If you owe a lot of money to multiple creditors, it’s easy to feel your situation is hopeless. Yet while digging out of a mountain of debt is never easy, taking a systematic approach may help you make progress. These seven steps could be part of an effective action plan:
1. Conduct a personal inventory. Figuring out how and why you fell into debt can help you work your way out of it. But that requires a thorough examination of your personal spending and saving habits. In addition, you’ll need to determine the amount of funds you have at your disposal, including cash or cash-equivalent assets on hand and other investments that you might liquidate. Doing a complete accounting of your finances could help you build a solid foundation for a plan to reduce what you owe.
2. Cut back on credit card spending. It’s so simple to use a credit card—and all too easy to inflate account balances with a splurge at the mall or too many online purchases. If you can resist the impulse to buy the latest cool gadget or this season’s pricey outfits, you’ll keep your financial situation from getting worse and free up cash to start retiring your debts. That doesn’t mean you never can take advantage of a credit card’s convenience, but it does mean training yourself to buy only what you can afford.
3. Warn your creditors if a payment will be late. If you know you won’t be able to make a credit card payment on time, be proactive and call the creditor. You may be surprised to find that many banks and retailers will be willing to work with you to resolve issues in a reasonable manner, perhaps waiving late fees or even giving you a break on interest rates if you show them you intend to pay what you owe. It’s much better to be honest about what you’re able to do than to try to dodge bill collectors.
4. Prioritize your payments. It’s natural to pay the bills you can afford to cover and leave others until later. But you may be better off if you look at the big picture and focus first on reducing credit card or loan balances that carry the highest interest rates. You might set a goal to pay down a specified amount of high-interest debt each month, making only minimum payments on other accounts. Once you’ve retired the most costly debts, you can pick up the pace in reducing other liabilities. That approach could save you a lot of money in interest charges and leave you with more cash to apply to other bills.
5. Try to pay your bills before the last possible day. When you don’t have much cash on hand, you’re not likely to write a check for a particular bill until you have to. But waiting until the last minute can bring its own problems. A payment you mail may not get there in time, and then you’ll owe a late charge, or a creditor may be able to increase the interest rate you have to pay. Being late also can damage your credit score, making it tough to get additional loans at reasonable rates. So do what you can to make sure your payment is received and credited before the due date. Paying online or by phone may speed up the process, but make sure your creditors don’t charge for that convenience.
6. Consider bankruptcy only as a last resort. If your best efforts to get out from under a mountain of debt don’t seem to be doing the trick, you may consider declaring bankruptcy. Yet while that could provide some relief, it may not do as much as you had hoped, and the long-term financial effects can be profound. Your reputation will suffer, and borrowing money in the future could be difficult, if not impossible. Consult with an attorney and make sure you understand all of the repercussions of bankruptcy before taking this drastic step.
7. Watch out for scam artists. When you’re struggling to pay off debts you may find yourself especially vulnerable to pitches from people or companies promising quick fixes to your problems. But most seeming shortcuts will do little to help. Avoid services that require up-front fees or voluntary contributions. Also be wary if someone tells you to stop communicating with creditors or asks for your confidential information before doing anything to help you.
Of course, that’s not to say that every debt management service is out to rob you blind or sell your private information to the highest bidder. There are plenty of reputable companies that may be able to provide valuable assistance, but it pays to be careful in choosing help in this area. Please don’t hesitate to contact our firm for advice.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.