While the average American household has acquired approximately $8,000 in consumer debt, many people have achieved the dream of living debt free. Reducing and eliminating your debt does not happen overnight. However, if you outline a realistic plan for reducing debt, you can become debt free in a few years.
Establish a Plan for Reducing Debt
Before achieving your goal, you must outline a detail plan for eliminating debt. To begin, gather all your credit accounts and unpaid bills. It is important to have an accurate debt amount. Individuals who earn a huge salary may be able to eliminate their debts by simply cutting expenses.
Record your monthly income and make a list of your monthly expenses Determine how much income remains after your have paid your bills for the month. This amount is your disposable income. Instead of frivolously spending this income, use the extra money to payoff your credit card balances.
If you do not have the extra income to payoff your debts, there are other options available to you.
Apply for a Debt Consolidation Loan to Reduce Debts
Applying for a debt consolidation loan to reduce your debts is a great way to eliminate high interest consumer debts. While a debt consolidated loan will not immediately erase your debts, these loans have short terms and low rates, which allow you to payoff your personal debts in less time.
There are three ways to acquire funds to consolidate debts. For starters, you can attempt to apply for a personal debt consolidation loan. Depending on the financial institution, you will need collateral or an excellent credit score.
Homeowners may apply for a home equity loan or line of credit. The funds received from the loan or line of credit may be used to payoff or reduce other high interest consumer debts. Be careful when accepting these types of consolidation loans. Home equity loans and lines of credit are protected by your home’s equity. With this said, the lender may foreclose your house if you do not repay the loan.
Debt Management and Consumer Credit Counseling Services
Another method for reducing debt involves establishing a relationship with a debt management or credit counseling service. These services will help you reduce debt and improve your credit rating by contacting your creditors and establishing better terms and rates on your credit cards and loans.
Debt Management Plans
Debt Management Plans (DMP) is placed one step beyond credit counseling and a stone’s throw short of bankruptcy. If you are too deep into debt and unable to pay them, a credit counseling agency may recommend Debt Management Plans. This is a serious step that should be considered carefully along with better money management skills and budgeting disciplines.
Similar to prescription medication that you would only take after consulting a licensed physician, Debt Management Plans should start only after you have talked it over with a certified credit counselor. Your certified credit counselor spends the time to review your financial situation, consider alternatives, and help you learn to handle money better. You want to stay out of debt after you get out of it.
What is Debt Management Plans?
In simple terms, your credit counseling organization begins to manage your debts on your behalf through direct interaction with your creditors. They come between you and most of your unsecured creditors, negotiate lower interest rates, eliminate certain fees, arrange payment amounts and prioritize which creditors gets paid first. In short, almost everything that could be done to get you out of debt fast. These plans cover most unsecured debts, like credit card bills, student loans, and medical bills. But secured debts such as real estate loans fall outside of these plans.
Before signing up with a credit counseling organization for a DMP, verify any concessions your particular creditors offer to that organization. All these concessions from your creditors amount to one thing: Lower your monthly payment and still get out of debt faster. In some cases, you will be able to pay you debts, years earlier. Ask your credit counselor how much earlier you will get out of debt if you stayed on course.
When DMP starts, you agree to send one monthly payment to the credit counseling organization and they in turn make all the payments to your creditors for you. In the meantime, you may have to agree not to use or apply for credit while you are participating in the plan.
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