Credit Cards >> Debts
Getting Out Of Debt
What You Can Do About Your Debts
Types of Debts
Determining How Much You Owe
Do You Have Too Much Debt?
Personal or Self-Repayment Debt Plan
Credit Card Consolidation
Negotiating With Your Creditors
Free Credit And Debt Advice (Credit Counseling)
Debt Management Programs (DMP)
Debt Settlement Service
Debt Consolidation Loan
Bankruptcy
Comparing Debt Solutions
Generating More Income
Credit Report Repair Services
It is really advisable to get out of debts as soon as possible, doing this will not only help your credit score, but may also help you to avoid getting some services at higher than normal fees or costs too.
To get out of debt, you will need to know if you are living within your
means first, and will also need to have a clear understanding and idea of how
much you owe. You can know if you are living within your means, by simply
tracking your incomes and expenses with a personal finance software or service.
You may also compile a list of your debts, so you know who you owe and by how
much you. You will then need to educate yourself about the possible debt
solutions that may meet your needs.
Some debt solutions include free credit and debt advice (that is, free credit
counseling, not a program or plan but expert advice(s) from one or more
certified credit counselors), credit card consolidation, personal or self
repayment debt plans, negotiating with your creditors, debt management
programs, debt settlement services, debt consolidation loans, bankruptcy and
generating more income.
Types
Of Debts
Generally, there are two main types of debts, and these are secured and
unsecured debts. Secured debts are debts from the loans or credit you got by
using assets as securities or collaterals, while unsecured debts, are debts
from loans/credit without securities/collaterals. Examples of secured debts are
car and home loan debts, unsecured debts include credit card debts, medical
bills etc.
Determining How Much You
Owe
You can do this in several ways, you may look over your bills and compile the
names of your creditors or lenders with the outstanding balances you owe
against each name. You may also get a list of your outstanding balances through
online access using a budget or personal finance software or service on the
internet.
You can also get free credit reports from the three credit bureaus Equifax,
TransUnion and Experian, to know what your creditors are reporting to the
bureaus. You may need to call or email some or all your creditors to know what
your most recent outstanding balances are, since there will most likely be a
time difference between when they did the last reporting to the bureaus, what
you may have paid after that and what your creditors have on their files as
your outstanding balances, you may get your outstanding balances from the last
bill statements from your creditors, if they are up to date.
Using all of these together should give you a very good idea of the amount of
debt you owe. You will want to include on your list your outstanding balances,
minimum payments you have to make on your debts, the interest rates of your
debts, how much you pay per month etc, something that may look similar to this
Sample - A List of Debts
APR (annual percentage rate) is the interest rate on your loan/credit, unless a creditor/lender uses non-interest based invoices or bills. The APR for your credit card should be on your credit card bill statement, you may call any one of your creditors/lenders to know what the APR of a loan/credit is. You may also use a spreadsheet, desktop software or online service to track your debts.
Do You
Have Too Much Debt?
To know your level of debts, you will need to determine how much of your income
goes to repaying them. You can do this by calculating your debt-to-income (DTI)
ratio, which is a simple calculation that divides your total monthly debt
payments, by your monthly income, to give you a percentage you can use to
determine if you have too much debt. The formula is
DTI = monthly debt payment / monthly income x 100
For example, if you are paying a monthly total debt of $1,200 and have a
monthly income of $5,000, your DTI ratio will be
DTI = $1200 / $5000 x 100 = 24 that is, 24%
To calculate your own DTI ratio, you will need your gross income which is your
total income in a year, to get your monthly income you will divide your gross
income by 12. If you pay the same amount of debts each month you can just add
all your debts for a single month together to get the total amount of debt you
pay for a single month. If the amount of debt you pay monthly varies however,
you can simply add all the debt you have paid, and the projected debt payments
you will have to make within the same 12 month period, you used for your
monthly income as a total, and then divide by 12 to get an average debt amount
for a month.
Your monthly debt amount should only include the debts you owed/paid on credit
cards, mortgages, child support etc, and not on expenses like clothes, food and
so on.
