Managing Debt On Your Terms
If you're struggling to make ends meet and having a difficult time paying your bills? If you’re getting alarming notices from debt collectors or worry about losing grip on your future due to potentially losing your home, or auto, you need to understand that you’re not alone.
Millions of individuals, and thousands of families are affected by the pitfalls that being in debt can bring. The most important thing you can do is know that it can be overcome and that you have avenues available for you to overcome your debt. Taking a calm and mindful approach to managing your debt can help the experience become a quality one in which you truly improve your situation and have the tools and resources available to you to prevent it from happening again.
When it comes to getting out of debt, there’s no help like self-help. Except in the cases of emergency debt issues that threaten repossession and foreclosure, most should explore the self-help path before approaching third parties. Self-help has many advantages. It does not involve fees. It leads to self-empowerment through increased knowledge and practice.
Roughly one-third of households with credit card debt take the debt reduction path of minimum payments. Unfortunately, this pay typically leads to unending debt. After they make a payment, they use the card again and return the balance to previous levels.
What’s more, in most cases, 50% to 75% of the minimum payment goes only to cover the interest charges, with just 25% to 50% paying down the principal balance. Even if the consumer stopped using the credit card, it could take her or him 15 to 25 years to pay off their debt by making just the minimum payments each month.
Negotiating Lower Interest Rate
Even at minimum payments, you can accelerate your debt elimination by negotiating lower interest rates with your creditors. If your credit card or retail store card company were to lower your interest rate from 25% to 17% on a $5,000 balance, you would be out of debt 10 years earlier and save over $6,300 in interest charges.
You will increase your chances of successfully negotiating lower interest rates if you have a one-year history or more of on-time payments to the creditor. In your phone call or message to your creditor, simply point out your history of on-time payments and ask how willing they are to lower your interest rates.
Another approach involves threatening to transfer your balance to another credit card if your creditor does not lower your interest. If you choose to go this route, you might consider softening this threat by using language such as, “I don’t want to transfer my account to another creditor with lower interest rates…” or “I know I can get a lower interest rate elsewhere, but I would prefer to keep my account with you…”
Send Extra Payments
To pay off your debts faster than the minimum payment method, send an extra amount each month along with the minimum payment. Every extra dollar your send, especially early on, will save you a dollar or more in interest down the road.
Many consumers will state they have no extra money to send because they are living paycheck-to-paycheck already. For most such consumers, we recommend they consider the PowerCash principle. PowerCash helps most households recover $50 to $200 a month from their purchases that they could turn around and add to their minimum payments.
The PowerCash method is simple: 1) Identify the amount of money you spend monthly on groceries, dining out, carry out, entertainment, gift-giving, travel and vacation, and any other purchases you have discretion over, 2) Multiply this amount by 10%, 3) Add that 10% to your creditor payment, and 4) Use the remaining 90% as you normally would.
We find consumers who try the PowerCash method feel little if any pain in their wallets because most can adapt their spending to the remaining 90% of their earlier spending levels.
Do-It-Yourself Debt Repayment Methods
With a little PowerCash to send to your creditors to accelerate your debt reduction, your next decision to make involves choosing which debt to accelerate first. Or, do you split the PowerCash equally between all your creditors?
The easy answer is to send all the PowerCash to a single creditor while making minimum payments too all others. Focusing on just one account at a time increases motivation by rewarding you with discernable progress on that account.
Choosing the focus account, though, requires you to decide your goal for getting out of debt.
“Wait, isn’t getting out of debt the goal?” you ask.
Actually, getting out of debt is just the path you take to your goal, not the goal itself. Your goals should involve something personal and meaningful that involves money that you currently don’t have because you have to pay back your debts.
A list of goals for paying off your debts might include one or more of the following:
Have enough money each month to save for a family vacation.
Afford to replace my old and unsafe vehicle with a newer, more reliable one.
Finally feel the security of knowing I am building an emergency savings fund each month.
Build my credit rating so I can qualify to buy a home next year.
Find relief from the frustration of being in debt for years.
We have identified four do-it-yourself debt repayment methods you can match up to your list of debt elimination goals. All four of them require you to stop using your credit accounts for additional purchases. You can’t dig yourself out of debt. You’ve got to stop going into additional debt.
What you do: Add your PowerCash to the minimum payment every month from your account with the highest annual interest rate and continue doing so until the account is paid off. Then, move the PowerCash and the minimum payment from the paid-off account to the next account with the highest interest rate on your list.
What it does for you: By accelerating the debt payoff on your highest interest account, you pay far less money in interest over time and you pay off the debt earlier than any other method.
