Living without the burden of consumer debt equals freedom of choice. If you're willing to make a serious commitment, there are several free or low-cost methods that are easy to use. If you're looking for instant gratification, you've come to the wrong place; if not, then know that the rewards of living a debt-free existence are subtle, but worth the effort. The keys to success? Don't incur new debt, and live cheaply.
The Power of the Telephone
Consumer debts such as credit cards often have interest rates as high as 16 percent, sometimes more, and every dollar you pay off equals that rate's percentage return on your money.
Make a list of your debts, including all the pertinent financial information, such as the interest rate and outstanding balance. Call each lender and simply ask for a rate reduction; you'd be surprised at the power customer service agents have. Most consumers are unaware that this easy request can be accommodated with a quick phone call (if your account is current, you'll have a better chance of success).
Once your interest rates are lowered, maintain your payments at the previous levels. This ensures that more of your money is paying off the principal balance, and lessens the amount of time you'll be in debt.
Snowballing Your Payments
In the debt "snowball" reduction method, one debt is selected and all available funds are "pushed" toward eliminating the balance. Pay only the minimum payments on the remaining accounts. Pay the highest interest debt first; this ensures you will pay out the least amount over time. However, you may opt to pay the smallest balance first; this is a good method to use if you'd like to feel success earlier.
The key to the snowball is to add the first payment to the next once the first debt is paid off. Continue in this manner until your debts are paid, remembering to allocate every extra dollar toward debt reduction, while living frugally at the same time.
Debt Consolidation Loans
The financially savvy consumer may find that debt consolidation loans, such as cash-out home equity loans or credit card bill consolidation offers, offer much lower interest rates (home equity loans may also offer tax advantages). However, be honest with yourself. If you take out a debt consolidation loan, have a clear plan in advance to pay it back quickly. Ask yourself: Are you in debt because you overspent? If so, this route is too risky for you.
Remember that consolidation loans borrow from Peter to pay Paul. If you're using a home equity loan and you default, you have placed your home in jeopardy -- all for debts that would have been eliminated in a bankruptcy proceeding.
Debt Management Plans
If you are in over your head and don't know where to turn, your first call should be to the National Foundation for Consumer Counseling. This organization is a reputable nonprofit whose counselors are certified in credit management and provide free budget consultations. If you are late or are about to be late, you may elect to participate in a debt management plan (DMP).
In a DMP, unsecured credit accounts you select will be closed and you will be placed on a payment plan that will eliminate your debts within five years. Interest rates may be lowered, and your accounts will be reported as "current" to the three major credit bureaus. Your credit scores may suffer a temporary hit, but participation in a plan is much less severe on your scores than delinquent payments, settled debts or bankruptcy.
Debt Settlement Options and Bankruptcy
Your last resorts, and those with the most serious consequences, are debt settlement and bankruptcy.
Debt settlement, a completely legal tactic, allows consumers to pay a fraction of what they owe, usually in a lump sum payment. To qualify, you must be several months behind. You may hire a professional negotiator or attempt to negotiate on your own; usually, about 40 percent of the outstanding balance is agreed upon. The debt is reported as "settled" to the credit bureaus, but not paid in full.
Bankruptcy requires hiring an attorney, but your debts may be eliminated or settled for as little as 10 percent of the total. However, it is the solution with the longest-reaching consequences. It may affect your employment status, and it may be years before you can qualify for a loan.
Regardless of the path you choose, a fresh, debt-free start will provide a financial peace of mind that can't be duplicated by the thrill of instant gratification.
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