Consumer Debt Recovery

The ultimate goals of financial planning are to increase wealth, while managing risks. Consumer debt management is an integral part of the financial planning process. Effective consumer debt recovery techniques reduce costs and financial risks. From there, sophisticated investors and everyday savers are better positioned to leverage other debt to improve their financial standing.

Identification

Consumer debt is spent towards items that do not create value, such as clothing, automobiles and electronic gadgets. Consumer debt differs from business, or good debt, which is identified with investments and improved earnings. For example, real estate and school loans generally build wealth, and differ from consumer debt.

Consumer debt recovery describes transactions that pay down loan principal, over time. Consumer debt is fully retired, or recovered, when the principal balance drops to zero. Borrowers can retire debt with cash flow, or refinancing. Refinancing occurs when you take out new loans to pay off existing debt.

Features

Effective consumer debt recovery prioritizes interest rates. For example, you should only refinance when the proposed new loan charges significantly lower interest rates than your existing debt. Additionally, the majority of your debt recovery cash flow should be spent first towards paying off higher interest-rate debt.

Consumer debt may either charge fixed or floating interest rates. Fixed-rate debt carries the same interest rate throughout the loans duration. Floating-rate consumer debt, however, fluctuates with prevailing interest rates. Higher interest rates increase the costs of carrying debt. Credit card companies often offer low teaser rates for set periods, which then adjust higher to match the current interest rate environment. If possible, you should retire these credit card balances before the teaser rates expire.

Benefits

Consumer debt recovery lowers your overall interest expenses and costs. Beyond saving money on existing debt, you can negotiate better terms for future loans. Banks and lenders constantly monitor credit reports, and extend lower interest rates to applicants that demonstrate solid histories of on-time payments and low consumer debt balances. As part of your consumer debt recovery program, you should also verify that all credit report information is accurate. You can order one free credit report per year through annualcreditreport.com (see the Resources section for a link).

Considerations

Consumer debt recovery frees up cash flow to make investments, and also allows for leverage. Profitable leverage requires you to invest debt financing at higher rates of return than its associated interest payments. For example, effective consumer debt recovery techniques enable you to qualify for a mortgage and buy real estate. Over the long term, appreciation of housing prices should create significant wealth that is above and beyond your corresponding mortgage interest payments.

Be advised that you should continue to make timely payments to minimize consumer debt, rather than aggressively paying down the mortgage. Because mortgages are secured by real estate, their interest charges are generally lower than those on consumer debt.

Warning

The Federal Trade Commission says that consumers burdened with large amounts of debt are targets for scam artists. Avoid debt repair schemes that promise immediate relief in exchange for large fees. Consumer debt recovery is a long-term process.