Debt Management: Do's and Dont's

With all the credit card offers and tempting financing deals, it is easy for debt to get out of hand. If this is the case for you, don't worry, you can achieve debt relief without a debt consolidation loan. Read on to find out what to do and what not to do to get debt relief.

Especially in times of economic uncertainty, many debt relief options seem like a good idea. Upon closer examination, however, you will find that they actually increase the amount you owe and may negatively impact your credit report. Debt consolidation companies make their money through somewhat hidden fees rolled into those "easy" monthly payments.

The idea of a debt consolidation loan may seem like a good idea to manage your debt, as it allows you to pay off your credit cards easily with one "small" monthly payment. However, especially if you have a poor credit rating, you may actually end up paying a higher interest rate than your current credit card terms, sometimes as high as 22 percent. This means in the long run, while your monthly payments are smaller, you end up paying more money than if you had not opted for debt consolidation.

While working with a debt consolidation company may seem like a dream come true to get out of debt, you must also think about how these companies make their money. Debt consolidation companies promise lower interest rates, lower monthly payments, and the convenience of one monthly payment. The trouble is that the debt consolidation company adds a service fee onto your monthly payment, increasing the total amount you will have to pay to erase your debt. Often, these fees are at least 10 percent of your current debt or 10 percent of any credit card settlements they make on your behalf. In most cases, the services provided by debt consolidation companies can easily be accomplished on your own. Often a simple phone call to the customer service department of your credit card company allows you to negotiate longer payment schedules or a lower interest rate.

Many credit card companies offer low introductory rates on new credit cards or balance transfers. It may seem tempting to transfer credit card debts to these lower interest cards as a form of debt relief. However, the lower rates only last for a few months and then they increase drastically. The balance transfers appear on your credit report, which will make you appear high risk. If you fail to get approved for another credit card you may by trapped with the balance on a credit card with an extremely high interest rate.

 

If your intention is to transfer your balance to a lower interest card and close the other account, be sure to close the other card "as per customer's request." You do not want your credit report to appear as if the creditor closed your account. 

If you are feeling like there is nothing you can do to find debt relief, fear not. A few simple steps will allow you to take charge of your finances.

The first step to debt relief is to figure out how much you really owe, including credit card debt, overdue bills, and any other debt. Write down all interest rates, total amounts owed, and minimum monthly payments. The next step is to keep only the two credit cards with the lowest interest rates. Cancel all other credit cards and do not roll credit card debts from one card to another. Next determine your minimum monthly payments and figure out how much over the minimum you can afford to pay. If you can only afford to pay a few dollars over the minimum, then pay off the higher interest rate cards first. If you pay just the minimum on all your cards, it will take forever to pay off all the debts and you will end up paying almost double the money you originally charged.

Homeowners have options for debt relief that will allow them to pay off their credit card debts quickly without having to take out a debt consolidation loan. Home equity loans often have a much lower interest rate and the interest is usually tax deductible. Most home equity loans offer a 15-year term for repayment. Cash out refinancing is another option that allows a homeowner to refinance for a greater amount than is owed. The extra money can be used to pay off debts. This also offers lower interest rates than debt consolidation loans but usually results in fifteen to thirty years of payments and should be considered a one time only option.

Non-homeowners also have several options for debt relief. Refinancing your car is an option but you will want to pay if off quickly before you decide to purchase a new vehicle. Personal loans are an option, as they usually have lower interest rates than debt consolidation loans.