If you're searching for the best ways to relieve your debt, you've taken the first step to becoming financially healthy. Paying off your debt yourself looks best on your credit report because you're paying the full amount owed, which gives future lenders more confidence in your commitment to repay loans. However, if paying off your debt without assistance is impossible, a credit counselor will be able to help you to choose your best option.
Budgeting
There's no way around creating a budget if you want relief from your debt; you need to gain control of your money to pay off your debt. Keeping your goal in mind while creating a budget may be helpful as you look at ways to cut back. Start by calculating an estimate of your monthly out-of-pocket spending by tracking your money over the course of a week, then multiplying by 4.3. Then, list your utilities, rent or mortgage, cell phone bill and other recurring bills and add them in to your expenditures. With this broad estimate, you will be able to figure out ways that you can contribute more to your debt. For example, borrowing books from the library, cooking meals at home, preparing your own coffee and enjoying movies at home are all good ways of saving money that still allow you to enjoy life.
Debt Snowball Plan
Once you've figured out how much more you have to contribute to your debt each month, you need to find a way to pay down your debt in an organized fashion. Paying the minimum balances on your debt will take a long time, and in the end you will pay exponentially more for your debt than you would by paying it off right away. Financial expert Dave Ramsey recommends using the debt snowball plan, in which you pay off the debt with the smallest balance first, while making minimum payments on the rest of your debts. The benefit to using this method is the psychological kick you receive from seeing your balance shrink quickly, which acts as motivation to keep paying off your debt. Once you pay off the smallest debt, you continue by paying off the next smallest debt.
Highest Interest Rate Plan
The other method for paying off your debt strategically is to pay down the debt with the highest interest rate first. This method works best for those who are motivated by saving money. By paying off the balance with the highest interest rate, you minimize the amount of time that the interest accumulates on that balance. However, it may take longer to see the effect of your higher payments if your balance is high. Payment methods are not one-size-fits all; you need to figure out which one you will be able to stick with over the long run.
Credit Counseling
For those who have extensive debt, working with a reputable credit counseling organization may provide the support to fully understand all available options. With your cooperation, a credit counselor will help you to create a budget and identify the root of your financial problems. Then, with your financial information, the counselor will present you with your options, which may include debt consolidation, settlement, a debt management plan or even bankruptcy. Each has a different effect on your credit, which is why working with a professional is helpful in understanding the best route for you. The National Foundation for Credit Counseling website will assist you in finding a trustworthy credit counseling agency (see Resources).
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