For people with significant debt, managing it should be a top priority, behind only paying your monthly bills. Once debt becomes more manageable or is eliminated entirely, you can start looking toward building savings and emergency funds.
According to the Federal Trade Commission, there are things you can do to manage your debts better. Options include using realistic budgeting, reputable debt relief services, debt consolidation, and bankruptcy. Determining which would work best for you depends on factors including your type and level of debt, your level of self-discipline, and your prospects of earning more money in the future.
Prioritizing Debt
In Ohio, the most common sources of debt are student loan, medical, credit card, and mortgage debt. It’s better to pay off some types of debt than other types. To make the best decision, consider the following suggestions:
1) Understand “good” and “bad" debt.
Good debt creates value; for example, student loans, real estate loans, home mortgages and business loans. Even some home equity or credit card consolidation loans can be good debts -- if they decrease the money you owe by reducing interest rates. Also, some home and student loan debt may be tax-deductible.
Bad debt is any debt you take on to fund a lifestyle you can’t afford, debt that causes you to overextend yourself, debt for something that goes down in value, or debt for short-term gratification. Stop taking on bad debts and get rid of these first.
2) Pay off your highest interest rate bad debt first.
For example, you will save most by eliminating the debt on the credit cards that charge you the most – often as high as 18% interest. Then pay off the next highest.
3) Consider the effect on your credit score effect.
Pay down credit cards that are near their credit limit to improve your “utilization ratio” (the percentage of available credit that you use) and this positively impacts your credit score.
How to Manage Debt
1) Self-Help – If you have enough self discipline, you can manage your debt by setting up a program that includes:
- Budgeting. Make an assessment of how much money you take in and how much money you spend. List "fixed" expenses like mortgage payments or rent, car payments, and insurance premiums. Then list varying expenses, identify which expenses are necessary, and prioritize the rest to see what you can cut.
- Not making credit card purchases until you pay off your current balances. Then, do not charge anything unless you can pay off the balance in 90 days or less.
- Committing to managing your money. Set aside time twice a month to managing your finances -- paying bills, balancing your checkbook, and analyzing your expenses.
- Contacting creditors. Contact your creditors to try to work out a modified payment plan that reduces your payments.
2) Seek outside help -- If you can’t do it on your own, you may consider getting help from the following:
- Debt Relief Services -- A debt relief service like credit counseling or debt settlement may help you meet payments. Make sure you check out the firm you're considering doing business with, find out what services cost, and get everything in writing.
- Credit Counseling -- Credit counseling is an educational service where you meet with a counselor who helps you go through your debts and determine how to pay them off. However, be aware of fees. Contact the National Foundation for Credit Counseling. (www.debtadvice.org/).
- Debt Management Plans -- A debt management plan (DMP) has you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts according to a payment schedule. In return, creditors may agree to lower your interest rates or waive certain fees.
- Debt Settlement Programs -- Programs involve having a company negotiating with your creditors to allow you to pay a “settlement”— a lump sum less than the full amount that you owe. Then you transfer an amount every month into an escrow-like account to pay off the settlement. Find out if the program will negatively affect your credit report or cause you to accrue late fees and penalties.
- Consider Bankruptcy -- If you have taken these steps and still find yourself drowning in debt, you may want to consider the fresh start available by filing for bankruptcy. Bankruptcy is a legal way to have many debts eliminated. The most common types are Chapter 7 and Chapter 13. Chapter 7 is a full liquidation of all assets, while Chapter 13 may allow you to keep property, such as a mortgaged house, while you complete a three- to five-year payment plan to have debts forgiven.
