Some Debt Relief Strategies
What is Bad Debt
Bad debt is paying interest on something that has no lasting value, pure and simple. For example, using a credit card to purchase a television and planning to pay it off in four or five months would be bad debt.
In the same way, purchasing a house with a thirty year loan is also bad debt. If you look at a loan chart you will see that it takes years (over fifteen) before you are paying more on the principle than on the interest. So unless you stay in the home for a very long time you will owe almost as much on the loan when you sell the house as when you bought it.
It’s for that reason that it is actually smarter to rent until you have a large amount of the home’s price saved up, and then get a ten or fifteen year loan. Renting a home or apartment for $600 or $800 a month (rental amounts vary according the area, of course) will allow you to save money a lot faster than having a $1,000 a month mortgage plus all the other expenses that come with owning a house (higher utilities, yard expense, repair bills, property tax, etc.).
What if You Have Bad Credit?
If you have bad credit and want to get a credit card, it’s a good idea to limit the number of inquiries to your credit report to help keep your score from dipping even further. To do that you need to research the credit cards and decide which cards you’ll have the best chance of obtaining before you fill out any applications.
Typically, cards for bad credit will carry much higher interest rates than the prime credit cards available on the market - but there are benefits associated with having a credit card despite the higher interest rates. But be careful of how much you put on the card each month and pay the card off when the bill comes.
Debt reduction credit card consolidation is offered by money lending firms who bail out the people neck-deep in debts. What makes debt consolidation appealing is that various companies offer a combination of several debt reduction and credit repairing plans which aim to completely obliterate a person’s existing debt.
Secured Debt Consolidation Loans
Debt consolidation loans may be classified into secured and unsecured loans. Secured loans are loans such as home equity loans. Secured loans are easier to get than other forms of borrowing because the loan is secured by tangible property.
Home equity loans are collateral loans, in which the loan is secured by a home’s equity. Although secured debt consolidation loans offer many benefits like large loan amount, longer repayment period and above all the low rate of interest, it still has one big disadvantage attached to it. That disadvantage is the collateral that could be taken from you if you fail to repay the loan. For instance, several missed payments could result in foreclosure of your home.
Unsecured Debt Consolidation Loans
There is no fear of the collateral being lost through non-repayment of the unsecured debt consolidation loan. Unsecured credit card debt consolidation requires a borrower to furnish proof of his sound income and financial standing, if any. The interest rates are usually higher than for a secured debt consolidation loan.
What to do if You Find Yourself Deep in Bad Debt
First, stop spending and reduce your monthly bills as much as possible. Do not buy any more items that are not absolutely necessary. Instead of purchasing $150 shoes for yourself or your child, purchase $15 shoes.
Second, start paying off the smallest debt first. Then, as you pay off each credit card or loan, use that money that had been going for that debt to start paying off the next smallest debt.
For example, if you have an $8,000 credit card debt and a $2,000 credit card debt, pay off the $2,000 debt first. Then use the money that had been going toward the $2,000 debt to pay off the $8,000 debt.
Of course, while you are putting every extra cent you have toward that lowest debt, you are paying the minimum amount due on the other debts. If your income is so low that you cannot afford to pay the minimum amounts on the debts, you definitely need some professional help from a trustworthy debt counselor.
Depending on the amount of debt it might take a number of years to pay every outstanding debt. But paying off the smallest debt first and then going to the next biggest works better than trying to pay off the largest debt first, or trying to pay them all off at the same time. So get started. The sooner you start the sooner you get out of debt.
Credit Card Debt Consolidation
If you have money in your pocket, you can spend only as much as you have, but there is no such limit when you are a credit card owner. Most people cannot resist the temptation of buying new cars, clothes, furniture, jewellery, etc., once the credit card is bouncing in their pockets. As a result, credit card debt is head and shoulders above all other debts and is acting as a constant drain on many families and individuals budget.
Once you find yourself caught in the web of credit card debt, effectively the only way out of that hazardous financial crunch to regain your footing is, opting for a credit card debt consolidation. Because of your negligence, first you bear the pain of paying a high interest for availing credit card services and then you pay a severe rate of interest for repaying the credit card debt consolidation.
Credit card debt consolidation will help you out in the following ways:
It will save you from the humiliation of turning bankrupt.
You will not face harassment at the hands of your creditor.
Instead of paying too many installments, you will be paying a fixed monthly installment.
The rate of interest you will be paying will be comparatively low.
Paying creditors on time will improve your credit rating.
It will lead you to a road of more healthy personal finances.
Availing a credit card debt consolidation is comparatively easy for homeowners, as they can take advantage of soaring property prices and can offer the same as security to obtain secured credit card debt consolidation loan. They shall have to pay a low rate of interest, because the lender is assured of his borrower’s repayment.
But no such safety net is available to people living in rented accommodations. They have no option but to go for unsecured credit card debt consolidation. Such a loan will also carry a high rate of interest. Adding to that, if you have a poor credit history, getting an unsecured credit card debt consolidation becomes really difficult, unless the borrower is ready to offer some kind of an asset (say a vehicle) as security.
No doubt, a credit card debt consolidation helps you in reducing your payment amount and sets you back on track, but too much of credit card debt may nullify the effect of this magical pill.