Having
debt problems can be a huge burden. You may be considering
bankruptcy as the only solution. Bankruptcy, however,
leaves a long-lasting mark on your credit report, and
consolidating your cashflow problems require you to
pay back 100% or more of what you owe in interest. A
well thought out debt management program is the alternative
that looks out for your best interests and can help
you to master control of your finances.
As
you are currently experiencing difficulties paying
your debts, your credit rating may have already recorded
an adverse finding against you by one of your creditors.
However, by joining a debt management programme we
ensure a regular monthly payment is made to each of
your creditors.
How can you tell when you are under financial stress-getting
in over your head? If bill collectors are calling,
you are in financial trouble. But what if you are
simply having difficulty stretching your paycheck
to pay monthly bills? Answering yes to any one of
the following questions could indicate financial stress:
Do
you routinely spend more than you earn?
Are you forced to make day-to-day purchases on credit?
Are you able to make only the minimum payments on
monthly credit card debts?
If you lost your job, would you have difficulty paying
next month's bills?
Three basic steps to get out of financial trouble
1.
Fixing the Current Situation
To fix your climbing debt, you have to make more money
or cut expenses. Because making more money is not
an option for most people, you must reduce your current
expenses. Consider these steps:
Reduce
expenses Eliminate any unnecessary spending, such
as eating out and purchasing expensive entertainment.
Clip coupons, purchase generic products at the supermarket,
and avoid impulse purchases. Above all, stop using
credit cards.
Consolidate debt A home equity loan, mortgage refinancing,
or short-term bank loan can help you pay off a lot
of debt at once. You can consolidate all of your short-term
debts (credit cards, personal loans, automobile loans)
into one loan. The advantage to consolidation is that
you have only one loan to repay and the finance charges
are specific (except for home equity lines of credit)
and will not change. Home equity rates substantially
lower than credit card interest rates, making monthly
payments lower.
Refinance
your mortgage Homeowners can consolidate their short-term
debts by refinancing their homes. A lower mortgage
rate and a rising value of your house means you can
take out cash when you refinance and pay off your
bills. The lower mortgage rate also lowers your monthly
payments substantially. Refinancing does spread the
payment of the short-term debt over a longer period
of time, but with a lower rate, it may well be worth
it.
The
problem with consolidating debt into one loan? You
may feel free to start spending more on credit cards.
If you are using your home as collateral, be clear
on how you are going to change your spending habits.
The only way to stay out of debt is to control it.
Seek information While most active service members
will not qualify for public assistance, in certain
situations they may receive unemployment compensation,
Medicaid, Social Security, food stamps, and low-income
energy assistance. Other sources may be churches or
community groups.
2. Fix Your Credit
If you have creditors demanding payments, deal with
them realistically. Contact your creditors and let
them know you're having difficulty making your payments.
If you have had a temporary financial setback, explain
it. Try to work out a payment schedule with your creditors.
Most are willing to work with you and will appreciate
your honesty, but they will want regular payments.
The
Fair Debt Collection Practices Law prohibits a debt
collector from telling anyone but your attorney how
much you owe, harassing or threatening you, using
false statements, giving false information about you
to anyone, and misrepresenting the legal status of
your debts. Under federal debt-collection laws, creditors
cannot seize most government assistance and can only
garnish a portion of wages to collect debts.
For
more information, see related topics: Credit Reports,
Bankruptcy
3.
Stay Out of Trouble
The most important aspect is to know what financial
condition you are in now and how you got that way.
Then, as you make changes, you should keep going back
to see how things are progressing. One of the most
important tools for doing this is creating and following
a set monthly budget.
Getting
a Handle on Credit Cards
Re-establishing good credit starts by paying off current
debt. Close unused credit cards and voluntarily lower
your credit line to limit the total debt you can get
into. As you pay off certain debts, close the accounts
and make sure each company sends you a confirmation.
Ideally,
you should carry one or two bank credit cards (according
to www.carddata.com, the average household in America
has 6.3 credit cards) and a total of no more than
three cards. When creditors look at your credit file,
they want to see that you can handle more than one
credit account at a time. You can do that by using
a card and paying off the amount in full each month.
Creditors
frown on applicants who have many open credit lines.
Keeping cards open that you don't use may lead to
denied credit. Rejected credit applications are kept
in your file. Too many don't give a good picture of
you.
A
credit report that shows voluntarily closed accounts
looks a lot better to your creditors than those that
have been involuntarily closed. Review your credit
report to verify that all of your actions are being
processed.
Using
Credit to Re-establish Credit
Regular payments on credit cards creates a strong
credit history. If you have a credit card, use it
every month—make small purchases and pay them off
to avoid interest charges. If you don't have a credit
card, apply for one. If your application is rejected,
try to find a cosigner or apply for a secured card—covered
by pre-payments into a savings account.
It
takes about two years to rebuild your credit so that
you won't be turned down for a major credit card or
loan. Even people who have declared bankruptcy can
generally apply for a mortgage with two years of re-established
credit. Approval depends on the amount of re-established
credit as compared to the severity of the credit delinquencies.
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