The recent economic bust has caused consumers to reevaluate their personal financial pictures. The 10-year period ending in 2007 saw an increase in credit card debt load of 75 percent. Eliminating this costly and potentially damaging debt is a critical first step as you begin to establish long-term financial security.
Your Credit Problem
Considering a few aspects of your debt situation yields immediate answers. For example, you have a problem with credit if you only pay the minimum payments every month. If you rely on credit cards to pay for basic necessities, such as groceries and gas, or if you have several lines of credit open, such as multiple Visas, store cards and an American Express, you have a credit card problem. Consolidating or transferring balances to a new line of credit, only to run up a new balance on the old card, also creates issues for you and your credit card use.
Reducing Your Debts
Many steps you can take today will lower your debts. Call your credit issuer and ask to lower your interest rate. The company will often do this over the phone. Also, pay more than the minimum every month, focusing on the highest-interest-rate card first. "Push" your payments: apply every extra dollar you can toward one payment instead of spreading it out. When that card is paid, apply that payment to the next-highest-interest-rate card, continuing until you're debt-free. Do not run up new balances while you are paying off the old ones. If you can, keep only one credit card and use it for emergencies only.
Debt Consolidation and Management Options
If you are falling behind on your bills, debt consolidation or management is a possibility. Be advised that these options may affect your credit. Debt consolidation, the practice of combining your bills into one new loan, is effective but tricky. While tapping home equity is tempting, you are securing your credit card debt with your home. If you default, you risk foreclosure. Additionally, there is nothing to stop you from running up another credit card balance. Debt management is the practice of using a counselor to combine your bills into one payment. However, it's not a loan, your credit may be affected and the credit lines are closed. In return, you make one payment instead of several, interest rates are reduced or interest is eliminated, and you pay your debts in full, usually in fewer than five years. The nonprofit agency National Foundation for Credit Counseling offers a free one-hour consultation and walks you through the process of reducing debt.
Debt Settlement and Bankruptcy
Debt settlement and bankruptcy are last resorts. To qualify for a settlement, you must be at least several months, at least six in most cases, behind on your bills. You must also be prepared to pay the negotiated settlement -- usually about 40 percent of the balance -- in full. Your credit is severely damaged, and you'll receive many debt collection calls. However, after the settlement is paid, you'll be debt free. Consumers who are considering bankruptcy should consult an attorney before proceeding to explore the different options. Also, consider that bankruptcy follows consumers for years and can even affect your employment status. Bankruptcy is only a solution of last resort.
Watch for Scams
Consumers who contact a reputable nonprofit, such as the National Foundation for Credit Counseling, can feel secure. Unfortunately, those seeking management and settlement services may have a difficult time finding a reputable firm. Check the Better Business Bureau website or your state Attorney General's office before sending money, and be wary of firms that want you to pay into an account for six months before settling debts on your behalf. If it's a scam, you'll lose six months of payments and have severely damaged credit. Offers from your mortgage company or bank for consolidation loans are most likely legitimate, but investigate offers carefully that you receive over email or from a bank you don't recognize.
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