Goals it helps you achieve: The Debt Avalanche helps you achieve any financial goal that focuses on increasing money available to you or on getting out of debt as soon as possible.
What you do: Add your PowerCash to the minimum payment every month from your account with the lowest balance and continue doing so until the account is paid off. Then, move those payments to your account with the next lowest balance. As soon as you feel sufficiently motivated, though, change from the Snowball to either the Avalanche or Landslide method.
What it does for you: Many people feel more motivated to continue their debt repayment if they can get a quick and easy “win” (paying off an account in full).
Goals it helps you achieve: The Snowball does not achieve a personal goal. However, you should consider this method if you need to kickstart your debt repayment-related goals.
What you do: Add your PowerCash to the minimum payment every month from the account you opened most recently and continue doing so until the account is paid off. Then, move those payments to the next newest account on your list.
What it does for you: Because credit scoring models weight activity on newer accounts more heavily than activity on older accounts, you can increase your credit score faster than with any other method.
Goals it helps you achieve: If your financial goal involves qualifying for a major purchase using credit in the future (e.g. mortgage, business startup), this method makes the most sense.
The Debt Cascade works for households that can’t come up with any PowerCash to accelerate their debt repayment. It works by helping you find PowerCash within your minimum creditor payment every month.
What you do: Add up all the minimum monthly payments you owe this month. This is your “Cascade Money.” Next month, your minimum payments on credit cards and store cards will go down a little. Instead of sending the minimum payment the creditors request, send your Cascade Money again. It may only amount to a couple of extra dollars early on, but after four or five months, your Cascade Money may amount to $50 to $100 more than what your creditors are asking for. In fact, starting with your second month of payments, you can take any extra Cascade Money over and above the minimum payments and focus it on a single account based on the Avalanche, Landslide, or Snowball methods above.
What it does for you: The Cascade lets you accelerate your debt repayment even if you currently have no wiggle room in your budget.
Goals it helps you achieve: The Cascade helps you get on the path to debt elimination, even if it previously felt impossible.
Debt Relief Services
Whether you’re struggling with a high burden of unsecured debt such as credit cards, payday loans, medical bills or even collection accounts, and you’ve been unable to successfully work out payment agreements with them, consumer debt relief services can offer you the help you need.
Everyone has a unique situation when it comes to their ability to repay their debt so there is not a perfect solution for everyone. There are nonprofit organizations that have been providing debt relief to consumers for decades. These nonprofits provide Credit Counseling and are a preferred method for individuals looking to manage their debt primarily because they counsel and provide a great deal of information and options back to the consumer in regard to how they could potentially deal with their debt.
If you’re at the point where you want help with improving your finances and getting out from under a heavy debt-load, be sure to do your homework first.
Don’t Settle for Debt Settlement Until You’ve Done Your Homework
There are for-profit entities that offer to settle your debt. We urge you to read our warning as it relates to Debt Settlement before speaking to an organization that promises debt relief through a settlement program:
Knowing how settlement works prior to making the call can help you in the decision-making process, and ultimately help you choose the right path.
You may also find credit repair organizations. Again, these are for profit services that have a poor track record in helping consumers get out of debt with minimal impacts to their prospective financial futures.
Nonprofit Credit Counseling Explained
Credit Counseling is a highly regulated nonprofit service that has a high degree of accountability. Be sure the organization that you’re working with is licensed and regulated as a 501 C3 nonprofit in your area. Some organization, such as Money Fit by DRS Inc, are licensed in all fifty states, others are not.
These nonprofit organizations should have free financial education programs available for you, that are designed to educate you about how you can improve your personal finances. Take them up on their free materials if you feel you could benefit from brushing up your financial skills. Some organizations may charge for their materials, nonprofits like Money Fit by DRS Inc. do not.
Credit Counseling organizations also offer debt relief programs called Debt Management Plans. These plans are designed to help you repay your debt in 60 months (five years) or less. The credit counseling organization typically has a relationship in place with your creditor that helps reduce monthly payments required, interest rates charged and if the account was delinquent the creditor will typically stop and late or over-the-limit fees. The cards become closed to further charging; however, it allows the consumer to end the spending cycle and repay their debt without the need of declaring bankruptcy. There is a large segment of individuals that find themselves in debt that find a debt management program as a positive solution to their situation.
Again, do your homework, because credit counseling organizations can vary greatly in terms of the quality of services and help provided. The Financial Counseling Association of America is a good resource for doing some research before selecting who to work with.
Bottom Line: Be Careful When Getting Help with your Debt! The endgame is to be out of debt and while the promises of quick, easy and painless debt relief can sound enticing, be sure that it isn’t too good to be true.