The greater your DTI ratio is, the more money you are using to service your
debts, and the less cash or money you have for your other expenses and savings.
Lenders/creditors generally use DTI ratios to grant or disapprove loans or
credit, with them, a DTI ratio of more than 36%, is an indication of too much
debt, you may want to use 36% too as your benchmark.
Personal or Self-Repayment Debt
Plan
If you can make some repayments on your debts each month, you may on your own
try to see if you can resolve your debt by yourself with a personal plan. Some
of the most common types of personal debt plans, methods or strategies are, the
snowball and stacking methods, and paying on bad debts first.
Snowball Method
With this method you arrange your debts in ascending order by value, with the
smallest debt at the top. You then pay the minimum payments on all your debts,
and then some extra on the smallest debt at the top of your list each month.
Once you have completely paid off your smallest debt, you then go on to apply
the minimum payment on the debt you cleared and the extra on the next debt. You
keep on repeating this until you are debt free.
Stacking Method
You may choose to pay your debts off too by paying more on the debts with the
highest interest rates first, that is you pay the minimum payments on all your
debts and then pay some extra on the debt with the highest interest rate
repeatedly until you are debt free. You will need to arrange and sort your
debts with the highest rate at the top and the lowest rate at the bottom, in a
descending order.
Bad Debts First
You may also choose to pay on your bad debts first, instead of starting with
debts with low balances or high interest rates.
As a general rule, you should if you can afford it, pay more than the minimum
payment on each one of your debts per month, and also pay the same amount
regularly too, these will reduce how much you pay on interests and also help in
paying off your debt much more quickly. If you choose to use any one of these
personal debt repayment methods/strategies, you will most likely reduce the
interests you pay on your debts and increase how fast you pay your debts off.
You may choose a method/strategy to use now with your own debts, or you can
compare and create different personal debt plans with each method/strategy, to
see how much you may have to pay on interests, how much you will save and how
fast you can pay your debts off, with a method or strategy.
You may compare several personal debt plans, methods and strategies by
downloading the free version of ZilchWorks (Standard), a debt management software.
Though some of the features in the free version are disabled, you can still get
a summary of using different personal debt methods/strategies on your debts,
and do some comparison. If you have a long list of debts (for example, lots of
credit cards), you may want to only try this out first with just a few cards,
using the free software, since you can’t save your entries with that
version. If you have any question relating to the ZilchWorks software, you may contact the website.
ZilchWorks
refers to the Snowball and Stacking methods/strategies as the "Quick
Elimination" and "Annual Percentage Rate" payoff strategies respectively; it
also refers to the extra money you pay on your topmost debt, as the
“Pledge Money”. Using our earlier sample of a list of debts and
ZilchWorks, if we choose to pay off each debt normally without applying any
personal debt plan strategy, we will get these results
With Normal (Minimum) Payments
Total Interest Paid - $11,846
Total Money Paid - $46,424
Payoff Time - 18 years 6 months
But by paying an extra $100 per month, and using the personal debt strategies
we will have
| Method/Strategy | Total Interest | Total Money | Money | Time | |
| Paid | Paid | Saved | Saved | ||
| $ | $ | $ | |||
| 1. | Snowball Method | 4,864.00 | 39,442 | 6,982 | 16 years |
| 2. | Stacking method | 4,342.00 | 38,920 | 7,504 | 16 years |
You may try this out by yourself, with your own numbers and figures too, this
will go a long way, in helping you to choose the right method/strategy, for
your own personal debt plan. You should determine how much you will have to
pay, on your debts regularly per month, with your personal debt plan, you will
need to review your budget to know if you can afford it.
With all these, if you then discover that
Based on
what you can afford, it will possibly take you a very long time or
forever to
pay off your debts or
You can only
make less than the minimum, or you can’t make any repayment
on some or
all of your debts or
As discussed
earlier, your DTI (debt-to-income) ratio is more than 36% or
You simply
want to reduce how much you owe
You may want to try and call your creditors for some negotiations. You will
want to see if they can provide you with some flexibilities or options, that
can make paying your debt easier and more affordable, which may help you in
resolving your debts with a personal plan. If you are not able to make any
headway with a personal plan and/or your creditors, you may need to go for some
professional credit counseling/advice, to know the next step to take, in
resolving your debts.
