Consumer debt is one of the biggest problems that households have to deal with on a daily basis. With the abundance of credit cards and store accounts, it is easy to see how many people get deep in debt. When it comes to getting out of debt, there are many ways that you could approach the process.
Credit Impact
Focusing on paying off your debt can help you in a number of ways. Besides saving you money every month, paying off your debt can also help your credit. Your credit score affects how much money you pay in interest as well as how much you have to pay in deposits. By paying off your debt, your credit score will jump up significantly. One of the biggest factors in calculating your credit score is your debt load, and paying off your debt will make you a much more attractive borrower.
Debt Consolidation
One approach to paying off your debt is to consolidate it first. Debt consolidation involves borrowing money from one source to pay off all of your accounts. You could consolidate with a home equity loan, a refinance or even a personal loan. When you take this step, you can focus on making only one payment every month and applying the extra money that you have to the single account. This can also lower your interest rates and help you save money.
Snowball Method
One of the more popular debt-elimination strategies is called the snowball method. With this method, you make only the minimum payment on all of your accounts except for the smallest one. You focus all of the money that you can afford on the smallest account. When it is paid off, you apply the strategy to the next smallest account.
Debt Solutions
Many companies try to get you to agree to use their debt-elimination services. Some services offer a debt-management plan, while others offer debt settlement. You have to be careful with debt-settlement plans because they can drastically hurt your credit score. Any time that you settle a debt for less than what you owe, it will hurt your score. With debt-management plans, you pay a company one payment every month, and they supposedly take the money and make payments to all of your creditors. These services should be avoided as often they don't do what they say they will do, and you are essentially paying them for something that you could do yourself.
Considerations
When you start trying to pay off your debt, you need to consider the best way to approach it. You should think about keeping an emergency fund in savings so that you will not be set back by small emergencies that come up. You may also want to avoid using your retirement savings or neglecting your savings for retirement.
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