If you need help with multiple credit card payments, medical bills, and other unsecured debts, then debt consolidation may sometimes be your best option if you want to protect your credit and avoid bankruptcy.
Debt consolidation takes all of your unsecured debts and combines them into one lower monthly payment. It can be accomplished in two different ways: with a loan or without a loan.
Debt Consolidation with a Loan
There are many organizations that offer loans for people looking to wipe out their debt quickly. These lenders will often offer a favorable interest rate with the promise of getting you out of debt faster than any other method.
However, in many circumstances your original indebted accounts are never closed. You then are stuck accumulating your original debt while also being responsible for paying off the new consolidation loan. Even worse, occasionally these loans can come attached to something with a collateral value such as your home. Fixing debt with more debt is a high-risk financial decision.
Debt Consolidation Without a Loan
Debt Consolidation without a loan is accomplished in an appointment with a Certified Credit Counselor. This appointment can be done in person or over the phone. (It can also sometimes be done via email.)
During this appointment, the Certified Credit Counselor will review your current personal finances such as your household budget, your income, and your expenses, as well as other assets and liabilities. You will determine if there is a benefit to participating with the Debt Consolidation Plan.
Your creditors will then be contacted by the counselor so that arraignments can be made to reduce monthly payment requirements, lower or waive interest rates, and stop late or over-limit fees.
All of the debt is combined, and a new single monthly payment is made. The Debt Consolidation Program will send payments on your behalf to each creditor. Finally, the account is closed to any further charging upon creation in order to avoid extending the repayment terms and building even more debt.
Which One Should You Choose?
Debt consolidation with a loan requires a qualification process. A low credit score or extremely high amount of unsecured debt can decrease your chances of choosing this option. Debt consolidation without a loan takes time and proper money management. Sometimes it may be your best option. Our organization recommends speaking to a certified credit counselor first before choosing either option.
Can Does Debt Consolidation Hurt Your Credit?
If you do choose Debt Consolidation, there is always a chance your credit score will be impacted in some way, especially when starting with a program. Debt Consolidation with a loan could have a smaller impact as long as you do not use any further credit cards and accumulate any more debt.
Debt consolidation without a loan will affect your credit score early on because your accounts are being closed to any new charges. It occurs over a small timeframe because the accounts only decrease instead of stagnating or increasing. Many different balance ratios play a role when calculating your credit score.
Does It Cost Money to Consolidate Your Debt?
Yes, and the cost of debt consolidation can sometimes change radically. If you choose a plan that uses a loan, then you may have new interest rates as well monthly payments that could be higher or lower depending on your circumstances.
Debt Consolidation without a loan has an up-front enrollment fee ranging from $50.00 or even $100.00, then a monthly fee of $25 to $50. The price is often based on your income. Prices can sometimes be temporarily lowered as well for struggling individuals.
One last note
Debt consolidation can be a safe alternative in comparison to other courses of action. It can sometimes save your credit, and is less risky overall, compared to any type of repayment through debt settlement or especially bankruptcy.
However, one of the biggest risks of debt consolidation comes from the potential for your own mismanagement. opening new lines of credit and adding to your overall financial burden with crumble any progress dent consolidation brings. Ultimately, Do-It-Yourself is best but can’t always be done.
If You Want to Try the Do-It-Yourself Way
After enough research you may discover that you can repay your debt on your own. A credit counselor appointment can help with that, often free of charge. It will take discipline to manage a working budget on your own, but by refocusing your expenses you may be able to avoid additional fees of unwanted changes to your credit profile.
Bankruptcy should be the last option if you are drowning in debt and you should do everything you can to avoid it. However, sometimes your finances become out of control and bankruptcy is all you can do. In these scenarios it’s time to let out one last sigh and begin the filing process. In the United States there are two types of bankruptcy for private individuals, liquidation or reorganization.
Chapter 7 bankruptcy- Liquidation: Your debt is wiped out but with one final cost, you must agree that the those you are indebted to can take and sell some of you property to pay back debt. However, you can keep certain properties protected under state law. Sometimes those protected properties include your home, your transportation, and even certain personal belongings.
Chapter 13 bankruptcy- Reorganization: This type of bankruptcy restructures your debt but only if you are a high-income earning individual (sometimes this option is available in certain circumstances.) You may keep all of your property, but you must pay creditors the value of any nonexempt assets as part of a 3-5-year payment plan under the agreement. This includes any additional discretionary income as determined by the guidelines set under Chapter 13.
Not everyone can file for Chapter 7. If your income is sufficient to fund the reorganization from Chapter 13, you won’t be allowed to utilize the prior option. You are also limited to use any form of bankruptcy for 8 years!
