Tips to Learn About and Compare the Top 6 Debt Relief Solutions. (With Video)
Does your debt make you want to scream? You are not alone, so check out your debt relief options.
Americans now carry more than $850 billion in credit card debt; this is a staggering number that impacts millions of American's lives. Debt is a national problem, but also an individual one, too. We may aim to pay off our credit card debt in full each month, but too many of us don’t succeed. Rising costs of living, stagnant incomes, unexpected life events, and undisciplined spending are common factors that lead to growing numbers of Americans struggling to get out of debt. Factor in the high interest rates that creditors are allowed to charge, and finding a way to manage your debt effectively can be a very difficult task.
An important first step to achieving debt relief is to look at the different ways you can solve your debt problem, whether working on your own or with a professional debt relief firm. One place to start is to assess who you owe, how much you owe, and the lifetime cost calculations of paying off that debt. You can start with this handy debt consolidation calculator tool.
Overview of Debt Relief Options
It is challenging to compare each debt relief option side-by-side, since each solution is unique. Some debt relief options require taking out a loan, some require home ownership, and some are very aggressive and designed only for consumers with serious financial hardship. Bills.com compares the different debt relief options and put everything on the table, so that you have the information you need to make the best decision for your own needs. If you do your homework, then you can find the right debt relief solution for your unique financial situation.
You may be able to consolidate your debts with a home equity loan, mortgage refinance or other debt consolidation loans. If you are confident that you will be able to make the payments without building more credit card debt, debt consolidation refinance loans can be an excellent path to reducing your payments and lower the total cost of paying off your debts. To qualify for a mortgage refinance loan, a homeowner usually must have excellent credit and significant equity accumulated in the home. You can learn about refinancing at Bills.com or even apply with one of Bills.com’s approved lenders.
Minimum Credit Card Payments
Making the minimum monthly payments on your credit cards is a dangerous financial strategy. It may like you have no choice but to push a growing problem off to another month, especially if you are struggling to make even your required minimum payment. However, if you have high interest rates or high credit card balances that have become a problem, it’s time to figure out how to get off the debt treadmill.
We recommend consumers pay off their debts in full each and every month, especially credit card and high interest revolving debt. If you cannot manage to do that, make sure that you are aware of the true lifetime cost of that debt and what all of your debt payoff options are, and do not just blindly stay on the treadmill of making minimum payments.
Credit counseling is a debt relief program that starts with a detailed financial review. If your debt problems are serious and best resolved with outside help, your credit counselor will suggest that you enroll in a debt management plan (DMP). In a DMP, the credit counseling program will obtain interest rate concessions from your creditors. Lower interest rates are the primary benefits of a credit counseling program. Credit counseling may also lower your lower monthly debt payment, but usually not significantly.
A credit counseling debt management plan is a very common type of debt consolidation program. In it, you make one payment directly to the credit counseling agency. The program then distributes that payment to your different creditors. If a reduction in high interest rates is not going to solve your debt problems, credit counseling is not likely the best debt relief option. Credit counseling is like aspirin for a mildly sick patient, where a little help and medicine solves a real pain or financial problem.
Paying Back 100%, Plus Interest
It is important to understand that in a credit counseling program, you are still repaying 100% of your debts, even though you are doing so with slightly lower monthly payments. On average, most credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 bankruptcy — or using a third-party to re-organize your debts. You can learn more about this debt solution at the Bills.com section devoted to credit counseling.
Debt settlement services offer to negotiate and settle your debts for less than you owe, many times reducing debts by as much as half, before provider fees. Debt settlement is an option for people who cannot afford their monthly payments, and who are not worried if their credit rating will be negatively impacted during the program. It is important to be aware that you are not making monthly payments and staying current on your debts while enrolled in a debt settlement program, so be aware of the credit impact and the potential collection harassment from your creditors. Debt settlement is also a very aggressive form of debt consolidation, and it is akin to chemotherapy for a seriously ill patient — it will hurt, but will hopefully kill the cancer and get you financially stable and healthy again quickly.
Unlike other forms of debt consolidation, debt settlement is based on the future resolution of your accounts, which means that results vary significantly and it is very important to work with a qualified and accredited provider.
Bankruptcy — Chapter 7 and Chapter 13
Bankruptcy should be your last choice for debt relief, because it will severely damage your credit, remaining on your credit report for 7 to 10 years. Also, depending on which type of bankruptcy you file, you could be forced to give up some of your assets or assigned a long-term payment plan. Congress changed the bankruptcy law in 2005, making it much harder to qualify for a Chapter 7 bankruptcy, forcing many people to file for a Chapter 13 bankruptcy, which is really a repayment plan.
