Don't consider debt consolidation or consumer credit counseling agencies your first stop. These should be a last resort! Although they may be tempting, if you're going to get your act together, doing it on your own will help you learn the skills you need to fix your own problem and avoid getting in this situation again.
Make a chart that displays how much you owe divided up by who you owe it to (make sure to include the interest rate on this chart- smallest to largest). Start making monthly payments to each creditor and as you pay off one item entirely, take what you were paying each month to them and apply it to the next largest item until you have paid off all debts except your largest one. At that point all monthly payments you will have been making to the other creditors will be applied to the largest (most likely your home mortgage) and you'll be able to pay it off quicker than you think. You might also talk to your local bank or credit union about their accelerated mortgage programs. These programs will help rapidly reduce the principal of your mortgage, helping to reduce the interest on your loan.
There are 3 approaches to who to pay first. Pay the highest interest rate first, pay off the largest debtor first or pay off the lowest debt first. Each has advantages. Paying the lowest debt first will give the best satisfaction and measure of progress, paying the highest interest rate first is the best return on dollars and paying the largest debtor first gives a sense of relief. But it is important to be methodical.
If creditors are hounding you, and you have grown fearful of answering your phone or reading your mail, stop and take a deep breath. You are okay. You will be okay. Now, take another deep breath and call them. Better yet, write them. If the company ever decides to take you to court, you will have proof that you are trying to pay off your debts. Most creditors want to work with you and figure out a way to get things sorted out. When you take the initiative to call and explain yourself, you may find them willing to help and may find they offer you terms that can help you get the debt back under control.
Contact your credit card companies. Ask each credit card company for help. They aren't likely to forgive you your loan, but they may be willing to reduce your interest rate. If your interest rate is currently 12% or more, ask if they would be willing to cut their rate in half. Why would they consider doing this? Well, creditors do not want you to default on your loan and they want their principal back. Sure, a nice fat interest charge would be ideal too, but if they sense you are ready to default on your loan, you can expect that a lower rate will be offered instead.
Consider a debt consolidation loan. You can pull all of your debt together into one account, preferably one featuring a fixed, low interest rate. You can use the proceeds from the loan to pay back your other creditors and then make monthly payments back to the loan consolidator.
Home refinancing. Refinancing your loan may be just the debt reduction help you need as the funds saved by you each month with lower mortgage payments could be used to pay off other debt. Caution: you are placing your home "at risk" if you opt for this choice.
Visit a credit counselor. There are credit counseling companies who help consumers by offering debt reduction plans to tackle debt. Essentially the way this works is that you will meet with an adviser and lay out a plan to repay your loans. The counselor will negotiate with lenders on your behalf for the lower rate which, in turn, will reduce your monthly payments as well as keep your credit rating intact. Credit counselors work for private companies as well as for government agencies or nonprofit firms. Be careful: a lot of what these people do you can do on your own. Read the fine print to make sure you understand any fees involved; make sure that your credit rating is not adversely affected too.
Credit counseling is all about you and your financial situation. When it's your dollars at stake make sure to ask the credit counseling organization about what type of customer service they provide. Credit counseling organizations should have someone available for you to talk to during all business hours of the day. Be leery of a credit counseling organization that requires you to leave a message in order to speak to customer service. This can be a sign that the credit counseling organization is shorthanded and having difficulty keeping up with their clients' needs. Be sure to ask about counseling fees and the type of management and education programs they have in place.
Pay yourself first. Many people in debt put their creditors first and themselves last. Create a budget category for a "contingency fund" to help create a cushion for yourself for spending. The wise owl articles you'll read will say this cushion should have 3-6 months of expenses in it. Don't get overwhelmed by this. Setting aside something, anything, for unexpected expenses (i.e. transmission replacement for your car) is a great start.
Can you earn more? Most people can figure out a way to bring in more income relatively painlessly. Do you have a skill or a hobby from which you could earn some income? If so, this money could be put directly toward debt, and might build an entirely new stream of income potential for you over time.
If you truly feel you need support, consider joining a local group of Debtors Anonymous. Debtors Anonymous is a 12-step program for people who have trouble with debt and spending and can be a source of great support and inspiration for you if money management is a habitual problem in your life. See the links below.
You are allowed a free credit report from each of the three companies every 12 months through AnnualCreditReport.com.
Use cash as much as possible. Paying with cash has a more significant psychological impact than plastic. It feels like you're spending more money so you spend less.
When paying down debt, pay minimum payments on everything but the bill with the smallest payoff. Once that is paid off, move to the next smaller bill. This is another psychological "trick". It will keep you working your plan because you see progress.
Remember: Minimum payments lead to the maximum amount of money paid over time. Paying more than the minimum applies more money to the balance, which decreases the amount of money you will end up paying overall. Note that some creditors frown on this practice.
Realize that Credit Card companies are not your friend. They want you to remain in debt paying a minimum payment on their credit cards every month for the rest of your life. (They list your credit card payments to them as one of their assets.) So you should pay off your debt to each of them and then after waiting a couple of months (without using their card again) seriously consider closing that account. It is much more to your advantage to use a debit card issued by your checking account's bank. That way you can still use the convenience of "plastic" for purchases, but the money is deducted from your checking account and you avoid any more debt. And by closing your credit card account a couple of months after paying it off, you'll keep a good listing on your credit report for it.
If you want something, save for it and then buy it. You should only finance items that are absolute necessities (home and car). Don't finance furniture, small appliances or vacations. If you can't afford to pay cash for it--you can't afford it.
Paying cash for items is a safe way to avoid any financial errors and bank fees. If you only take $50 to the store, that's all you can spend. (Bring a calculator) People lose money everyday to banks.
Avoid the temptation of payday advance loans at all costs. It's a quick "fix" that will cause you to get into a snowballing problem of debt. Before you even think about taking out a payday loan, consider other resources: family and friends, home equity, and Debtors Anonymous.
Chronic spending and debt can be a harmful habit, just like alcoholism or any other addiction. Spending can be an escape, or can be used to mask deeper issues. Consult a professional and/or Debtors Anonymous if you feel you might have a problem.
Don't be hasty. Closing revolving credit card accounts may actually lower your credit score. It can shorten the length of your reported credit history and make you seem less credit-worthy. Carefully choose which cards to cancel. You can avoid this problem by keeping the older cards and get rid of newer ones. However, you will still want to take your different rates into account as you choose which cards to cancel.
Be careful with those low-interest balance transfer credit cards. Their default rate will almost always get you into more debt.
If you settle on an amount to pay a creditor that is less than what is owed that account will reflect poorly on your credit report. It is best to pay off cards and the balance owed 100%.
Try not to give too much personal information to a collections agency as everything you say is entered into a file. Keep the conversations short and sweet. Don't be tempted to answer personal questions.
If you are going to use any settlement companies be sure that they are registered members of the BBB (Better Business Bureau) and that they have little to no complaints. And if there are any complaints make sure they were resolved to the clients liking.