What Comes Next
After Declaring Bankruptcy and moving forward under Chapter 7 or Chapter 13, you will need to complete a Pre-filing Credit Counseling appointment as well as a Post-filing Debtor’s education. This is part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. They are to prevent individuals from taking advantage of the Bankruptcy process.
Pre-Filing Credit Counseling
If you need to file for a Chapter 7 or Chapter 13 bankruptcy, you must complete a Certified Pre-Filing Counseling Session with an approved Non-Profit counseling agency.
A Pre-Bankruptcy Credit Counseling Course will:
Take place through a secured online application.
Fulfill the Budget Briefing & Credit Counseling requirements.
Include registration, a disclosure agreement, and an educational course
Take about 1-2 hours to complete.
Include a Personalized Financial Summary and a list of debt options to consider once the online course is completed.
Upon completion of the course, you must talk to a Certified Credit Counselor to review the information and findings and receive the Certificate of Completion.
Post-Filing Debtor Education
Under the same circumstances, after you have completed the Pre-filing Credit Counseling Course, you must complete a Post-filing Debtor Education course. It needs to be approved by the same standards of the previous course.
Your Post-Filing Debtor Education Course will:
Take place through a secured online application
Instruct you on important financial subjects ranging from Household Budgeting to Risk Management and Consumer Protections.
Last the required 2 hours as specified by the 2005 Bankruptcy Act.
Give you helpful Tips and Suggestions designed to help you improve your financial situation.
When completed you will receive the Certificate of Debtor Education for you to deliver to your legal counsel within 3 business days.
Last thing About Bankruptcy
Bankruptcy is an option you will want to avoid. It is not worth the negative impacts. You should only consider it if you are out of options. If you are unsure about what you can do and are considering bankruptcy, contact a Certified Credit Counselor and seek financial advice.
Online Financial Education
Now, more than ever, you have seemingly limitless opportunities to find financial education resources to help you improve your financial literacy and financial capabilities. When you struggle with credit card, store card, car loan, medical, or even mortgage debt, formal and informal education can open the gateway first to a better understanding of your financial situation and then to better behavior to correct or improve upon your financial choices.
What is the difference between financial literacy and financial capability?
Financial literacy is about knowing. Financial Capability is about doing. Financial literacy indicates an individual’s ability to understand and even discuss a variety of critically important personal and household finance topics. Financial capability indicates the individual’s skill level revolving around personal and household financial issues.
How to Build Financial Literacy on Debt Reduction
Building your understanding of personal finance topics, especially debt reduction and debt prevention, should be a life-long commitment. Unfortunately, very few states require any sort of personal finance class for their students to graduate from high school. Consequently, most of us will build our financial literacy on our own through experience, conversations with family and friends, and through personal research.
Financial literacy arises from awareness, new understandings, gained knowledge, and the mental connecting of topics and principles related to personal finance. Consider the following options for building your financial literacy around debt reduction and debt prevention:
Banks and Lenders
Some banks and lenders have developed some great financial education programs. You must recognize, though, that they exist and generate revenue from lending, so they will come at the subject from an understandably pro-borrowing point of view. They typically argue for common sense and reasonable loans rather than mindless consumer debt.
The traditional source of personal finance education includes businesses specializing in personal finance. Many used to (or still do) publish magazines and newspapers with well-researched articles from respected journalists and financial experts.
These long-established businesses usually have websites with thousands of blog posts, often multiple each day related just to consumer debt. As the line between journalism and blogging continues to blur, you will likely notice many of the posts on some of these sites are basing their writing more and more on opinion rather than on research and best practices.
If you pick a personal finance topic, you will likely find millions of blog posts on the subject. The Google search term “Best Ways to Get Out of Debt” currently yields results linking to posts that list the 3, 5, 6, 7, 8, 10, 23, 25, 26, and even 33 easy and best ways to get out of debt.
Bloggers come in all sizes and shapes and come from various backgrounds. Many like bloggers in the FIRE field or Financial Independence Retire Early simply blog about their personal experiences and financial lessons learned throughout life. Other bloggers have written books and published peer-reviewed articles, offering a bit more stable and traditional view of money management.
Blogs can offer fantastic information and even provide effective motivation to move from financial knowing to financial doing. However, you should get a well-rounded view of the topic by visiting and reading blogs from dozens of writers. If you find that nine out of ten bloggers agree from experience on how to get out of debt, you can probably trust what they are sharing.
We highly suggest you avoid getting drawn into an exclusive relationship with any one blogger, author, radio talk show host, or otherwise. We have met far too many learners in our classes who argue an erroneous debt elimination principle based on the opinions of their favorite talk radio personality. Just as you should shop around for the best deal on big purchases, you should read around so you can distinguish between financial fact and blogger fiction.