Credit Card
Consolidation
Credit card consolidation involves transferring your credit card balances to
zero or low interest rate credit cards. Though some of the interest rates may
be introductory, they could give you the time you need to pay off your credit
card balance without incurring any or a lot of interests.
You can transfer multiple credit cards to a single card with zero or low
interest, which can make it easier for you to make one single payment on your
credit card debt. If you cannot get zero interest rate cards, you may want to
go for some low interest rate cards instead. You may also want to look for
cards that may not charge for balance transfers too. You should read the read
terms and conditions for a credit card before using it for your transfers.
Negotiating With Your
Creditors
As soon as you have some problems with making your repayments, or if you know
you are likely to have problems making your next payments, you should get in
touch with your creditors, to try and create a workable plan that may still
allow you to make some form of repayments on your debts, before it get so bad
your debts are charged off and/or turned over to debt collection agencies etc.
What you will likely want by negotiating with your creditors include, getting
an affordable repayment schedule, a reduction of your interest rates, getting
some fees waived and a reduction of your debts. Your success with this will
depend on your negotiation skills.
Free
Credit And Debt Advice (Credit Counseling)
You may need some credit and debt advice, that is, free credit counseling, if
you fall into any one of these categories
You are
having problems keeping to your budget
You cannot
pay on your credit card balance any more
You are
having difficulties managing your debts
You could
not work out a repayment plan with your creditors or your
negotiation
fails
You can only
afford minimum payments
You are
confused
You
don’t know where to start
You
don’t know what to do
You feel
overwhelmed by your debts
You think
you need help
Your debts
appear to be too much
You cannot
afford or do not have the money to pay the total repayments
on your
debts each month
You are
thinking of using a debt relief service, solution, program, plan or loan
The reason for having a credit counseling session(s) is to determine the
best debt solution, for your own specific situation, not every debt solution
will work for everyone. Through credit counseling you can learn how to manage
your finances, and do budgeting, reputable credit counselors may also help you
to create a personal repayment plan, and will review your debt and financial
issues in their entirety, and thoroughly too, to provide you with some real
solutions to your debt problems, without trying to push you into any specific
program, plan or service. They are also likely to provide you with some free
educational materials too.
Your credit counselor should be able to tell you if you are okay with the way
you are handling and managing your debt. He/she or the firm, should also be
able to tell you, if all you really need is to negotiate directly with your
creditors, or should provide you with ideally, if feasible more than one option
for resolving your debts, and these may include setting up a personal debt
repayment plan, using a debt management program (DMP) or debt settlement
service, getting a debt consolidation loan or declaring bankruptcy.
You may get some free credit counseling sessions through certified counselors
from credit unions, your financial institutions, military bases, universities,
housing authorities, your local consumer protection agency and branches of the
U.S. Cooperative Extension Service.
Some non-profit debt relief organizations may also provide credit counseling
services too, you will need to look for reputable non-profit debt relief firms,
that provide free
credit counseling and educational materials at no charge. Most of
these organizations will most likely have a debt program, plan or service to
offer, you are however not under any obligation, to take up any one of these
services, until you have done some adequate research of your own first, and
compared other providers, before deciding on what is best for you, after your
counseling session(s).
Debt
Management Programs (DMP)
With a debt management program (DMP), you should note that you really
don’t have to pay for anything, until a DMP firm or service does whatever
it promised, according to the Federal Trade Commission (FTC) rules, for the
debt relief or settlement industry.
To understand what you can possibly get through a DMP, you will need to know
how it works. A DMP service will try to get your creditors to reduce your
interest rate and/or cancel, or discontinue some of your fees. If they are
successful, you will be able to pay back the total debt, a DMP service chooses,
to handle for you. Through DMP, you may be able to pay off your debts within a
specific period of time, which may be several months to a few years, depending
on your own specific situation. Your DMP firm should give you some idea on how
long it will take you to pay off your debts through the program. You will pay
your full debt, with a DMP program.
