How To Get Out Of Debt And Not Hurt Your Credit

Consumer debt can be eliminated without hurting your credit, it requires commitment and personal sacrifice.

How to Get Out of Debt and not Hurt your Credit

Many Americans work very hard at good paying jobs, but can never seem to eliminate their debt. The debt seems to continue to grow each month, and consumes all of the monthly income of the middle class worker. People who are experiencing debt problems are most often faced with large amount of consumer debt. High monthly automobile payments and high credit card balances are typically the greatest contributors to consumer debt. It is often possible to relieve your consumer debt without hurting your credit, but the process can require a great deal of commitment and personal sacrifice.

The first step toward beginning to eliminate debt is to make a personal commitment to be in control of your spending. This requires making a budget. Decide how much money you are required to spend for basic necessities each month, and decide how much you are going to apply toward your debt. The budget should consist of only those two items. If you are seriously attempting to eliminate a large amount of consumer debt, you do not need to budget for entertainment, restaurant meals, alcohol, or vacations. The debt should take precedent over all other aspects of monthly spending except for personal necessities. Be honest with yourself in deciding the personal necessities that you list in your budget. Many of the items you currently purchase are probably not truly necessary.

Maintain that budget that you create and apply the extra money toward the debt each month. Send the money to your creditors at the beginning of the month instead of at the end. Do not wait to see if the budget will work or to see if you will need extra money during the month. Send the money at the beginning and commit yourself to live on the rest. Remember that you have already created a budget that will meet your basic necessities.

If your debt is such that you cannot reduce it drastically simply by keeping a tight budget and sending the leftover money to creditors, you might consider selling some of your possessions. Many people who finance 100% of new automobiles are surprised to find that they are upside down on the vehicle for the entire term of the loan. This means that the owner cannot sell the car for what he owes on it. If you have a car loan that you are upside down on, and you want to eliminate your debt more quickly, attempt to sell the car. Selling the car may mean that you have to find extra money to pay off your original loan, or continue making loan payments on an automobile that you are not driving. Selling the car will allow you to eliminate the monthly note more quickly, however. If you decide to sell your car, do not purchase another new car. Do not even purchase a nice car. Purchase a small car that will achieve the purpose of getting you where you need to go until your debt is eliminated. If you must take a loan to finance the replacement car, the loan will be much smaller and will likely be paid more quickly. Apply the difference in the original car note and the new car note to other bills.

If you have created and maintained a budget and replaced your new car with an older car and you still do not feel that you have a handle on your debt, consider bargaining with your creditors. Many credit cards companies offer to accept your balance at no interest for the first several months of new service. I would not recommend transferring balances unless you are absolutely certain that you will pay the balance off during the no interest period. If you do pay the balance within the prescribed time, the company may add interest on the entire balance owed at the end of the time period. For example, if you transfer $10,000 at no interest for six months and pay the balance down to $2,000 at the end of six months, the credit card company may charge you interest for the entire $10,000. I would recommend using these offers to negotiate with your current creditors. Many credit card companies will lower your interest rate if you simply call and ask them to. Speak with a service representative and tell them that you are considering transferring their balance to another company, and they will likely offer you a rate much lower that what you are currently paying. Some credit card companies may even negotiate a settlement with you for a portion of the balance. If you call the credit card company and tell them that you are considering filing for bankruptcy and ask them if they would be willing to settle your account for a lump sum cash payment, you may be able to eliminate them as a creditor for a percentage of the amount owed. The credit card companies will often take a lump sum of cash rather than be faced with the time, expense, and risk associated a bankruptcy claim.

Another method of eliminating bad consumer debt without hurting your credit is taking a second mortgage on your home or a home equity line of credit. Refinancing your home will essentially allow you to roll your current debt into your monthly house payment. The interest on the second mortgage will typically be an income tax deduction and will almost always be lower than interest on credit cards and car loans. Refinancing your home to eliminate your debt can be detrimental, however, if you do not fix the problem before you refinance. The central problem that often leads to large amounts of debt is not the debt itself, but the spending habits of the consumer. Should you opt to refinance your home to clear your consumer debt, your house payment will increase. This increased house payment could make it necessary for you to cut spending in other places to maintain your budget. If you choose not to cut spending, and instead use your newly cleared credit cards to maintain your comfortable lifestyle, you will likely accumulate another large amount of consumer debt very quickly. Therefore, you should use refinancing as a last resort attempt to eliminate your debt. You should first readjust your lifestyle and make a commitment to not spend money that you do not have. If this doesn't completely eliminate the debt, get rid of all of your credit cards, and refinance your home to eliminate the debt. Once your debt is cleared, commit yourself to spend only the amount of money that you make each month, or perhaps save a portion of your income.

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