Books (including ebooks and audiobooks) can offer a lot of help for getting out of debt. Books published with large national publishers are typically written by well-known writers, TV or radio personalities, or others who have already built a strong social media following.
Books published on Amazon directly by the author or through a smaller, local publishing company can often offer the most innovative and insightful information on debt reduction. However, you will have to weed through a lot of fluff from authors with nothing new to say on the subject.
Whether you have a five- or fifty-five-minute commute each morning and afternoon, you might find some great podcasts to help you decide on your debt elimination method while you drive or ride to work. Like our caution regarding bloggers, we suggest you listen to a variety of podcasters and not just one so that you don’t become a mindless follower of a brainless albeit forceful or entertaining podcaster. As you listen to several sources, you can quickly learn the difference.
Like the dozens offered by Money Fit, webinars can offer excellent information to build financial literacy for combatting consumer debt. Often pre-recorded or self-guided, you can take such courses at your own speed at anytime and from anywhere. Whether you spend a half hour or ten hours taking an online class, you should look into getting a certificate of completion, not for show but because it often comes after a course quiz or exam that confirms your newly-gained learning.
How to Build Financial Capability
Reading and studying might build literacy, but it does not automatically lead to capability. A few rare studies even indicate that some financial education programs have absolutely no effect on the learner’s financial performance. Fortunately, other studies find that results depend on the type of programs and courses used to increase capability.
Consider these types of programs when building your debt elimination capabilities:
Workshops and Camps
Many nonprofit credit counseling agencies like Money Fit offer free personal finance workshops, especially around debt and budgeting. You can also find personal finance camps for teens and adults at local financial institutions, libraries, and YMCAs, to name a few.
Workshops and camps should include opportunities to both learn and practice financial principles. A debt workshop should provide you a chance to put together a debt reduction strategy. A debt camp should help you pull and review your credit report in order to identify your path out of consumer debt.
Interactive Activities and Downloads
Online activities, calculators and downloads give you a hands-on experience with personal finance topics, taking you from novice to expert-level capabilities. Activities might include simulated budgeting activities like our My Life My Choices that include a component of consumer debt.
Downloads, on the other hand, allow you to start putting financial principles into practice within your own finances. Debt Reduction Calculators, for example, come as online forms, PDFs, Excel spreadsheets, or printable documents you can fill out with your personalized information. The best downloads also include practical, easy-to-follow steps to get started.
Personal coaches can provide you the support and motivation to make steady progress toward debt freedom. Although coaches don’t need to specialize in personal finance, you might consider looking for a certified Financial Fitness Coach® through the Association of Financial Counseling and Planning Education.
There’s No Teacher like Experience
Of course, learning by doing continues to be both the most common and the most effective way to build our personal capabilities. At the end of the day, it’s the only way to put book knowledge to use. You will make mistakes, and not just early on. We all do. But, as we keep trying and keep learning and keep experimenting, we eventually find methods and systems that work for us as we work toward debt elimination goals.
Common Questions About Managing Debt
How debt management affects credit score?
The FICO scoring model ignores any consumer participation in a debt management program. Indirectly, though, participation in a debt management involves closing accounts to further use, which might initially lower your credit score. Over time, though, by establishing a pattern of on-time monthly payments and paying off your debts, you can build a positive credit score through a debt management program.
What to look for in a debt management plan?
When deciding on a debt management plan (DMP), choose one through a nonprofit agency so it can offer all the concessions creditors can provide DMP clients. Also, make sure to confirm that any debt management agency has registered to do business in your state, usually through the secretary of state or a department of banking, consumer affairs, or finance.
Can I get into a debt management plan on my own if I’m married?
If you are the sole owner of a debt, you may enroll in a debt management plan on your own, even if you are married. If your spouse is a joint-account owner, both of you will need to enroll in the debt management plan. If your spouse is an authorized user, you do not need your spouse’s authorization to join a DMP.
Is debt management better than bankruptcy?
Financial advisors and credit experts all generally recommend consumers consider bankruptcy as an option of last resort. Because bankruptcy has both long-term and significant effects on your credit, debt management is considered a better option to bankruptcy whenever possible. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires consumers to meet with a nonprofit credit counseling agency before filing a bankruptcy petition with the courts.
Is there a do it yourself debt management plan?
Many credit card companies will offer you a debt management plan with lower interest rates if they know you have no credit cards with other credit card companies. If you have debts with multiple credit card companies, they are less likely to offer you a DMP because it might eliminate their competitive advantage of charging higher interest rates than other creditors.