Benefits with County of San Diego

General Debt Management Techniques

Very few people are lucky enough to be living debt free. Not everyone can afford to pay for a college education, buy a house, or even purchase a new car outright. Typically, these large purchases rely on the use of credit, which creates debt for the borrower. The key is to manage your debt so that it does not get out of control.

When taking out personal debt for any reason, it is important to understand the terms of the agreement. When you use credit to purchase something, you pay back the entire amount owed plus interest (a fee paid for the use of the funds you borrowed to make the purchase). It is very important to note what the interest rate will be on your payments and how long you have to pay off the debt. Interest compounds (adds up) over time; so the longer you take to pay off a debt, the more you end up paying for your original purchase. Although a longer term loan lowers monthly payments, in the long run you will end up paying a much higher total cost.

Credit cards can be a great way to build your credit, but they can also lead to debt if not managed properly. You should never miss a credit card payment. Trying to pay off your credit cards each month is ideal. Missed payments are the most damaging to your credit score. Additionally, you should strive to limit the amount of credit you use. Ideally you would want to make use of less than 30% of your available credit at any given time. The ratio of credit available to credit in use can impact your credit score and your ability to open new lines of credit.

Whether or not you are struggling with debt, it is important to keep track of your debt situation. First, determine how much debt you owe and to whom you owe that debt. Next, you need to determine if your debt is secured (tied to an asset, as a car loan is tied to your car or a mortgage would be tied to your house) or unsecured (not tied to a particular asset; this would include most credit card debt, medical bills, or signature loans). Once you are aware of the amount and type of debt you owe, you can begin to plan the best way to pay off those debts.

Developing and maintaining a budget is the best way to manage your debt. A number of budgeting tools are available online to assist you with creating a budget. You would start by totaling your income from all sources. Next, you would list any fixed expenses (bills that are the same each month, such as rent or mortgage payments, car payments, or insurance premiums) and any expenses that may vary, like gas, groceries, or entertainment. Tracking your expenses will help you to identify your spending patterns. Once you identify where your money is going, you will have a better idea of what bills you need to prioritize and where you need to cut back.

The best thing to do is to stop using credit cards and live on a cash-only basis. This will keep you from overspending and adding to your debt. You may need to adjust your spending habits to free up money to pay toward debts by cutting back on nonessentials in your budget. You may also wish to consider finding additional work or selling nonessential items to increase your income.

Once you have a budget in place you may want to focus on paying off the debt with the smallest balances first. By taking care of these more manageable balances first, you can decrease the amount of debt you have quickly. You should also consider the option of paying off the debt with the highest interest rate first. If the interest rate is very high, taking longer to pay off this debt will lead to paying more than if you focused on paying off this debt first. Adding up how much you will end up paying on each debt can help with making the decision on which debts to pay more toward.

A budget alone may not be enough to bring your debt under control. If you are having trouble making payments on your debts, contact your creditors right away. Some creditors will offer options for paying down debt or may assist you with creating a payment plan that will work with your budget. Alternatively, they may offer to reduce your interest rate for a period of time. Creditors are often more willing to work with you the earlier you contact them. If you miss payments, your debt may be sent to a collection agency. Once this happens it is harder to negotiate an affordable payment plan.

If you are unable to negotiate a suitable payment plan with your creditors, you may wish to seek professional help. A certified credit counselor can review your finances with you and offer advice on managing your money. The counselor may recommend a debt management plan, or DMP, where you deposit money each month with a credit counseling organization. The DMP would use your deposits to pay your unsecured debts. It is important to ensure that you are able to make the required monthly deposits before entering into a DMP.

When looking for professional assistance it is important to be wary of any scams. Remember that not all debt settlement programs will deliver on their promises. There are risks associated with these programs. Many times clients drop out of these programs before settling their debts or may continue to receive calls from debt collectors.

Another route is a debt consolidation loan, a loan designed to help pay down debt. With a debt consolidation loan you would be making one payment instead of multiple payments to all of your creditors. As long as the interest rate on the debt consolidation loan is less than what you are currently paying on your debt, this can be a good option.

Often, the final resort is filing for bankruptcy. If you follow the bankruptcy rules, you receive a discharge (a court order stating you don't have to repay certain debts). However, a bankruptcy will remain on your credit report for 10 years. Having a bankruptcy on your credit report can make it difficult to open a new line of credit, purchase a home, or even get life insurance. There are two types of bankruptcy:

• Chapter 13—This allows someone with a steady income to keep property like a house or car. The court will approve a repayment plan that will allow you to use future income to pay off debts in 3-5 years. After making these payments, you receive a discharge of your debts.
• Chapter 7—This is a full bankruptcy. All assets that are not exempt will be liquidated (sold off to pay for debts). Exempt property may include your vehicle or work-related tools.

Because of the high cost and long-reaching effects of bankruptcy, it is important to try to manage your debt in other ways before bankruptcy becomes necessary. Making smart decisions regarding using credit and what you do with the debt you have can help you avoid needing to file for bankruptcy.

Resources

1. Money Management International. (n.d.). Choosing a debt consolidation loan. Retrieved May 30, 2015, from http://www.moneymanagement.org/
2. Money Management International. (n.d.). Personal debt management. Retrieved May 30, 2015, from http://www.moneymanagement.org/
3. Money Management International. (n.d.). Resolve to pay down debt. Retrieved May 30, 2015, from http://www.moneymanagement.org/
4. U.S. Federal Trade Commission. (2012, November). Coping with debt. Retrieved May 30, 2015, from https://www.consumer.ftc.gov/