Which Debt Relief Option is Right for You?
If you are struggling with debt, understanding the different debt relief options available is a smart step. Some debt relief options you can do yourself and others are offered by professional firms that can help you.
If you are spending more than you are earning, living on credit, you probably know that you can’t keep that up forever. Over time, your credit card balances and minimum payments will grow. Eventually, you will max out your cards, using all your available credit. Higher balances mean larger required payments, too.
Maxing out your cards also harms your credit rating, narrowing your debt relief options. Higher minimum payments increase the risk of not making your required payment on time. If you are one day late with your payment, your creditor can raise your interest rate to a penalty rate, which can be 30% or higher.
It is easy to be trapped, in this situation. The interest is so costly that it is hard to pay down the principal. If one late payment starts a spiral out of control, it is easy to end up in collections or facing lawsuits, and dealing with all the stress that comes with financial problems.
If you’ve established this pattern, it’s time to stop, and reclaim your life by finding the appropriate debt relief option.
You can speak with a Certified Debt Consultant at 800-610-4560. It takes about ten minutes to go over your situation and discuss your options. You can also use this link to start a consultation online.
DIY Debt Relief Options
If you have the discipline and the know-how, you can create and complete your own program. The two most common do-it-yourself debt options are:
Snowball and Avalanche
The “snowball” method works by making the minimum payments on all of your accounts aside from the one with the smallest balance. On just that one account, make the highest payment you can afford in an effort to pay it off as quickly as possible. Once you pay off that account, you take the entire amount you were paying each month on the paid off account and add that amount to what you send to the account with the next smallest balance, repeating the process until all your debts are paid off.
The “avalanche” method works the same way, but targets the account with the highest interest instead of the smallest balance. Avalanche will cost you less, though depending on the mix of interest rates and the balances on your accounts, the difference may not be great. The advocates of snowball stress the importance of the psychological reinforcement you get when you pay off the first account. This is Dave Ramsey’s recommendation. His experience is that snowball will lead to fewer dropouts.
Not everyone is the same and how you look at decisons and follow through on them is a key part to finding the right debt relief option. What is more important to you? Run the numbers to compare snowball and avalanche. Is the difference significant? If the savings are enough to matter, maybe you can use it to motivate yourself. If thinking about running the numbers is enough to give you a headache, then stick with the snowball method.
If your credit is still good enough for approval, open an account with a zero-interest introductory rate. Many cards offer this rate for up to 18 months. Transfer your existing balances to the new account (there’s usually a fee), and pay as much as you possibly can during the introductory period.
If you can’t resist the lure of available credit once you’ve transferred your balances, close your accounts. Or skip this method and get professional help with your debts.
Homeowners with equity may have very cheap financing at their disposal. Even with interest rates higher than they were the past number of years, the rate on home equity loans are much lower interest rates than credit cards or personal loans. Using equity in your home also can lower your monthly payments significantly, because your repayment is extended to 15 years or more.
There are a few pitfalls:
- Consolidation does not wipe out your debts. Remember, you still owe the money.
- Stretching out repayment can increase your interest charges over the life of the loan, even at a lower rate. If a lower payment is your primary goal, then it may be a good solution, but be aware of the downside.
- Running up account balances after zeroing them with a home equity loan will leave you with more debt than before, worse off because you gave yourself the leeway to run up more debt. Some experts estimate that 85 percent of consumers who try to consolidate with home equity fail for that reason.
One reason people get trapped in credit card debt is that they can’t resist the temptation of available credit. Personal loans can be useful because they are installment loans, usually with a fixed rate and monthly payment. You make monthly payments until the balance is zero, and the debt is gone. You can usually pay off early without any penalty, if you have the means, and save yourself money by paying back less interest.
Personal loan interest rates are usually higher than home equity rates, but lower than credit card rates. Personal loans have shorter terms than home equity financing, so if you pay off your cards with a personal loan and then pay off the personal loan, you can get debt-free in a reasonable time-frame – from two to five years. The higher your credit score, the better interest rate you will get, so this is an attractive option if you have strong credit.
As with other debt relief option, this only works if you don’t take on more credit card debt. Close your accounts if you need to.
Professional Debt Relief Options
The DIY approach has a high failure rate, because it doesn’t address the habits that get people into trouble in the first place. If you have big money problems, consider bringing in a heavy hitter.
Credit counseling agencies offer confidential assessments of your debt problems. They help you create and stick to a budget, and hold you accountable for your debt repayment. The long-term benefits of credit counseling include financial literacy and the establishment of better habits.
Debt Management Plans
In addition to advice and education, credit counseling organizations offer debt management plans, or DMPs. DMPs consolidate your unsecured debts so that you make one payment each month, and your plan doles it out to your creditors. In many cases, your plan administrator can get your creditors to waive penalties and fees, reduce your interest rate and lower your monthly payment. Typically, your debts are repaid through your DMP in three to five years. You’re usually required to close your credit cards and refrain from seeking new credit until your plan is completed.
Debt settlement is worth considering if you have $10,000 debt in more, are struggling to make your monthly payment or already behind. Debt settlement is a debt relief option if you are looking for a way to avoid bankruptcy.
In a debt settlement program, you make a monthly payment that is held in a bank account under your control. You choose to put money in your account instead of paying your creditors directly. While the money is building up in your account, the debt settlement firm negotiates with your creditors to obtain an agreement for you to pay off the debt for less than you owe. When a settlement is negotiated, the money is paid from your account funds after you review and authorize the settlement.
The main benefits of debt settlement are:
- The lowest cost for getting out of debt outside of Chapter 7 bankruptcy
- A lower monthly payment than other debt relief options
- Shorter time to get out of debt than other options
The main drawbacks of debt settlement are:
- Your credit is harmed when you stop paying your creditors directly.
- Collection calls from your creditors.
- Possible legal action against you.
- Results vary.
- Total costs quoted by a settlement firm are an estimate. Avoid a firm if it says that your settlement program is like a personal or car loan that is done and over if you make the agreed on number of payments.
It is important to choose an experienced, reputable debt settlement firm. They have well-established contacts with creditors, can bundle settlements from various clients together to get a better deal. They disclose the pros and cons of debt settlement and will guide you through ways to minimize the negative effects of the program. Look for reviews of any debt online, such as at the BBB or TrustPilot.
For any debt relief option to succeed you need to address what caused you to get into debt in the first place. Learn from your past and avoid repeating the same behavior.
Whether you get out of debt with a professional debt relief option or a do-it-yourself strategy require you to stick to the plan you put in place. If you stop partway through, you won't solve the problem. This requires discipline to achieve. You have to control your spending and make your plan's regular monthly payment.
Because any debt relief option other than bankruptcy Chapter 7 takes years to complete, sticking with the program shows a discipline and commitment to your financial health your efforts to pay off your debt rs. If bad spending habits got you into trouble in the first place, replacing bad habits with good ones can get and keep you out of trouble in the future.