Taking control of your financial life is incredibly empowering, especially if you've resolved to pay down that expensive, worrisome habit commonly known as debt. When bills are piled up high and you're not sure where to begin, don't hide; grab your statements, a calculator and your phone. You may be able to do the heavy lifting yourself. If not, there are plenty of resources available to help. Just don't give up.
You Can Do It Yourself
Perhaps the biggest secret about debt elimination is that you can do it yourself, especially if you're current on your bills. Begin by making a list of all your debts, including car and home loans. Prioritize them by putting the highest-interest unsecured loan at the top.
Pick up your phone and call each lender's customer service department and ask for a rate reduction. Customers who have good payment histories will be more likely to receive a rate reduction. If your minimum payment is lowered as a result, continue making the higher payment anyway.
Debt "snowballs" and "avalanches" are commonly used techniques that eliminate debt. The snowball tackles the smallest balance first; the avalanche tackles highest interest first. The avalanche could save more money long-term, but borrowers may find the snowball more satisfying. The key to both is adding the payment from an eliminated debt to the next debt on your list.
You Can Enroll in a Debt Management Plan
If you are delinquent---or about to become so---consider a debt management plan. The National Foundation for Credit Counseling---the nation's oldest debt education nonprofit---can enroll you in a DMP, in addition to providing a free budget counseling session. In a DMP, the NFCC will negotiate with your lenders on your behalf to lower or eliminate interest and minimum payments. The accounts will be brought current, but will be closed. The debts you include in the DMP will be paid in full within 5 years.
The NFCC provides DMP services for unsecured debts, like credit cards. They also offer housing counseling services, but secured debts (for cars and homes) aren't eligible for DMP participation.
You Can Negotiate Your Debts
Lenders are loath to advertise it, but delinquent borrowers may settle their credit card debts for pennies on the dollar. There are several caveats: you must be seriously delinquent (at least 3 months), you must be willing to accept a significant hit to your credit score (although it's bad already if you have recent missed payments) and you may need to pay a debt negotiator, which can cost thousands of dollars.
Ideally, you'll be able to pay the settlement---sometimes as low as 30 or 40 percent of the original balance---in full to get the best deal. It's also possible to spread payments out over a short term, such as 6 months.
If you decide to hire a negotiator, contact the NFCC and refer to the Better Business Bureau's business ratings website. Desperate borrowers are prime scam targets. Don't pay negotiation fees upfront.
You Can Improve Your Credit Score
The notion that a borrower can never improve a bad credit score is false; in fact, the opposite is true. According to Fair Isaac Corporation, the company that tracks consumer debt payment information, the FICO score is simply a "snapshot" of current risk. Even with debt settlement and bankruptcy, it is possible to recover.
Timely payments and low credit-to-debt ratios make up almost 2/3 of your score, so beginning a new, debt-averse regimen helps within a few short months. Don't "max out" your cards; keep your balances to less than half of your available credit. Don't close paid-off accounts, because "$0" balances keep your debt ratio low. Time heals all wounds. Stick with it, and you'll be on the path to debt freedom.
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