Freedom From Debt: When to Choose a Debt Consolidation Company?

Freedom From Debt: When to Choose a Debt Consolidation Company?

Statistics show that average American household has credit card debt of more than $16k. Figures jump when we include mortgage payments and car loans. It is okay to take a loan however we must learn to manage our payment structure and debt.

In this fast-paced world, you cannot avoid using credit cards. You need to live a good life; you need a house and a car. However, having these facilities does not mean you have to endure financial hardships. You can successfully execute your financial statements to enjoy amenities of life while staying debt free forever. Here is how you do it.

1.Figure Out How Much You Owe

Sadly, people who are in debt, do not have an idea about how much money they owe to the bank. Without looking at the entire amount, they just send the minimum amount while never thinking of a debt repayment plan.

Your first step is to know the amount you pay. It is a stressful experience to know these expenses, but that is how we get started in the financial game.

2.What Types of Debts Do You Have?

Look at the credit mix. What is it?

Most common types of loans are mortgage, car loan, student loan and credit card debt.

You do not have to worry about mortgage payments unless you are behind on your plan. Vehicle loans are also short-term plan, so you do not have to worry much about it. When we look at the financial statements, you will see that student debt and credit card loans create the most trouble. Your student loan can have an interest of 6%-8%; mortgage payments cost 4%-5%, car payments have a rate of <5% and credit card debt exceeds all limits by having the compound interest rate of any limit.

3. Decide Which Debt Are You Going to Pay First?

Credit cards come first. Student loan gets the second position. So, let’s say, you have two credit cards charging an interest rate of 5% and 18%. Your job is to pay off the loan on the second card before you think of paying any other loan.

Often, you can execute this step by automating a portion of your income to the credit card company. You do not have to send thousands of dollars. Start by sending an extra $100 to your credit company. Improvements will be slow but eventually, they will create momentum, and you will be debt-free without having to make the extra effort.

4. Earn on Side

Most people underestimate the value of an extra $500. Are you a professional person? Do you have a 9-5 job? Then you can create a way to earn an $500 as the side income.

To become debt free, you just need this extra monthly income, and the debt will take care of itself. Just imagine, paying an extra $500 to your credit company each month. You are sending it after paying the minimum payment. In less than a year, the interest rate on your debt will drop by several points. It is much easier to deal with a 3% interest compared to 18% rate.

5. Contact a Debt Consolidation Company

Debt consolidation helps you with the steps mentioned above. The officer will look at your financial statements, and he will create a “minimum living budget” for you. Depending on your income, more than 50% of your monthly payment can go towards debt payment, and you must live within a restricted budget.

The problem with this process is that you cannot live below a lifestyle level and debt consolidation costs money.  Consolidation companies charge you a monthly fee for using your services which I believe is not the right decision.

Second, most debt consolidation companies claim to reduce your credit card interest rates. They often do this by not paying your credit card loan for months. Then they call the company to negotiate the terms. For the same reason, debt consolidation severely affects your credit score.

It is not recommended to go through debt consolidation unless you cannot solve the problem yourself. In many occasions, you can handle your financial situation yourself without consolidating your debt. However, if you are in serious debt and want to know your options, then a debt consolidation company is the right choice. Opt for a free consultation and then decide whether you would like to pay for the program.

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