Many people find some sort of debt management necessary at some point in their lives. This is because debt management basically involves juggling your debts until you can slowly begin to pay them off. Debt management is different from debt reduction, which is concerned with reducing debt as quickly as possible. With debt management, you simply try to shift the debt around until it is paid off. Often, this process can take years. And, in some cases, might add further damage to your credit score. Here are three types of debt management:
This is probably the type of debt management that you are most familiar with. It consists of taking out a large loan to pay off your smaller loans. Usually, you end up paying less each month in minimum payment, and your interest charges are lower. For those with the discipline not to get into debt further while paying off the debt consolidation loan, this can work out well. Debt consolidation loans come in two types:
An unsecured debt consolidation loan is usually smaller, consisting of less than $8,000. This is because most financial institutions prefer not to loan large amounts of money without some sort of collateral. If you have less than $5,000 of consumer debt, taking out an unsecured loan can be a good way to lower the interest on high-interest credit card debt, and it can help you improve your credit score, as long as you make on time payments.
The secured debt consolidation loan is a completely different animal. In such, you use an asset you have, usually a house, to secure the debt. Many people use this method to pay off large amounts of debt, such as medical bills, as well as credit card bills. While this can help free up money each month, if you can’t keep up with the payments, you could lose your home.
Word of caution: Many people who get debt consolidation loans do not change their habits. Rather, they view the extra room on credit cards as “more money” and end up further in debt.
This is not a loan, but it is a form of debt management. You get in touch with a credit counseling agency which helps you develop a plan to pay back your debt. In many cases, the credit counseling agency negotiates lower interest rates and can help you get a lower over all payment. In most cases, you simply make one payment to the credit counselor and the agency then distributes the money to your creditors.
Word of caution: It can take a few months to get everything set, so you may be paying the credit counseling agency and your creditors until everything is arranged. Also, watch out for high fees charged by some agencies.
This form of debt management involves negotiating the amount you will pay. In many cases this can be done because the high interest you pay means that you have probably already paid back the actual amount borrowed (and then some) already. You can do this yourself or through an agency.
When you do it through an agency, you work with a negotiator who has you put a certain amount of money, each month, into a savings account owned by the credit negotiating agency. You stop paying your creditors, and inform them that you will be represented by the agency. The agency then begins negotiating your debts. As each creditor settles, money that you have been paying into the account is used to pay off the negotiated amount.
Word of caution: Because the hallmark of debt negotiation is that you stop making your monthly payments (the threat of defaulting becomes real to creditors), your credit score can be negatively impacted. Also, some agencies charge steep fees.
Doing It Yourself
Next week we will look at debt reduction that you can take care of yourself. You pay off the full amount you owe, but you’ll do it faster than you might think. But you have to have the discipline to change your outlook on your finances and how you accrue debt.