card debt should be the first consideration in any debt-elimination strategy. Interest rates are higher than for most other loans, and some companies charge yearly fees. If most your debt is in credit cards, negotiate a low-interest credit card with a major company that you’re not presently doing business with. Call your current credit card company and ask them to match the offered rate. If they deny your request, take the new company up on its offer and, after carefully considering any fees associated with transferring a balance, move the current balance to the new card and close the existing account.
Snowball image by Vladimir Krivsun from Fotolia.com
Employing a debt snowball is one debt-reduction strategy that works well from a psychological standpoint. With a debt snowball, you concentrate on paying off the loan or credit card with the lowest balance first. Budget all your income toward minimum or standard payments for all your debt, and whatever funds you have left, commit to the smallest-balance debt. With this strategy, you’ll see immediate results, which may prompt you to continue on the debt-free road.
Line up all your debts and pick the one with the highest interest rate. That’s the one you’ll work to eliminate first. Just like the debt snowball, you’ll budget all your income toward minimum or standard payments, and in this scenario, you’ll apply any leftover money to the high-interest obligation.
No matter what the bill says, maintain payments at the highest level you have paid in the past. For instance, if your credit card had a balance of $2,500 and the payment was $75, and you were able to make it with no problem, when the balance reduces and the payment does too, continue to make $75 payments. Using this strategy significantly reduces the term of repayment and the amount of interest you’ll pay.
Consolidation loans refinance your debt, generally at a lower interest rate. This strategy works if you are disciplined enough to stop piling on more obligations. If you start using the credit cards after you pay them off with a consolidation loan, you’re back to square one, and you haven’t accomplished a thing. Use this strategy only if you’re confident you can break the credit habit.
Nonprofit credit counseling agencies often negotiate on your behalf to lower your interest rates and with it, your monthly payments. Under current regulations, you can use these services only if you have $10,000 or more in unsecured debt, such as credit cards or medical bills. Keep in mind that these services are not free. Most counseling agencies charge a set-up fee and a percentage of the money sent to your creditors. In addition, any repayment plan they negotiate that decreases interest or payment amounts will have a negative impact on your credit report.
Use bankruptcy as a last resort. There are two types of individual bankruptcy available to you: Chapter 7 and Chapter 13. In Chapter 7 you liquidate certain assets to pay down debt, with the remainder discharged or forgiven. Chapter 7 filing stays on your credit report for 10 years. Chapter 13 restructures your debt over a period of three to five years and discharges any debt remaining. A Chapter 13 filing stays on your credit record for seven years.
Cheryl Withrow is a writer in Michigan’s untamed Upper Peninsula. Following a teaching career she served alternately as editor of the "Washington County News" and the "Geneva County Reaper," and as associate editor of "Bay Life" magazine. Withrow holds a Bachelor of Science in business with a major in accountancy from Wright State University and a Bachelor of Arts in English from Ohio University.