Debt Management Options for Debt Free Living
I was amazed when I began building my counseling site at the number of keyword searches for debt and credit counseling.
But then I began to think about my own personal experience with a significant increase in income and the results for me in terms of debt, and I ruefully had to nod my head in agreement.
I finished my Master's degree in Counseling in 1996, and while I was in graduate school, working on a mid-life career change, I lived on a very small income, and when professional level income began to arrive, I was elated. That emotional response lead to some very poor choices in regards to tax planning and niche choosing in the market place. I thought that I was insulated from competition, and I was not. After a very big year in 1999, which was also the year my son was born, I faced a 30% decrease in revenues the following year, and by August of 2000, I was using credit cards to pay the utility bills at my office. At one point I had 17 credit card accounts open and maxed.
So I had to grab my emotional use of money and begin to manage it as a tool, including paying back those credit card balances.
Luckily I was used to living cheaply, which is not necessarily the same thing as frugally, and could do that. In years since 2000, I have paid off significant debt and rebuilt my credit rating to the point where we were able to get a loan for an almost new house last year.
So if you find yourself in that kind of bind, you may need to choose from among the following tools.
Debt Consolidation, Counseling, or Settlement?
Which debt management option should you choose....debt consolidation, debt settlement, debt counseling?
Debt Consolidation Defined
Debt consolidation is the process of consolidating debt into one larger payment. Based on your personal financial situation and lifestyle, there are a few consolidation options to consider.
Debt Consolidation Loans: Consolidating credit balances into one, lower interest, loan and one monthly payment. This option could save you thousands in interest and reduce your monthly debt payment .
Home equity or second mortgage - Borrowing against your home equity. It's not always the best solution to turn unsecured debt into secured debt. Unsecured debt is "not secured" by the debtor's assets. Secured debt, such as mortgage debt, is "secured" by collateral or assets. In the case of the mortgage, this would be your home. Consider this option if you can commit to stop creating debt and are disciplined enough to stick to debt management goals. Otherwise, you put your home at risk.
Personal loans - Personal loans may be unsecured or secured with assets other than your home. If you can qualify for such a loan, this may be an option for you.
Balance transfers - Transferring credit card balances to a lower interest credit account. Be sure to read all terms of balance transfers. Be aware of initial balance transfer fees and introductory rates that will change after a specified period. You'll want the terms to still be beneficial to you after the introductory period.
Debt Management Defined
Debt Management Contract - A credit counselor or debt management company negotiates the lowest interest rate and payments possible from your creditors. Once all contacts and contracts are complete, your agree to make one lump sum to the debt management company. They then distribute payments to your creditors as per agreements. This is a consolidation option available to those who do not qualify for debt consolidation loans. A great option of those with little self discipline. You will not be able to use your credit cards while they are under a debt management contract. Make sure your debt management company pays your creditors on time, or you will be charged late fees and/or over limit fees.
Debt Settlement Defined
Debt Settlement: Negotiating with creditors to reduce balances and pay off debts. This option can certainly save thousands of dollars, but can have some negative impact on your overall credit history. Consider this option if you have a serious financial crisis, are already substantially behind in payments or, just don't have enough income to meet essential living expenses and minimum debt payments.
Credit Counseling or Debt Management: Credit counselor’s address all of your personal finance issues. Addressing household budgeting and spending habits, in conjunction with debt management, is essential no matter what debt management option you choose. A credit counselor offers professional advice for debt management options based on your individual financial situation. They offer personal finance education and manage debt as in debt consolidation. If you're not sure what debt management approach is best for you, a credit counselor can help you make an informed decision. You can check with the Federal Trade Commission, your state's Department of Professional Regulation, and your local chapter of the Better Business Bureau as you make your choice in regards to credit counselors.
Choosing the right debt management option for your unique personal finance situation is essential for success. If the whole process seems overwhelming, try this....
Eliminate options that you don't qualify for first. For example, if you don't own a home, you won't be considering a home loan for debt consolidation.
Make a list of remaining options and note the pros and cons of each. You may want to consider impact on credit score, access to credit, length of time, savings, flexibility in payments, etc. Next, eliminate those with cons that you would prefer not to enter into to. If your goal is to keep your credit history in good standing, eliminate those that will definitely have a negative effect. Don't like the idea of putting your home at risk? Eliminate the home equity debt consolidation option. Narrowing your options down gives a more focused picture of what debt management options are available and/or acceptable to you. Research and choose the most financially beneficial option from there.
The key is to choose a debt management option that you determine can be successful for you and stick to it! You must manage debt to become debt free. There is no other option!
And that means manage your emotional response to money also. Money is a tool. Having lots of it does not mean I am better that or worse than anyone else. Same goes for having to little of it.
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You don't have to be a slave to debt!
"We've learned so much from Tawra... As of last week, our regular bills are finally all paid up! We're no longer behind on any of them and can start working on our debt instead of playing catch-up with the utility companies. This was due in very large part to Tawra and her mom's wonderful advice, ideas and guidance."
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Living on a Dime