When you're deep in debt, it might seem difficult to see how you'll get yourself out of the red, but there are a range of methods that will help you to recover from your debt. Choosing one depends largely on the extent of your debt. Each of the methods require you to be fully committed to paying your debt off and keeping it paid off.
Budgeting
The first step to recovering from your debt is identifying what behavior has landed you in debt to begin with. When you create a budget, you need to face the reality of your spending. While this may sound painful, it's important to keep in mind that doing so will allow you to regain control of your finances. For one week, keep track of everything you spend money on, and multiply the total by 4.3 to get an idea of what you spend monthly on out-of-pocket expenses. Add that to a list of recurring expenses, like your utility bills, cell phone bill, mortgage or rent. Break down your list into categories, such as groceries, entertainment, utilities, gasoline, clothing, gifts -- whatever is specific to your lifestyle. You may be surprised to find areas in which you're overspending. For example, some people spend a lot more on eating out than on groceries. Committing to eating out just once a week or every couple of weeks may mean savings in the hundreds of dollars, which can be contributed to paying off debt.
Payment Plans
Once you understand how much more you have to contribute to your debt each month, you can plan your attack. For those who need to see their payments bring down their debt quickly to get motivated to continue paying down their balances, the debt snowball method may be most effective. With this method, you pay off the debt with the smallest balance first, while paying minimums on the other debts. You then move on to the next smallest debt, until all debts are paid off. The other method you may use is to pay off the debt with the highest interest rate first. By eliminating that debt, you will minimize the amount of interest you end up paying, which saves money. Debt payment is not a one-size-fits-all solution, so it's important to choose the method that will work best for you.
Debt Consolidation
Using a debt consolidation loan may help you to recover from debt more easily; however, it's important to understand the risks that go with such a move. Debt consolidation does not always equal savings. Although these loans are often advertised at very low interest rates, usually those rates are for people with excellent credit scores. Ensure that the interest rates offered by the loan are actually going to be lower than those of your current creditors. The main benefit to debt consolidation is ease of payments; rather than making multiple payments each month, you just need to make one. However, debt consolidation means that you're trying to get out of debt by taking on more debt, which is sometimes risky. Avoid continuing to spend on the credit that a consolidation loan frees up if you want to find success with this method.
Credit Counseling
If your debt situation is so dire that you cannot see a way out, you may consider using a credit counseling organization to help you choose the best method to resolve your debt. The National Foundation for Credit Counseling website will help you locate a reputable organization. Your counselor will help you create a budget and decide the ultimate route to financial freedom, whether through a debt management plan, settlement, consolidation, self-help or bankruptcy. You can only qualify for a DMP through a credit counselor. Also, to qualify for bankruptcy, you must have received credit counseling within six months of filing.
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