Getting out From Under Too Much Debt

Credit Debt Doesn’t Have to be Permanent

Sep 18, 2009 Mark Dennis

A little creativity and perseverance is all it takes to achieve debt relief and avoid those debt collection calls.

Many people suffer from the effects of carrying too much personal debt. Often, the first warning sign of too much credit debt is an overdrawn bank account or perhaps a telephone call from a debt collection company. As disheartening as these events can be, it is important to maintain a sense of perspective. Most debt problems didn’t occur overnight, and it will take time to resolve them. The key is to develop a debt relief plan to get those personal finances back on track.

Types of Debt

Personal debt takes on many forms. Some debt can be considered necessary, such as loans to purchase homes and automobiles or to pay for a college education. Other debt, such as credit cards and personal loans, is more general and typically is linked to more than one purchase. In a manner of speaking, some debt may be considered "good," while other types of debt are regarded as "bad."

Good Debt vs Bad Debt

Not all debt is bad. Generally, temporary debt used to purchase something that has little investment risk and which appreciates in value, such as a home, can be an acceptable form of debt. Student loans, which can help increase earning power by qualifying for better paying careers, may also be a form of “good” debt. Ultimately, even these debts will need to be paid.

On the other hand, carrying balances on credit cards for purchases of consumables, such as food, gasoline, or vacations, is not recommended. Unlike a home or automobile purchase, these items generally cannot be resold to generate cash to help alleviate the initial debt. It is best to use cash for these purchases or to pay off the credit card balance in full each month if purchased on credit. Heavy reliance on credit cards and carrying long-term balances on them is generally where most people get into trouble with seemingly insurmountable credit debt balances.

Debt Consolidation

A debt consolidation loan that rolls all credit card and consumer loan debt into a single loan with one payment may seem like an easy way to stop the debt monster dead in its tracks. However, this approach is not without its pitfalls. Unless the behavior of using credit cards and borrowing money stops, the debt consolidation loan only adds to the growing pile of consumer debt. For many people, a better approach is to abandon the use of credit altogether for a while, and concentrate on paying off each loan or credit card in a disciplined manner.

Debt Management

If the first step along the road to debt relief is admitting that a problem exists, the next immediate step is to commit to using cash only. This cash-only approach includes checks and debit cards, but no more credit card charges! If the cash is not in the account, the money can’t be spent.

Once all credit card use comes to a complete halt, the next part of the debt relief plan is to pay off all existing credit cards and consumer loans. The idea is to continue making minimum payments on all outstanding loans, except for the loan or credit card with the highest interest rate. All available discretionary income from the monthly budget goes toward paying down this loan first, because the high interest rate makes this one the most costly to keep.

When the first loan is paid in full, the next loan with the highest interest rate becomes the primary loan to pay each month. As each loan is paid off, the big payment from the recently paid-off loan is combined with the minimum monthly payment for the next highest interest rate loan and so forth. Gradually, this primary loan payment gets larger and larger, accelerating the rate at which the consumer’s debt is paid off.

It may take two or three years to completely retire credit card and personal loan debt, but the financial freedom that comes with being debt-free is worth it. The result is much more than relief from a stack of bills in the mailbox. In addition to healthier credit score, being debt-free means more cash is available for saving and investment, as well as having cash on hand for emergencies. Perhaps the greatest reward is the sense of well-being that comes from taking another step toward financial independence.

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Handling Credit Debt