DMP may only take care of unsecured debts like credit card debts, medical bills
etc however, you may not be able to add your secured debts like home loans, car
loans etc, to the program. If you choose to use a DMP service, you will need to
ensure that any agreement to reduce your interest rates, or cancel some of your
fees are formally enforced by confirming this with your creditors. You will
also need to ensure that payments are being made regularly to your creditors
too, if you decide to go with a program, you may call your creditors and check
your monthly statements to confirm these.
With a DMP program, you will make some monthly payment to the DMP firm, which
will be used to pay your creditors, you will need to make some timely and
regular payments for the program to work for you. As part of the requirement
for using a DMP program, you may not be able to apply for any credit while
going through the program.
If you choose to resolve your debt through a DMP program, a creditor may state
this on your credit file, some creditors may because of this, view you as a
credit risk, while others may see it as a responsible act on your part.
DMP firms may also offer some credit counseling too, but you should understand
that credit counseling is not DMP, and is not meant to make you do or go
through DMP either, DMP will most likely not work for everyone.
You will need to do some research on any DMP service you may want to use before
you sign up for it, you should find out what other people’s experience
has been with the service and also read the firm’s terms and disclosures.
You should also know how much in total, you will have to pay as fees plus your
debts, for the use of the service.
Some of what you may gain from a DMP service includes
A reduction
in your interest rates
A reduction
in your minimum payments
Lower
monthly repayments
Cancellation
or elimination of some fees
You make a
single monthly payment for your debts
A fixed time
to pay off your debts
Debt
Settlement Service
With a debt settlement service too, you don’t have to pay for anything
upfront either, until the firm does whatever it promised too – FTC rules.
A debt settlement service will try to reduce your debts by negotiating with
your creditors on your behalf. You should however note that there are no
guarantees that a debt settlement service will be able to work out a positive,
and favorable negotiation with your creditors.
With a debt settlement service/program, you may have to stop making repayments
on your debts, which may lead to more charges and fees for you, and may leave
you open to law suits, collection efforts etc from your creditors. Joining a
debt settlement program will most likely damage your credit ratings or score.
If you are not that keen on having your credit rating becoming severely
damaged, you may have to look for some other debt solutions.
You should ideally, review all your options and possible solutions first, and
also seek some reputable and free professional counseling/advice, before
deciding on debt settlement as a solution for resolving your debts.
Debt
Consolidation Loan
A debt consolidation loan is a loan you take to pay off your debts, you will
then have only one payment to make, which is to repay the new loan. You may get
a secured or unsecured debt consolidation loan. With a secured loan, you will
need a collateral like your home for example, to get the loan, while with
unsecured debt consolidation loans (like a personal loan from your bank), you
won’t need collaterals.
A secured loan may have a lower interest rate than an unsecured loan. The
downside of a secured loan however is, you may lose the asset that is, the
collateral you used for securing the loan, if you are late on your payments, or
if you are unable to pay the repayments on the loan. A loan that is secured
with your home may be tax deductible. You will need to consider all the costs
or fees, you may have to pay with a debt consolidation loan, in addition to the
interest on the loan, to know its total cost.
With a debt consolidation loan, you will want a lower interest rate than you
are currently paying on your debts, and a lower monthly repayment too, to make
it worthwhile.
Bankruptcy
Personal bankruptcy is a legal process for clearing your debts. You may declare
bankruptcy to get out of debts, if you meet the criteria for it. Declaring
bankruptcy will affect your credit score negatively, and your bankruptcy record
will also remain on your credit file for up to ten years.
To file for bankruptcy you will need to get some counseling first within six
month, from one of the government approved organization listed at www.usdoj.gov/ust, prior to
filing for it. You will need to pay for some filing fees and attorney fees, to
apply for bankruptcy. You may file for either a Chapter 7 or Chapter 13
bankruptcy.
With Chapter 13 bankruptcy - If you still have a regular income, the court will
allow you to keep some of your assets and will also draw up a repayment plan
for you, which you will have to pay on and keep to for 3 to 5 years, after
which you will be discharged from your debts.
