Dealing with debt can be a hard task, especially if you don’t see a way out. Here are a few things you can do to start getting out of it and give yourself peace of mind.
Do-It-Yourself Debt Reduction
With the DIY approach, you make the minimum payments on all of your debts except the one you are targeting. There are two main variations on this strategy: the snowball method, and the avalanche approach. With the snowball method you pay off the account with the smallest balance first. With the avalanche approach, you pay off the credit card with the highest interest rate first. Either way, once the first debt is paid off, you apply the payment you were making to the next target debt, and so on until they are all gone. This takes patience and resolve, but you will feel great and motivated as you continue to pay off the debt one by one.
If you are able to consolidate your debts, you will get a new loan to pay off other debts. Then you will pay off the new loan as quickly as possible. You may be able to consolidate with a personal loan or by using balance transfers to low-rate or 0% credit cards. The risk with this approach? The new loan will make you feel like you solved the problem, and soon you could be pulling out the plastic again. Put your credit cards somewhere that they won’t be easy to get to, so you won’t be tempted to run up new debt while you’re still paying off this loan.
A reputable credit counseling organization will typically review your budget with you for free, and help you figure out if a Debt Management Plan is the solution to get you out of debt faster. If you enroll in a DMP, your credit card issuers will typically reduce your interest rates, and you’ll make one monthly payment to the counseling agency, which will then pay each of your creditors. In this scenario, be sure you are working with a reputable company, and that you are realistic about your ability to make the payments required.
If your balances are too high to pay them back within three to five years, or if you’re dealing with significant debt that’s been turned over to collections, you may want to consider trying to settle with your creditors. With this approach, the creditor or collector agrees to accept less than the full balance to satisfy the debt. This is my favorite approach because you pay off the debt in one fell swoop and typically the debt contains a lot of unnecessary fees (late fees, over the balance penalties etc. that can be removed by the creditor). Here, be sure you can come up with the money all at one time (typically there aren’t payment plans with debt settlement agreements) and also, make sure you investigate upfront whether you will owe taxes on the canceled debt.
Jennifer Streaks is a money pro, lifestyle expert and contributor for Black Enterprise. Continue the conversation by following her on Twitter @JStreaks and checking out her website www.JenniferStreaks.com.