Credit Card Debt: Solutions To Your Challenge
These days, many consumers find themselves in difficult situation: they have amassed a large amount of credit card debt, and they see little or no hope to solve their problem.
If that situation sounds like yours, don't give up hope. There are many ways for you to get a handle on your credit card debt, and even begin to reduce or settle it, so you can get back on your financial feet.
The first step: figure out where you stand.
To begin reducing your credit card debt, you must first understand the specifics of your problem. First, determine your debt-to-income ratio. This statistic is widely used in the financial industry to determine an individual's financial health.
To figure out your debt-to-income ratio, begin by adding up all your monthly expenses, including mortgage or rent, utilities, monthly credit card payments, car payments, and any other payments like student loans and child support. Taken together, all those payments amount to your total monthly expenses.
Then determine your monthly income by either looking at your paychecks, or by dividing your total annual income from all sources by 12. Now divide your total monthly expenses by your monthly income, and the result is your debt-to-income ratio expressed as a percentage.
For example, someone with a monthly income of $1000 and monthly expenses of $500 has a debt-to-income ratio of .5, or 50% of their monthly income goes to expenses.
How to read the results:
• Percentages of 35% or less: this is considered to be a low debt burden.
• Percentages between 35% and 50%: This is the "danger zone." Stop using credit cards and begin paying down your debt now, to avoid letting your debt situation get out of hand.
Percentages of 51% or higher: You are in immediate danger of severe financial consequences if you lose control of your debt. Take action now.
Step two: Choose a course of action.
You have several options to help you manage your credit card debt problem.
1. Cut Back. The most self-evident way to get a handle on your growing debt is to stop using credit cards for purchases. Pay cash, and don't buy more than you can afford. Work to save money every month, and then put every penny you can spare toward paying down your debt. This option can be very difficult, however, and requires strict financial discipline to succeed.
2. Bankruptcy. Filing for bankruptcy should only be considered as a last resort. Recent acts of Congress have altered the way personal bankruptcy works, and it has become more difficult for consumers to free themselves from unsecured debt through bankruptcy. Additionally, bankruptcy severely damages your credit rating, and it makes getting loans for new cars or mortgages far more challenging for years to come. If possible, you should seek to avoid bankruptcy unless you have exhausted all other possible solutions to your debt problem.
3. Debt Consolidation Loan. Using a debt consolidation loan, you can pay off all your existing credit card balances, and turn multiple monthly payments into a single, possibly lower, payment. A debt consolidation loan lets you pay off your debts quickly, and convert higher-interest balances to a lower-interest loan. It does not damage your credit score, and in fact, if you manage your debt consolidation loan responsibly, it can even improve your score.
However, before you take out a debt consolidation loan, you should be aware of the potential downsides. Often, debt consolidation loans require collateral against which the loan is secured, such as your home or some other valuable asset. If you fall behind while repaying your debt consolidation loan, your asset may then be at risk for foreclosure.
Further, even with a lower interest rate, debt consolidation loans may require a larger monthly payment than your current total monthly payments on your current credit cards. Generally, debt consolidation loans take five years to repay.
4. Debt Settlement. Debt settlement means of negotiating between you and your creditors, which can result in a discounted lump-sum payment that is lower than the total debt you currently owe. Creditors agree to accept less than the total amount you owe them, in return for the assurance that they will receive at least a partial payment, because they may receive much less if you declare bankruptcy.
Debt settlement can be the fastest option to eliminate your credit card debt short of filing for bankruptcy. However, debt settlement does carry certain negative consequences. It will damage your credit score. It may also create potential tax liabilities. And debt settlement will not prevent your creditors from filing a lawsuit to collect on your original debt.
Depending on your unique situation, debt settlement and debt settlement programs are an effective alternative for managing your debt problems, and it may help you avoid bankruptcy. Of course, debt settlement is not for everybody. But it can be the most cost-effective and fastest way for you to get out of debt, while still helping you pay back a portion of your debt.
If you think debt settlement might be a viable option for you, contact us today for a free debt analysis and consultation.