With Chapter 7 bankruptcy – most of your assets except those that you
need for things like your basic need, work etc will be sold off to pay your
debts. To file for Chapter 7 bankruptcy, you will also need to pass a test, to
confirm that you are not earning above a certain level of income, you can find
more information on this too at www.usdoj.gov/ust.
Personal bankruptcy may not clear or protect you from having to pay for taxes,
child support or some student loans and debts.
Comparing
Debt Solutions
You may get several quotes on debt consolidation loans, debt management
programs, debt settlement services, and the total cost of declaring bankruptcy
(if you choose to go with that), to compare the total costs of using any one of
these for resolving your debts.
You should also find out from each company/firm you may want to use, how much
your monthly repayment will be, and how long it will take you to be debt free.
If you tried out a personal debt plan with your debts as illustrated earlier,
you should be able to through it, know how much you will need to pay on a
monthly basis, and how long it will take you to be debt free, with a personal
debt plan.
Generating More
Income
You may get yourself out of debt too by creating more income for yourself. If
you are able to generate enough income within a short period of time, you may
be able to clear off your debts quickly, but if not, you may need to generate
more income along with using some other debt solution, to get out of debt.
You can earn more to pay off your debt faster, and reduce how much you pay on
interests, and/or rebuild your credit. You will need to find out if there are
any cost implications for paying more or early on your repayments, if you are
going through a debt management program, debt settlement service, or using a
debt consolidation loan, if you wish to use any additional income you make, to
clear off your debts faster.
Credit
Report Repair Services
The only negative information that can be removed from your credit report are
inaccurate negative information, no service or any one for that matter can
remove accurate negative information from your credit file until some time has
passed, which is either a seven year period or ten years for bankruptcy.
In essence, errors, inaccurate information, and any other information on your
credit file that you may have disputed, and that cannot be proved as accurate
by your creditors, can be removed from your credit report, but only time can
remove undisputed, negative and accurate information from your credit file,
what you can do however is to try and improve your credit score within that
period. There is really nothing a credit repair service or company can do, that
you cannot do by yourself, when it comes to repairing or correcting the
information on your credit report. You may get more information on how to do this
on the Federal Reserve Board website at http://www.federalreserve.gov/creditcard/.
In
Summary
You should review your credit report periodically to keep it up to date and as
accurate as possible. The information on your credit report may affect how much
you pay and/or the interest you will be charged on loans, insurance or some
other service, it may also determine if you will have access to some services too.
Regularly reviewing your credit report may also help in detecting or spotting
identity theft early.
To do some research on a debt relief company, you may want to check on some
information about the company with the Better Business Bureau, your state
Attorney General and your local consumer protection agency. You may also check
to see if a firm is licensed to provide any type of service in your state. You
will want to know if there are complaints filed about the firm with any of
these organizations or offices. You should also look at how much the company
tried to help you while you were still seeking for some counseling, help and
advice too, all of these together should serves as pointers to either use or
avoid a firm.
You should be very clear about the type of debts a service, program or plan
will help you to resolve, you will want to ensure you are tackling all of your
debts and not just some of it.
Getting out of debt is not automatic, it involves budgeting, time, being
disciplined with your finances and taking some definite steps and a plan to
resolve your debt issues. To get out of debt, you will most likely need to
create or update your budget, to accommodate your incomes and expenses, and any
regular repayments you may have to make on your debts. You may also have to cut
back on some of your expenses too, to move ahead with resolving your debts.
If your finance software has the feature, you should be able to track how far
you have paid on your debts, if not, you may use some other software, online
service or tool instead. As much as possible, you will need to ensure you
don’t add to your debts in any way, while trying to resolve them.
Debt Relief Firms' Use of
Words and Phrases
Debt relief companies or services may
sometimes use the word credit counseling, debt management, debt settlement,
debt consolidation interchangeably, once you can get a service or program
description though, you should have a good idea of what is being offered on a
site and/or with a firm or service.
Resources
Credit Card And Loan Calculator
ZilchWorks
Personal Debt Management Software
ZilchWorks
Debt Management Services
Debt Experts
USA
Debt
Consolidation America
