How Taking Out More Credit Could Help You Get Out of Debt
More and more Americans are having problems paying off their credit card debt. It is easy to obtain and use credit cars in our daily lives, but when the bills come in every month, the total amount may be difficult to pay. The more the person uses their cards, the harder it is to pay even the minimum payment on every card every month. Then, an emergency like a job layoff or a medical problem complicates the picture, and things get even worse.
Finding the Right Debt Relief Program
If the debt is mainly from credit cards, the first step might be to contact each credit card company and ask about their credit card hardship programs. It may not be easy to get approved for these programs, but it is worth trying because you could get payments and interest lowered along with a reduction of penalties and fees. You need to meet certain conditions for this kind of help.
You can also seek a loan to pay off debt. Under the right conditions, this solution can be helpful. If you qualify for a debt consolidation loan, the loan is used to pay off your other debts. These will be the unsecured financial liabilities, not the car or house payments. Now, instead of multiple credit card company payments, there will be only one payment. This type of loan is a good solution if it covers all the unsecured debt and if the single payment is manageable.
If the monthly payment is more than the combination of payments were, it will not solve the debt problem. If the interest and fees are too high, this loan may actually make matters worse. Finally, if the person does not stop using their credit cards, they will pile up new debt on top of the loan payment.
Personal Loans can be an option if the person with credit card debt does the research to find a loan with helpful terms and fees. You must add up all the minimum payments due each month and compare that figure with the loan payment that is proposed. Then make a list of all the credit card interest rates and compare them to the loan interest rate that is quoted. Next, read the loan contract’s fine print and find all the fees that will be charged.
Ask the loan officer to provide an estimate of the loan amount, fees, total interest, and final payout figure. Then you can ask each credit card company for their total payout figures. Compare the total from the credit cards and the loan amount. Will you even qualify for a loan? A person in debt might already have a low credit score.
Refinancing Your House
Refinancing Your House to pay off credit card debt is another loan solution. This option only works if you own your own home and have a large enough amount of equity to help you. With today’s low-interest rates this loan may help you in more ways than just paying off your credit card debts. Lower interest rates than you presently have might lower your house payment in addition to paying off credit card debts.
But you must be careful to use a reputable refinance company that will reduce the interest rate and not charge unreasonable fees for the loan. Home loans are not easy to qualify for. A high income-to-debt ratio will sink your loan chances.
Debt Settlement and Debt Management
Debt settlement and debt management programs help some people. These programs involve having a third-party act as an advocate. With debt management, a structured payment plan is developed to pay off the whole debt in time. Debt settlement programs still have the third party as an advocate, but they are negotiating a partial payment of debts. Your creditors agree to accept a negotiated amount if you agree to pay that amount
These advocates do not work for free and the person seeking relief from debt will need to consider the fees they will be paying. The creditors can refuse to lower interest or payment amounts and they can refuse to negotiate the amount of debt that will be paid. Even if they come down a small amount, it may not be enough to help. With both programs, there is the possibility that the person will end up in worse financial condition than before.
Credit Counseling focuses on helping people develop better budgeting and spending habits. The counselor could also recommend one of the above or a combination of the above strategies. This plan asks you to change your spending habits, learn to follow a budget, and make financial ends meet each month. But, if you have already done what you can in those areas and just don’t have enough money coming in, this solution will not help.
Finally, people with significant credit card debt and no money coming in to pay what is owed can consider bankruptcy. A person can file for chapter 13 bankruptcy which gives you an opportunity to pay off part of the manageable commitments and restructure debt. Or you can go for chapter 7 bankruptcy and have all credit card and other eligible debt obligations taken away. Your obligation to pay these debts is ended.
But this must be a last resort. It hurts your credit rating for seven years or longer. The debtors lose the money you owe them. You will not be using credit cards for a while since all the ones you owed money on will be cancelled and your credit score will be too low to qualify for new ones. It may be difficult to be approved for a home loan, a car loan, or other big purchases.
In the end, no matter what debt solution you choose to try, you must stop charging and spending too much to get out of debt and stay out of debt. Continuing to use charge cards will only rack up new debts. The only end solution is to change your spending habits to match your income. If you get laid off from a job or have another financial or medical emergency, you must lower your spending, even if it hurts, to match your new financial situation.