If you’ve reached a point where your debt has gotten out of control, you’re likely now considering your options to deal with it. If you’ve recognized your problem early in the process, you have several options. However, if you’ve ignored your problem, you may find your options have become limited and carry significant financial consequences.
Americans have never been in so much debt. In fact, household debt numbers in American are at levels not seen since the Great Recession, which officially began in 2008. In 2017, Americans added the largest amount of debt in over a decade. Since we are now about 10 years past the beginning of the financial downturn, many consumers have seen their credit scores recover and their borrowing power increase. With interest rates staying relatively low, the economy booming, and wages on the rise, there’s nothing standing in the way of Americans accumulating more debt.
There are many reasons why you might fall into debt. Perhaps it’s for the simple reason of being irresponsible with money or living above your means. Or, perhaps it’s because you’ve had an unfortunate event occur in your life, such as a job loss or an unexpected injury or illness. Whatever the reason, you cannot just ignore your debt. Not addressing your debt problem in a timely manner can lead to bigger problems down the road.
Figuring out how to solve your debt problem can be a complex and stressful process, especially when you don’t know how to get started or how much the process might cost. Knowing your options and the costs associated with those options is an important first step in getting your debt problem resolved.
Option one: Transfer your balances
Balance transfers can provide respite from high-interest credit cards and their costly payments. In an industry that’s highly competitive, there’s usually a better deal available when it comes to credit card interest rates. If you’re carrying several high-interest credit card balances, sometimes you can transfer those balances to a card with a significantly lower interest rate or even a 0% rate for a limited period, usually 12 to 18 months. While you may not be able to pay off your entire balance in that period, a lower interest rate, even for a year or so, can help you make a sizeable dent in your credit card debt balances.
Determining how much a balance transfer will cost means paying attention to a couple of key things. Most importantly, be mindful of any balance transfer fees or interest rate increases after the predetermined low interest rate period. Sometimes, the fees associated with transferring your balance are high and roughly equivalent to a hefty interest payment over the period offered. Only you can determine whether a balance transfer is the right option by doing the proper analysis. Also, if you decide on a balance transfer, make sure you have a plan in place for when your low interest rate runs out.
Option two: Debt consolidation loans
Debt consolidation loans are the process of borrowing money from another lender in order to pay off all your other debts. The goal of a debt consolidation loan is to get an overall better interest rate and terms and streamline the repayment process by making one payment to one lender each month.
You can structure a debt consolidation loan in a number of ways. If you have a good credit score, are up to date on your payments, and don’t have a large amount of debt, you may be able to get a personal loan to consolidate your debts. The advantage of getting a personal loan is that it’s an unsecured loan, meaning that the bank will lend you the money on your signature alone and will require nothing as collateral. The downside of trying to obtain a personal loan is that the banks are generally very picky about whom they’ll lend money to on just a signature, so qualifying can be difficult.
Another way to consolidate your debt is to use your home as collateral by refinancing your mortgage and taking extra cash out or by taking a second mortgage and tapping into the excess equity in your home. Both loan options, however, do require a significant amount of equity in your home to qualify.
The downside of using the equity in your home to pay off your debt is that you’re increasing the amount you owe on your home and therefore the payment as well. If you’re ever in a position where you cannot make the larger payment, you could be at risk of losing your home to foreclosure. In addition, if you decide to recast your mortgage and take some cash out to pay off your debt, the cost could be very high. These types of loans can have closing costs that can run into the thousands of dollars. You’ll need to pay these costs upfront or roll them into the balance of your loan. Either way, this can be very expensive.
Option three: Credit counseling
Another option you have to consolidate your debt is to seek help from a credit-counseling agency. Credit-counseling agencies help consumers come up with a plan to pay off their debt in the shortest period of time and at the lowest interest rate. This is usually called a debt management plan or a DMP. The credit counselor that you work with will contact all your creditors and attempt to lower your interest rates and get any fees or penalties erased as well. Then, he or she will develop a plan for you to make one payment to the credit counselor who’ll then make payments to your creditors for you every month.
The cost of credit counseling depends on what the credit counseling agency charges you for its services. You should be smart about this and shop around to get the lowest fee. Beware though, as many credit-counseling agencies out there don’t have the best interests of the consumer in mind. Be especially cautious with agencies claiming affiliation with any religion or other type of group. Check to see if the agency you’re looking to work with is a non-profit credit counseling organization that belongs to the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). These associations only allow legitimate credit-counseling agencies to join.
One of the downsides of utilizing a credit-counseling agency is the impact it’ll have on your credit score and your access to credit in general. Lenders will know you’re working with a credit-counseling agency and will most likely close your accounts to keep you from accumulating any more debt. In addition, this will be reported to the credit bureaus who’ll then note it on your credit report. This will lower your overall credit score. Since your debt management plan could take years to complete, your credit could suffer for quite some time.
Option four: Debt settlement
Debt settlement is a way for you to settle your debts with your creditors once and for all. Debt settlement companies such as National Debt Relief negotiate with your creditors to reach a full and final settlement for, usually, much less than what you currently owe.
They achieve this by having you cease all payments to your creditors and instead start making payments into an escrow account in your name. Once you’ve accumulated a good amount of money, the debt relief company will use that to negotiate a reduced, lump sum settlement with one of your creditors. This process repeats itself until all your debts are gone.
Debt settlement companies do charge a fee for their service, and this fee can vary from agency to agency, so be sure to ask the companies you’re considering about their costs. In addition, be aware that debt settlement will damage your credit. However, while the damage could be significant, it’s a far better option than bankruptcy, which would have severe credit impacts for many years to come.
Which option is right for you?
While all these options can help you get debt free, the right option for you depends on your individual circumstances. In addition, you should consider a number of things before making a decision, such as how you accumulated your debt in the first place. If your debt problem was due to an isolated event such as an illness or the loss of a job, then it’s unlikely that you’ll find yourself back in the same situation in the future after you’ve paid off your debt. This would make borrowing money make more sense.
However, if your debt has accumulated through irresponsibility with money, you should perhaps explore the other possibilities, which will force you to stop spending and get your problem under control.
Whatever your decision, working to get debt free is something everyone should do. Explore all your options and get started as soon as possible so you can get back on the path to financial security.
