Getting out of debt is not a sprint; it’s a marathon. Before you can reach the finish line, you have to fully understand the course ahead. You also have to understand pacing to go the distance. Eliminating debt is about much more than just throwing money at your outstanding balances. Rather, it involves months or years of careful commitment to whichever debt solution you choose.
While this may sound like a long time, pursuing a more structured debt solution may actually speed up the process. For example, tackling $15,000 of credit card debt with 17 percent interest on your own would take over 11 years at the minimum repayment rate. Plus, consumers end up paying thousands of dollars in interest—and there’s no guarantee against sliding into more debt in the meantime.
But, speaking of debt solutions, which one is right for you? This is a big decision you’ll face at the beginning of your debt repayment journey. Conducting research will help you demystify debt solutions so you understand the pros and cons of each. Then you can get started with confidence.
Do you carry multiple high-interest debts? Debt consolidation aims to simplify these into one payment. Consumers can consolidate their debt by taking out a personal loan—usually with a lower interest rate—and using this money to pay off their debts. Then they are free to focus on making a single monthly payment on the loan until it’s repaid. Another option is transferring multiple credit card balances to one card via a process called balance transfer. The new card should have no or low interest. But consumers be warned: There is usually a promotional period after which interest rates will bounce back up to their previous highs.
Parameters for consolidation are: regular income, qualifying credit and total debt less than half of your income.
What about a debt solution for consumers with less-than-great credit? In this case, debt settlement is an option. This solution involves negotiating with creditors. The end goal is to get creditors to accept a settlement that’s lower than the original amount owed. Instead of paying back creditors slowly over time, consumers pay a set amount into a designated bank account until they’re amassed enough to begin negotiations. This provides leverage because creditors may agree to settle if they think the alternative is receiving no payment. Furthermore, many consumers choose to work with a partner like Freedom Debt Relief with experienced negotiators on staff.
Consumers facing debts they deem unpayable may go so far as to consider bankruptcy. However, this is not a decision to take lightly. Chapter 7 bankruptcy involves liquidating your assets. Chapter 13 bankruptcy focuses on debt repayment and allows consumers to keep some or all of their possessions. However, bankruptcy will affect your credit score for 7 to 10 years. Creditors will be able to see bankruptcy proceedings on your record, meaning it becomes very difficult to get credit following this course of action.
Homeowners can refinance their mortgages, taking out the difference in cash to pay off high-interest credit card debts. Here’s an example from Zillow: You have $200,000 left on your mortgage. You’d like to pay off $30,000 in credit card debt. Using this strategy, you could get a new loan for $230,000 and use the $30,000 difference to pay down your most pressing debts. Yes, it will ultimately take longer to pay off your mortgage. However, you typically won’t be paying as much in interest. The catch is that this strategy requires meeting or exceeding a minimum credit score, and you must own a home.
It’s time we demystify debt solutions for consumers so they can make informed choices and defeat their debts.