Debt consolidation loans, debt settlements, debt management programs ““ as an increasing number of people find themselves trying to climb over a mountain of debt, the number of companies offering various types of assistance increase. Before you join one of these programs however, you should try to reduce your debt on your own and avoid company fees or the potential for a dishonest company to make your financial situation even worse. Here’s how you can set up a do-it-yourself debt reduction plan:
Step One: How Bad is It?
It’s not good enough to say you’re in debt. You need to have a very accurate view of how much debt you’re in, what your interest rates are, and how much you’re paying in minimum payments each month. Pull out your bank and credit card statements, your check register and/or any online accounts you use to keep track of your finances and make a complete list of everything you pay, every single month.
If you have bills you pay annually or semi-annually, figure out what those costs are per month as well, and factor them into your outgoing bills monthly (even though you don’t send them a payment monthly).
Figure out what your monthly income is. Are you making enough to pay at least the minimum amounts on each of your accounts? If not, you’re in a very tough situation and it is cause for some drastic measures. You need to increase your income and reduce your expenses, until you are making more than what you owe each month. This may mean taking on a second job, but often it means getting control over your spending and getting rid of anything that isn’t absolutely necessary right now, like cable television, more than one phone line, subscriptions, etc.
If there is absolutely no way for you to reduce expenses or increase income to the point that you’re making more than you pay each month, you may need a different option than a do-it-yourself plan.
Step Two: Let the Negotiations Begin
One of the primary benefits of working with a debt settlement or debt management company is that they will help you negotiate with creditors. Just because there is a company talking to the creditors on your behalf doesn’t mean you have a better chance at getting a lower interest rate or altered repayment plan, though. You have just as good of a chance when calling them yourself. Tell them your situation, and ask if there is anything they can do to make it easier for you to pay them the money you owe. You might be pleasantly surprised to find they lower the interest rate for six months or a year, allowing more of your payment to go toward the balance and less to be eaten by interest.
Step Three: Time to Re-Budget
There is no point in going through all of this work if you aren’t 100% committed to getting out of debt. Take a look at your lists and determine where your money is going. If you haven’t already, eliminate anything that is not an absolute necessity.
Put your debts in the order you want to pay them off. So if you want to pay off your highest interest account first, put that first on the list with all other debts following. If you want to pay off the lowest balance first (in order to generate momentum and get rid of one of your debts faster), put it first on the list with the rest of your accounts following it.
After accounting for your basic living expenses (rent, car, insurances, utilities, food, etc), pay the minimum payment on all of the debts except for the one in the first position on your list. You’ll pay as much as you can afford on the first account on your list every month until it is paid off. The moment it’s paid off, you take the money you had been paying on it and apply it to the next account on the list. Each time you pay off an account, you’ll have more money to put toward the next debt and it will accelerate your payments.