The several ways to escape high-interest debt
Debt consolidation options explained
- Do a full accounting of your debts and expenses, and establish a budget.
- Debt counseling companies can evaluate your financial situation, negotiate credits and set up debt-management plans.
- Debt-consolidation financing options can replace high-interest credit card debt with a lower-interest fixed-rate loan.
Let’s just say that, like lots of other people in America, you have racked up significant debt on several credit cards, and you’ve also got to pony up a mortgage and car payment each month. Like many people, you may struggle to make the minimum payments on your cards each month and are adding more charges to cover basic expenses, such as food and medicine.
In a situation like this, it is easy to do the wrong thing, such as digging out old credit cards or applying for new ones, and maxing them out. You may be tempted to run to a private debt-settlement company that will promise, typically for a hefty fee, to wipe out your debt. That route should be taken with extreme caution.
The tactics of for-profit debt-settlement companies can put your credit score at risk, and there is no guarantee that your creditors will negotiate and your debt will ever be reduced. You could pay out significant fees and wind up in a worse situation. Some of these programs are outright scams.
Fortunately, you do have other options.
Setting a budget
The first step is one you can take entirely on your own: Set a budget.
Many people don’t keep a good accounting of how much they spend each month, don’t know how much they have available to spend each month, and have a fuzzy idea of much they owe. If you don’t know these things, chances are you’ll never get out of debt.
Figuring out your expenses will take a little of work because you’ll have to gather up all of your monthly bill, and set a realistic budget that ensures that you are, at a minimum, not adding to your monthly debts.
If you have racked up high balances on several cards, you also can try contacting the card issuers directly to negotiate payment plans that would reduce the required monthly payments.
Seeking out help
Of course, all this can be easier said than done. For those who don’t feel they can attack their debt on their own, there is help available. In many communities, nonprofit credit-counseling agencies have sprung up that can help you develop a budget and offer advice on how to manage your debt.
If you can’t dig yourself out by traditional methods, you can go one step further by setting up a debt-management plan with a credit counseling agency. This differs from debt settlement. These agencies won’t wipe out or reduce your debt, but they will negotiate with your creditors to reduce your overall monthly payments. Typically, the agency takes over the payment of your unsecured bills, like your monthly credit card bills, and you’ll send the company a fixed amount each month. Normally, your creditors will close off access to your credit cards as a condition of lowering your payments.
Another option for people with good credit and a high debt load is to pursue debt-consolidation financing. The advantage of this is that you can consolidate all the debt owed on high-interest cards into a single, lower-interest fixed-rate loan. Banks and credit unions offer personal loans that are specifically marketed as debt-consolidation loans.
Another step is tapping your home equity through a cash-out refinance, line of credit or second mortgage. The downside of this strategy, however, is that you run the risk of increasing your overall debt load in the long run. Unless you change your spending habits and establish a budget, you could end up accumulating more debt on top of the debt that you refinanced.
The bottom line is that you have a number of options for getting debt under control, but some might not fit your particular needs. So, it is important that you weigh all your options carefully after taking a good accounting of what you owe first, then do your homework on what might be the best solution for you.