Quick Debt Relief Options Evaluation Decision Tree
Here are four fast tips for your own quick Debt Relief Evaluation:
- If you have perfect credit and have equity in your home — consider a mortgage refinance.
- If you can afford a healthy monthly payment (about 3% of your total debt each month), you want to protect yourself from collection, and do not want to go delinquent — consider Credit Counseling.
- If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, and you are willing to deal with adverse credit impacts and collections — then evaluate Debt Settlement.
- If you cannot afford anything in a monthly payment (less than 1.5% of your total debt each month) — consider Bankruptcy, to see if Chapter 7 might be right for you.
Bills.com makes it easy for you to apply for debt relief with pre-screened debt resolution providers.
Ways to Manage Debt on Your Own
If you have more credit card debt than feels comfortable, but it has not reached the point where it is a serious problem, here is some quick and simple advice on how to manage your own self-directed credit card pay-off strategy:
- Avoid paying minimum payments each month, if possible. If you can pay more than the minimum payment, you will save hundreds or thousands in interest expense. Credit card interest rates can go as high as 29%-39%! The larger your monthly payment, the faster you will pay off the debt and the less interest you will pay. For example, take a credit card debt of $10,000 with a 22% interest rate. If you continued to only make the minimum payments (4% of the monthly balance), it will cost you $18,216 and take 14 years to become debt free, largely because the minimum payment drops each month as you pay down your debt.
- Paying a constant amount each month could save you thousands and will clear out your debt in far less time than paying the minimum amount. For the same scenario above ($10,000 debt and 22% interest rate), a constant payment of $400 per month would cost only $13,094, taking you 3 years to become debt free.
Snowball or Avalanche
If you carry balances on multiple credit cards and can afford more than the minimum payment, you should consider the following strategies. To be effective, both strategies require you to continue paying the same monthly amount towards your debt until all debts have been paid off. Once a single credit card has been paid off is not the time to reduce how much you should pay towards your total debt. Maintaining the same monthly amount (or even increasing the pay-down amount) will help you get out of debt faster and at a reduced cost.
- Avalanche Pay Off — The avalanche method involves paying off your credit cards in the order of the highest interest rates. Once you have decided how much you can afford each month, allocate enough money to only pay off the minimum payment on each credit card. Then apply all the remaining funds to paying off the card with the highest interest rate. Once the first credit card has been paid off, apply every dollar you were using to pay off the highest-interest card and add it to what you were already sending to the second highest-interest credit card. Keep following this strategy and continuing paying the same amount each month towards your debt until all debts have been cleared. Using the avalanche method can result in greater savings by paying less interest in the long run.
- Snowball Pay Off — The snowball method involves paying off the lowest debt amount first. Like the avalanche method, budget enough money to pay off the minimum payment on all cards. Then apply any remaining funds towards paying off the credit card with the lowest balance. Once you have paid off the first credit card, continue paying the same monthly amount you started with. Follow the same strategy as the first credit card: Pay only the minimum payments on all other cards while using all the remaining funds to pay off your second lowest debt. Although the snowball method may be more costly than the avalanche method, seeing even a small debt eliminated often helps motivate people to stick to the discipline of paying down debts.
You are armed with the right tips and solutions to start your journey to debt freedom. Get on the right path and stay committed to getting rid of that nasty credit card debt, so you can build a bright, debt-free financial future. If you want to see a very innovative side-by-side comparison of the various solutions to getting out of debt, including a chart comparing payments, cost, time and rates of success for the different solutions, then read the Bills.com Debt Options Whitepaper.
Here are simple and quick tables to evaluate debt relief options:
|Option||Total Cost|| Monthly Payment |
(% of debt)
|Monthly Payment||Annual Fees|
|Credit Card Pymts.||$63,000||3.0-4.0%||$600-$800||19.9-29.9%|
|Ch. 13 Bankruptcy||$14,000||N/A||Varies||$2,000|
|Ch. 7 Bankruptcy||$1,500||N/A||N/A||$1,500|
|Option||Typical Length||Completion Rate|
|Mortgage Refinance||30 yrs||N/A|
|Credit Card Pymts.||10-30 yrs||N/A|
|Credit Counseling||5 yrs||21-26%|
|Debt Settlement||3-4 yrs||40-45%|
|Ch. 13 Bankruptcy||5 yrs||30-35%|
|Ch. 7 Bankruptcy||6 mos||N/A|