Posts Tagged ‘debt pay down’

Debt Consolidation vs. Debt Management

Thursday, January 15th, 2009

Another frequently asked question is when is it appropriate to use a debt consolidation service as part of a process of getting ready to pay off debt. And does this constitute effective debt management?

Debt Consolidation is Not the Same as Debt Management

Debt consolidation and debt management, while very similar, are not the same thing and distinguishing between them is critical to understanding what you’re actually using to reduce your balances. Simply stated, debt consolidation is grabbing any or all of your multiple outstanding debts, and taking out a new loan for the aggregate owed amount. The lender of the new larger loan pays off the existing balances on the multiple debts, and you’re left with just one loan to be repaid. Debt management is the tools, plan, and strategy to pay off your debt brought together with an actionable agenda that you use to pay off outstanding balances. In other words, debt consolidation can be one of the tools you choose as part of your debt management plan.

Word of Caution

Debt consolidation in theory is fine; debt consolidation services, however, need to be carefully evaluated before incorporation into your debt reduction strategy because of several factors. The upside to consolidation is clear: no more juggling of different debts and payment schedules; instead, a simple, clear, and more organized process for getting out of the red. The downsides, depending on the terms, can be numerous and include:

  • unfavorable new interest rates
  • penalties for paying off the loan ahead of the agreed schedule
  • consolidation fees, both one-time transaction expenses and recurring surcharges
  • longer debt repayment periods
  • heavier penalties for things like missed and late payments; steeper interest rate hikes in the case of default
  • negative impact on your credit score, which in turn makes it harder for you to pay off your existing debt (See our article on credit score impacts debt repayment)
The overall risk with debt consolidation services is that, depending on the terms of the new umbrella loan, you may actually be getting deeper into debt rather than quickly paying off what you already owe. Also, even if both the interest rate and the monthly payments are lower than your previous multiple loans, they usually lengthen the repayment period, in which case your outstanding debt amount actually increases. Finally, the problem with debt consolidation is that any underlying factors that make you struggle with debt like spending habits go largely unaddressed, which in turn keeps your risk of falling back into a cycle of debt accumulation even greater. In short, with the exception of some rare cases, debt consolidation services are not the best option for the vast majority of people that struggle with debt.
                                                                                                                                                                        
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Advice, Tips, and Techniques to Eliminate Debt: Steps Two and Onwards

Wednesday, January 14th, 2009
Steps Two – Onwards

After getting organized and creating your basic plan, follow it up with solid execution. These additional tips can help make the progress towards paying off debt go much faster. Choose and implement any of the following:

  • Automate your debt payments, making sure that you keep your total payments at least as high as the amount needed to execute your payment plan.  Automating it makes it less likely that you reduce your payments and fail to reduce your debt.
  • Avoid eating out – it costs a ton
  • Create a budget for all of your non-debt expenses. Trim out everything but the bare minimums and turn that savings into direct payments towards your debt pay down.
  • Use free or low-cost recreational and entertainment options only. They are limitless and everywhere.
  • Build up a cash reserve for emergencies equal to three months of basic expenses: housing, food, and transportation.
  • Create a short-list of arguing points why your interest rates should be lowered. Next use the list as a script and call each of your lenders, haggling with them to have your rates lowered. If you aren’t getting anywhere with the level one representative, ask to speak to a manager, and repeat the same points.
  • Transfer your balance to a new credit card with a zero percent rate, then cut up the new zero percent card and never use it, turning the credit card into a credit tool. Shop around and find a zero percent balance transfer option that has the longest zero percent period available. Note the end date of the zero percent period and make that your deadline to have that account cleared.
  • Stop adding any new funds to investment accounts, retirement or otherwise, and apply those funds instead towards debt pay down.
  • Make a checklist of everything to review during your time paying down debt, then use the list to check your progress on the first of every month. Compare your outstanding debt amount at that point to what it was on the first of the previous month. Adjust your plans to make sure that steady progress is actually a fact.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Advice, Tips, and Techniques to Eliminate Debt: Step One

Tuesday, January 13th, 2009

The idea of getting ready to reduce and eliminate debt is enough to put most of us on edge. Those nervous about the tasks involved to step out of the red often put to us the question: “What are the best tips and advice for getting out of debt?” In a two-part article, we answer it here.

Step One: Get Organized and Make a Simple Plan                                                                          
Getting organized and coming up with a simple strategy is the first and most important step. In it, you don’t just bring together all of the various bank statements, payment stubs, and notices of changes to debt terms lying around the house; you’re actually writing down concrete and straightforward things that need to get some debt control. Only with a written plan can you effectively measure your progress towards debt elimination. Still confused and not sure where to begin?                                                                                                                                                                                
Here’s the broken-down steps to “Step One”:                                                                                                                                                                     
1. Collect all documentation you can find regarding your debt. Don’t pour over it yet; just pile it all into one place.                                                                                                                                                         
2. Take the pile and organize it in groups, according to type of debt (i.e., auto, credit card, housing/mortgage, etc.)                                                                                                                                               
3. Read through it to get a basic understanding of what is owed and to whom. On a separate notepad, jot down important things such as: the principle, the current debt balances, interest rates, whether the rate is variable or fixed, mandatory timelines for payment, minimum payment amounts to avoid additional fees, and any debt prepayment penalties. Also jot down the phone number(s) of the contact(s) for the account. Don’t worry about finding all of information; do your best and don’t be afraid to call the contact phone numbers for each of your lenders to fill in the blanks.                                                                                                                                                                                                               
4. Snowball Method: Within the mandatory guidelines for repayment you can choose between one of two basic strategies: pay off the smaller balances first, or pay off the balances with the higher interest rates first. Paying off the balances with the highest interest rates makes the most financial sense to pay less interest in the interim, but motivation-wise you might feel increasingly confident as you wipe out credit cards to zero balances. In this second case, the snowball method will be optimal:  it entails paying the minimum monthly payment on each of your debts, except the one with the lowest balance, where you apply all of the remaining funds you can dedicate towards debt reduction.                                                                                                                                                                                                           
5. Check your progress every month. Tell a friend, family member, or loved one about your plan and monthly targets so that they can keep you on track, like a coach. Be explicit and clear as to what is owed. Providing your coach something in writing will add to the sense of commitment.                                                      
Tomorrow we discuss step two: various quick and simple options to speed up the debt pay down process.                                                                                                                                                                                
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Posted in Credit Card, Debt Management, Paying Down Debt | View Comments