A debt, in itself, is not a negative thing. However, a debt that you cannot pay for whatever reason can hurt your credit score and your chances of getting more loans in the future. The good news is that hard work, focus, and motivation can help you get out of debt too. For starters, one of the simplest and most effective tools you can use is a budget.
There is a reason budgeting is so popular. It might seem elementary but seeing where your hard-earned money goes every month puts your spending habits into perspective. And if you’re already struggling with how to get out of debt, then you have nothing to lose and everything to gain by trying your hand at budgeting.
Once you get used to creating and sticking to a budget, you’ll have a better handle on the funds that come in and go out. Strict budgeting also shows you in certain terms what you can truthfully afford and what you can’t. From here, you can devise a clear plan to get out of debt.
How to Get Out of Debt
The first step is to determine what kind of debt you have. Generally, there are two kinds of loans, secured and unsecured loans. Secured loans require some form of collateral to be pledged while unsecured ones don’t.
To get out of debt, you want to address your secured loans first because missing the fixed payments can cause you to lose the collateral you had pledged. After, you can start clearing out your unsecured loans.
How to Get Out of Credit Card Debt
One of the most common types of unsecured loans is credit card debt. It is a common question about how to pay down credit card debt? It can be frustrating to manage payments for several cards, but there is a systematic way to do it and get out of debt.
The first step to managing your unsecured loans is to list them down according to interest rates from highest to lowest. You must continue to pay the minimum amount for each of these loans but, where possible, choose to pay more.
You might have difficulty paying even the minimum amounts for your credit cards. Though it might seem counterproductive, it would be a good idea to get in touch with your creditors and let them be aware of your situation.
They will likely be more than happy to help you come up with a payment plan. After all, it’s in their best interest that you get to pay them regularly promptly!
Another option you can consider to get out of debt is debt consolidation. This lump sum payment is a loan typically provided by a bank, credit union, or online lender that clears the full amount of your unsecured debt in one go.
However, it is important to note that the interest rate of your debt consolidation loan must be lower than the average interest rate you were paying on your credit cards. If not, then the debt consolidation plan does not help you get out of debt.
Debt settlement, also known as debt relief or debt adjusting, is another possible solution to get out of debt. This strategy allows you to settle for far less than you owe. Again, you can do this yourself, or you can avail of this service from third parties who will try and negotiate settlements with your creditors on your behalf.
Some of these services are successful but be aware that these come with significant risks and, instead of helping you get out of debt, can leave you in even deeper debt if you aren’t careful.
For instance, there are no guarantees that your creditors will accept the negotiation terms or even speak with debt relief companies. And many times, debt settlement companies advise you to stop making monthly payments until they reach an agreement with your creditors.
During a period of 36 to 48 months, you need to put money into an escrow account. This accumulated amount will then be used to make an offer to your creditors.
Take note that failure to pay your creditors carries the risk of late fees, debt collectors, and even lawsuits. In addition, missed payments can be considered delinquent accounts, which could negatively affect your credit rating.
Unfortunately, the risks do not end there. If some of your credit card balance is forgiven, this portion can be considered taxable income, which means you have to pay a tax for it, negating any savings you just made.
When you’ve finally found the best way to pay off debt and complete it, your credit report will reflect that the account was “settled,” which stains your credit score for seven years. As a result, you can suffer a credit score hit of 100 to 125 points.
As you can see, debt settlement as a way to get out of debt is possible but comes with serious drawbacks that must be considered carefully.
Another way to become debt-free is to utilize debt management, an unofficial agreement with unsecured debt creditors to repay debts over a particular period. This period essentially extends the time with which you can get out of debt.
Under this arrangement, your creditors are offered a Statement of Affairs (SOA) that shows them your disposable income that you will proffer to them. They will then decide to agree to it or not.
Once an agreement is reached, you are to pay regular installments to the debt management company. These installments are then distributed between your creditors.
The overall goal of debt management is to help you get out of debt at a manageable level over a fixed period. In this way, you are afforded a chance to create a fresh start with your finances.
One real benefit of debt management is its informal and flexible nature. In effect, the payment plan can be altered to accommodate changing circumstances.
Entering a debt management plan also signals to your creditors that you are serious about your plan to get out of debt. This also signals to prospective creditors that they can trust you regarding future loans that you may need.
Debts are incredibly useful and, most of the time, unavoidable. But if you have a negative relationship with debts, you might find yourself in a stressful situation with your creditors. Get out of debt using simple and personal solutions like budgeting your monthly cash flow.
You can also opt for more complex solutions like debt consolidation to clear out your debt in one go. Just make sure your debt consolidation interest rate is lower than the average interest rates of your credit cards.
There are other solutions to get out of debt. For some, the benefits of debt settlement outweigh its risks and can allow you to pay far less than what you owe at the possible cost of your credit score.
And lastly, you can negotiate a debt management plan that gives your creditors a look into your disposable income, which you can then proffer to them. This plan is informal and can even make you look like a promising debtor to future creditors.