Any amount of debt can seem overwhelming, depending on what your income is or how much debt you’re comfortable having. If you’re feeling in over your head, it’s time to start looking for help to get you out of debt and back on track.
When it comes to digging out from underneath your debilitating debt, there’s a sort of order you should go through — beginning with some fundamental strategies before turning to increasingly drastic measures. Here’s where to start when you’re staring down an insurmountable debt.
Do-It-Yourself Debt Help
Here’s where you need to begin, before you call anyone else in. No one can help you like you can help yourself. Look at your finances, see where you can make some spending cuts, and pay that extra money forward to make more aggressive progress against your debt. If you’re being honest and track your spending with a critical eye, you’ll probably be able to find some expenses that could be better spent on getting yourself out of debt.
In this process, reach out to your lenders, especially any you’ve fallen behind in paying. What do they need you to do to get back on track? Starting here is going to save you time, money, and aggravation. Once you’ve done this, if you’re still having trouble, it’s time to think about bringing in some additional help with your debt.
We’re still sort of in the DIY arena here, but this is a little more aggressive. You might look at zero-interest balance transfer credit cards or consolidation loans as a way to get your debt under control. In most cases, this means trading multiple high-interest balances for one larger loan with a lower interest rate (or, with a balance transfer card, an introductory period with 0% APR).
This approach has a few benefits: First, if you qualify for a consolidation loan or new balance transfer card, it’s probably going to help your credit score immediately — the increase in your overall credit limit will reduce the amount of your available credit that you’re using, called your utilization rate. You’ll also have just one monthly debt payment to keep track of, instead of several – potentially
Plus, if you’re able to consolidate to a lower interest rate or even a 0% APR credit card, more of your money will go toward the principal of the debt — meaning each payment will have a greater impact and you’ll make faster progress.
In addition to balance transfer fees or loan fees that you need to be mindful of, there’s one other major pitfall here: If you’re not careful — if you don’t change the behaviors that landed you in this predicament in the first place — you can just end up deeper in debt. So know yourself and tread lightly. But if the lower interest rate makes up for any fees you’ll pay, and you think you can handle the responsibility, debt consolidation offers a straightforward path out of debt.
Some people pursue debt settlement, but it’s not all it’s cracked up to be. In the first place, you’re going to have to not pay your bills for several months before your creditors are even going to consider negotiating a settlement with you — and this is going to have a very negative impact on your credit report and credit score.
What’s more, settled debt is treated like income by the IRS. You’ll get paperwork at the end of the year for the “income” that you owe taxes on and the IRS will expect you to pay it.
For most people, it’s best to skip this step. It’s just not an option that has a lot of positives to it. If you’ve already fallen behind, however, and your credit report is already pretty roughed up, this might not be quite so bad.
Debt management is a bit like debt settlement, but a little more positive. You pay a company a single flat rate every month to manage your debt for you. That’s going to save you a lot of money when it comes to interest and fees — however, they’re not going to do much for you that you couldn’t do for yourself. In this case, you’re effectively just outsourcing a debt consolidation loan to a third party and paying for the difference.
Better than this is getting free or low-cost consumer credit counseling from a non-profit agency. They can help you to evaluate all of your options and come up with a plan that works best for you. Paying high fees to another company to do what you can do for yourself isn’t necessary. Calling in a third party for a fresh set of eyes on the situation, however, might be useful in helping you to figure out precisely what it is that you need to be doing to get yourself out from underneath a mountain of debt — and hopefully before bankruptcy is a serious option.
This post orignially appeared The Simple Dollar and was written by Nicholas Pell.