According to an article on Time.com, Americans are still concerned about the state of their financial future. 6 out of 10 participants of their survey revealed that they are worried about the long term financial security of their family. Even after more than 5 years since the Great Recession, it is still not clear if we should really relax. The article revealed that majority of those who are earning less than $100,000 and half of those earning more than that are worried about their financial security.
One of the most prominent reasons for this concern is our mounting debt. Although things are supposed to be better, we cannot completely free ourselves from credit obligations. Despite the debt solution that we have implemented over the years, it is still not clear if we are really out of the debt pit. That does not mean the current debt relief programs are ineffective. They are all able to get us out of debt but there are debt relief mistakes that you have to make sure you will not commit. These are the ones that will compromise the effectiveness of debt solutions.
Although you have implemented certain debt relief programs, you have to ensure that first and foremost, they are the right solution for your unique debt situation.
3 financial conditions and their respective debt relief programs
What you have to realize is that there is no such thing as a one size fits all debt solution. There are certain things to look into before you can consider using a debt relief program as your way out of debt. One of them, and probably the most important, is your current financial situation. This does not only mean your debt amount. It mostly refers to your payment abilities.
You see credit card debt relief is easier than you think – as long as you are using the right program for your financial situation. There are three different scenarios that you need to choose from. See which of them is applicable to you before you really choose the program that you will follow to lead you towards debt freedom.
You can comfortably pay off the minimum monthly contribution.
The first situation is for those who can comfortably pay off their monthly contributions. These are the people who have enough disposable income to pay off their creditors and lenders. They do not really have to sacrifice their basic needs just to meet payments. Now if you belong to this group, you may think that you do not need a debt relief program. That is where you are wrong. Believe it or not, even if you are able to meet your payments, there is a debt solution that you can implement to help expedite and organize your monthly payments.
You have two options before you: debt snowball and debt avalanche. Both of these payment methods require you to list your debts and rank them according to priority. The snowball will require you to rank the lowest balance as your priority. The avalanche method will require you to rank the debt with the highest interest rate.
Once you have ranked your debts, you will pay the minimum for all the debts and anything extra will be placed in the priority debt. That will help you pay off that debt a lot faster. Once the first debt is paid off, you will transfer that freed amount to the second debt. This will be repeated until you have paid off all the debts on the list.
You cannot pay off the minimum monthly contribution.
The second financial situation is when you are having a hard time paying the minimum payment requirement. That means you will be required to sacrifice some basic necessities so you can avoid defaulting on your loans. In this scenario, you have a stable job that provides you with a monthly income – but it is just not enough to sustain all your financial needs.
The debt solution that will work for those in this predicament is debt consolidation. According to the consolidated information from CreditCards.com, 28% of low and middle income household paid late fees in their credit cards in 2012. If you are part of this group, what you need is a lower monthly payment requirement that will not cause you to pay penalties. There are two debt solutions for this: debt consolidation loans and debt management. Both of these will help you lower your monthly payments without incurring any charges. What happens is your balance will be restructured so you will have a longer payment period. Since your balance is stretched, you do not have to pay as much as you did before. Sometimes, debt consolidation results in a lower interest rate.
In debt consolidation loans, this happens by borrowing a low interest loan that will pay off all your high interest rate debts. You will then concentrate on this one debt that usually has a lower payment requirement every month.
Debt management, on the other hand, involves a credit counselor who will help you create a debt management plan. This plan shows your proposed lower monthly payment over a longer payment period. The counselor will help you present this to the creditor and when they accept, you can follow this payment plan. Sometimes, they will even negotiate for a lower interest rate – but this is not always guaranteed. You need to follow this plan strictly because failure to do so may result in the termination of the debt management plan.
You cannot pay the minimum and you do not have a stable job.
Now in a more severe financial situation, you cannot pay off your monthly minimum and at the same time, you also do not have a stable job that will help you meet your payments. If this is your situation, do not fear because there is a debt solution for you. You need debt reduction.
One way to do this is through debt settlement. This is a type of debt relief program wherein you will negotiate with your creditors to allow you to make a lump sum payment that is lower than your actual balance. Once you have paid this off, the creditor will have to agree to forgive the rest of your debts.
If they will not agree to this, then you have no choice but to opt for bankruptcy. This involves court proceedings that will eventually lead to the discharge of your debt – at least a portion of it, if not all.
Another factor in choosing a solution to credit problems
Once you have considered your debt solution based on your financial situation, there is one more thing that you need to ask yourself.
What are you willing to sacrifice?
If you want a stress free debt relief, you need to wrap your head around the idea that you have to make certain sacrifices to achieve debt freedom. Here are some of the sacrifices that you may have to make.
- Lower standard of living. If you will choose debt snowball or debt avalanche, you may want to lower your expenses so you will have the extra money to put into your priority debt.
- More effort in earning more. One of the ways that you can increase your debt payment is to earn more money. That means you have to sacrifice your personal time and opt to work instead. That is how you can hope to pay more for your debts so you can get out of debt faster.
- Longer time in debt. If you opt for debt consolidation, that includes stretching your debt payments over a longer payment period so you can lower your monthly contributions. That is your sacrifice for this debt solution.
- Damaged credit score. Although debt reduction seems like a great option because you do not have to pay for all your debts, it will cost you a good credit score. If you do not need a good score for now, this is a sacrifice that you can make. After all, your credit score can improve over time.