You haven’t answered the phone for months, fearing it will be another collection agency calling. Bills are arriving so quickly you don’t bother opening them anymore.
If your debt is getting out of control, you need to develop a strategy for paying it off and get yourself back on track to financial solvency and help you sleep at night.
Your strategy may include contacting your creditors and rescheduling the payment of your debts. You may also be able to replace high-interest-rate debts, such as credit card balances, with a home equity line of credit or personal loan at a lower interest rate. Consolidating some of your debts also allows you to replace several monthly bills with a single loan payment.
Consider taking action on your debt load if any of the following statements applies to you:
- You can only afford to make minimum payments on your credit card bills. Most of that payment is interest. It may take you decades to pay for your purchases with this approach.
- You pay off one card or creditor by borrowing from, or taking a cash advance against, another. Borrowing from Peter to pay Paul will only create more debt in the end. And cash advances are much more expensive than other credit card debt.
- You are maxed out -- or over the limit -- on more than one credit card. Most companies penalize you with additional fees if you go over your credit limit.
- You never pay off your entire credit card debt. You strategize about who gets paid each month.
- You put day-to-day expenses on credit. You are charging necessities such as your groceries and gas.
- You have to earmark more and more of your income for debt repayment. Professionals suggest that you should be spending no more than 20 percent of your monthly income on repaying debts (not counting your mortgage or rent payments). If, for example, you spend $1,000 per month on debt repayment and your monthly income is $3,000, you’re spending more than 33 percent of your income on debt repayment. That’s way too much.
- You often pay your bills late. Everyone comes up short occasionally. But you have to triage your bills every month.
- You have insufficient emergency reserves to cover a financial setback. You live paycheck to paycheck, and your savings have long since disappeared.
- You find yourself fumbling to find a credit card that works and post-dating all your checks. You never know which card will be declined or which check will bounce.
- You apply for new credit cards with low introductory rates, and transfer your debts to them. This can be a short-term solution, but eventually, the debt will catch up to you. Plus there may be a fee for transferring your debts. And after the introductory period, the interest rates can skyrocket.
- Bill collectors are calling.
- You don’t know -- and don’t want to know -- how much money you owe. You avoid the mailman. As for actually opening the bills – forget it.
- You lie about your debts. You may still be keeping the truth from your spouse.
If any of these statements applies to you, it’s time to take control now. The first thing you should do is throw your credit cards away, stop spending on anything but essentials and devote all your disposable income to paying down debt.
- Getting a copy of your credit report, or even consider a credit monitoring service. This will give you a concise overview of your total debt and help you prioritize the steps you will take to reduce it.
- Approaching your creditors on a one-on-one basis to ask if you can reduce your payments. This may mean rescheduling the debts, or refinancing them over a longer time period, which will increase the total interest you pay and the time before you are debt-free.
- Applying for a home equity loan or a personal loan to replace high-interest-rate debts with one loan at a lower rate
- Making a budget, that distinguishes your needs from your wants and cutting out spending on extras and luxury items.
- Consulting a credit counseling service. It may come up with a solution that has not occurred to you.
- Selling assets, such as a second car.