Managing debts can become tricky but there are a number of ways to get your debt reduced and/or make payments more affordable.
There are a number of formal debt solutions as well as informal methods that you can utilise in order to make your debt more manageable.
In this post, I’ll be describing these methods, discussing how they work and helping you figure out which one would be right for you.
Balance Transfers and Credit Card Debt
Credit card debt is one of the most common types of unsecured debts.
It’s very easy to slip into credit card debt since the urge to buy different items using your credit card can be quite alluring.
If you don’t keep a constant check on your credit card balance, it can quickly spiral out of control. Not to mention the fact that interest rates on credit cards are extremely high.
I usually advise people to only use their credit cards for items they can afford with cash as well. It’s a good way of keeping your finances in check.
However, if you’ve already accrued credit card debt, there are a couple of things you can try out to get it reduced.
The first step is giving a call to your credit card company. Contact them and inform them of your financial situation. Be clear about the fact that you can provide documentation and proof for your financial situation if it’s needed. This proof could be in the form of wage slips, bank account statements, etc.
As a result of your call, your provider may try to help you. This could be in the form of a payment break or it could be in the form of a lower interest rate.
Lowering your interest rate just by one or two points can save you a huge amount of money depending on what your outstanding balance is.
One more thing you can try out with your credit card is transferring your balance. The first thing you’ll have to do is get a balance transfer credit card with a lower (or 0%) interest rate.
Once you’ve secured your credit card, transfer the outstanding balance of your current credit card onto the 0% credit card. By lowering the amount of money you pay as interest, you effectively lower the amount of money you have to pay back overall.
It’s a highly effective way of reducing your debt.
It’s important when you’re looking for a card with a 0% introductory interest rate that you don’t take a ‘scattergun’ approach. What I mean by that is that you should look at all the different credit cards available in the market, choose the best one for yourself and then only apply for that one.
Do not apply for several different cards at once as this can negatively impact your credit rating. This happens because when you open many different new accounts, you will effectively lower the average age of all of your credit accounts.
Thus, it’s always a good idea to only apply for a single card at a time.
However, if you’re suffering from debt, there’s a chance that your credit score is quite low and you may not get approved for a 0% credit card. In cases like that, you can look towards a close friend or a relative whom you trust that may have such a card or may be able to apply and get one.
You can then transfer your balance onto their card and pay off your debts that way.
Lastly, when it comes to balance transfer between credit cards, ensure that you’re informed about any transfer fees they may have.
Debt Management Plan
A debt management plan is an informal debt solution that you can take advantage of.
It’s an agreement between you and your creditors which states that you will make reduced payments towards your debts. These monthly payments are to be made until the entirety of your debt has been paid off in full.
You may be wondering why I’m mentioning this solution here when you have to pay your debt in full as part of it.
Well, when you enter into a debt management plan, there’s a chance that your creditor(s) may freeze interest and charges on your payments. Please note that they are not obligated to do this but there’s a chance it might happen.
If you can get your creditor(s) to freeze interest on your payments as part of your debt management plan, you can effectively lower the amount of money you have to pay overall by a lot.
Furthermore, DMPs are also great because they’re extremely flexible. If somewhere down the line, your financial circumstances worsen or if you run into some emergency expenses, you will be able to get your DMP payments lowered in order to accommodate for it.
You can get a DMP set up on your own or you can hire a debt management company to set it up for you. They would negotiate with your creditor(s) on your behalf.
Debt Consolidation Loan
If you have a lot of personal loans and/or if you’re finding it hard to manage making a monthly payment to many different people who you money to, then a debt consolidation loan is definitely something worth considering.
Make sure to look for a loan that has a lower rate of interest than the debt repayments you’re currently making.
A debt consolidation loan would involve you taking out a big loan in order to pay off all of the other debts you have.
The lower rate of interest would mean that you have effectively reduced the amount of money you have to pay back and it would also mean that you now only need to worry about a single creditor.
Reducing Debts and Credit Scores
Not being able to address your debts effectively can mean your credit rating is going to get lowered by a lot.
Opting for a debt solution also typically results in the lowering of your credit rating.
At the same time, if you keep making your payments on time and in full, this will be reflected in your credit file and your rating will start to rise.
Individuals that have good credit scores aren’t typically individuals that have never taken out a loan but rather, they have taken out loans and have always made their repayments on time.
Your credit file is a record of how well you handle your finances and as long as you pay back your money on time, you shouldn’t have too much to worry about.
Information about your credit cards is logged in credit reports as well as information about any loans that you take out.
If you opt for a debt consolidation loan, for example, this will get logged within your credit file and as a result, your credit rating will fall.
However, if you keep making your regular payments on time and in full, then this will also get reflected in your credit report and as a result of this, your credit rating will gradually start to rise.
As long as you practice financial discipline and ensure punctuality in all of your payments, your credit rating will be back to its former glory in no time.
Sometimes, the best way of managing your debts is to use methods to reduce the amount of money you owe.
Just make sure you’re aware of all the consequences of whatever method you’re using and you’ll be debt-free in no time.
For more information on reducing your debts, feel free to contact me.