There’s one simple reason why the overwhelming majority of people get into debt. It’s because they spend more than they earn. Does this sound too simplistic? It might but it’s true. When you spend more than you earn your only option is to use credit to get by and using credit means creating debt. As you use more and more credit you create more and more debt until the day comes when you absolutely must do something about it or declare bankruptcy.
A debt consolidation loan can be very tempting
When many Americans have found themselves overburdened by debt they’ve turned to debt consolidation loans because they see them as the only solution. And getting a debt consolidation loan can be very tempting. You get the loan and immediately use its proceeds to pay off all of your debts simultaneously. All those creditors or even debt collectors that have been hounding you go away instantly. Your brand new loan will likely have a much lower interest rate than your current debts and a dramatically lower monthly payment.
The big mistake
There are two problems with this. The first is that a debt consolidation loan does nothing to reduce your debts. You may feel good about what you’ve done in the sense that your debts have become more manageable but you will have the same amount of debt as before. All you’ve really done is move your debt from one set of creditors to a new one. The second is not realizing that there are other options for taking control of your debts that could be better than getting a loan.
The options
- Create a budget
- Pay off one card at a time
- Contact a credit-counseling agency
- Negotiate with your creditors
- Contract with a debt settlement company
- Declare bankruptcy
Why create a budget?
Creating a budget can sound nasty, time-consuming and onerous. But it doesn’t have to be. There are numerous smart phone apps now available that make tracking expenses and making a budget about as complicated as falling off a log. The important thing about a budget is that it can help you learn where you could cut your spending and use the money you free up to pay down your debts. Most people who’ve gone through the exercise of tracking their expenses, categorizing them and then finding “leakages,” (places where they are spending money unnecessarily) have learned that they could cut their spending by $300, $400 or more a month. If you were able to do this and use that money to pay down your debts, you might be surprised at how quickly you could become debt free.
Pay off one card at a time
This may also sound too simplistic but one way to get out of debt is to do everything you can to pay off one of your debts, which will free up money you could then use to pay off a second debt. You could accelerate this process by using the strategy called snowballing your debts. We have seen people who have been able to pay off as much as $50,000 in debt in just a couple of years using this strategy.
Get with a credit counseling agency
Credit counseling can be an excellent way to get debts under control and ultimately paid off. Plus, a good credit-counseling agency will review all of your finances, help you understand where you’re making mistakes and work with you to develop a budget. The best of these agencies are nonprofits and charge practically nothing for their services. The credit counselor you will be assigned will probably even work with your creditors to get your interest rates reduced.
Negotiate with your creditors
Believe it or not you can negotiate with many lenders. This can be especially true with credit card companies. It may take some time and effort to find the right person to negotiate with but when you do you may be able to get a reduction in your interest rate or even a two or three month timeout during which you would not be required to make any payments at all – which would give you time to get your debts under control.
Settle your debts
The truth is you can actually do debt settlement yourself. What it amounts to is contacting all of your creditors and attempting to negotiate settlements for much less than you owe – with the promise that you will immediately pay them. You will need to be a good negotiator to pull this off and, of course, will need to have the cash on hand to pay your settlements. For more information about negotiating with with your creditors, watch his video.
Hire a debt settlement company
These are some good reasons why many people choose to contract with a debt settlement company to negotiate for them. For one thing, most people do not have enough cash on hand to pay for their settlements. Second, debt settlement companies generally have experienced debt counselors that have good relationships with the credit card and loan companies and can negotiate better settlements than individuals could do themselves.
Declare bankruptcy
If you’ve reached a point with your debts where you just can’t see any way out and none of these options seem doable, you could declare bankruptcy. If you were to file for a chapter 7 bankruptcy you could get most of your unsecured debts discharged such as credit card debts, medical bills and personal loans. But you should do your research and understand both the pros and cons before you file. There are some very serious consequences to a chapter 7 bankruptcy and it’s important to understand what they are.