Everyone can benefit from having a budget, regardless of their income and lifestyle. Budgeting provides a framework for optimising your spending habits and meeting your money goals. But budgeting alone is not always enough, especially for consumers carrying significant debt.
According to CNBC, the average American now has about $38,000 in personal debt — and that’s not even counting a mortgage. This figure is on the rise year over year too. While budgeting is a great first step, people with debt in the double-digit thousands may need a heavier-duty solution to get their finances out of the red.
As Freedom Debt Relief co-founder Andrew Housser notes, “Not everyone can just tighten the budget to pay off their debts.” Some people find it helpful to take a more structured approach to debt elimination, especially those who are starting to feel like bankruptcy may be their only option.
Here are three alternatives to DIY debt repayment to consider.
Working with a Credit Counselor
Tackling debt on your own is daunting. It helps to have someone in your corner who’s qualified to look at your financial situation and help you come up with a plan. Non-profit credit counseling agencies offer free or low-cost services to consumers looking for help with debt.
A credit counselor may be able to help you enroll in a debt management program (DMP). This entails the agency acting as an intermediary between you and your creditors — you’ll make one monthly payment to the credit counseling agency and they will distribute it to your creditors accordingly. They may also be able to negotiate with your creditors to earn you lower interest rates and fees, provided you stick to the DMP until your balances are paid in full.
Consolidating Your Debts
Along similar lines, many consumers find it helpful to streamline multiple high-interest debts into a single payment each month. This is known as debt consolidation, and there are a few ways to pursue this strategy.
Depending on your credit score, you may qualify for a low-interest debt consolidation loan. You can use this to pay off your credit cards and medical bills with higher interest rates. Of course, you’re still responsible for repaying this loan in full over the course of months or years. The key is doing the math to make sure you’re actually reducing how much interest you’ll pay over time by taking out the loan.
Another way to consolidate your debts is to transfer the balances on high-interest credit cards to a balance transfer credit card with zero percent interest. Doing so usually costs between three and five percent of the balance, but you’ll earn yourself a reprieve from high interest rates for as long as the introductory period lasts.
Settling Your Debts
If you have major unsecured debt to the point where bankruptcy is starting to feel like your only way out, consider settlement as an alternative. It will affect your credit score, but typically not as detrimental as bankruptcy — which can stay on your credit report for up to 10 years and require you to forfeit some of your assets.
Enrolling in a settlement program means making monthly deposits into a special account until you’ve saved up enough to kick off negotiations, which are handled by a professional team. If your creditors agree to a settlement — ideally a percentage of the amount you originally owed — the money you’ve saved up goes toward paying off that account. This process repeats for each line of credit you have.
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Do-it-yourself debt repaying works for some people; others need a more structured solution like consolidation, settlement, or debt management.
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