How To Get Out Of Debts? -Part 2

Continued from Part 1

Contact Creditors
If paying bills on time becomes a problem, do not wait for your accounts to become delinquent. Contact your creditors immediately and explain your situation. Emphasize that you want to pay your debts and suggest a repayment plan. Your creditors may allow you to arrange new terms, such as deferring or reducing payments or making interest-only payments for several months.

Being late on vehicle loans is especially risky because most financing agreements allow lenders to repossess your vehicle at any time you are in default. If your vehicle is repossessed, you may also become responsible for the cost of the repossession. In addition, repossession will hurt your ability to obtain credit in the future. Because of this, it is better to sell the vehicle yourself to pay the loan if you cannot work out an agreement with your creditor.

Reduce your interest rates. If you can, move higher interest rate balances to lower interest rate cards or loans. You may be able to take advantage of a low introductory interest rate on a new credit card. Before doing so, be sure you understand what will happen to the interest rate at the end of the introductory period.

Consolidate your debt. You may be able to consolidate several debts into one obligation with an interest rate that is lower than the interest rate you were paying on the consolidated debts. Debt consolidation is not the answer for everyone. It works only if you are disciplined enough to avoid taking on any new debts.

Review your insurance deductibles. You may be able to improve your cash flow by increasing your insurance deductibles which will generally decrease your insurance premiums. The deductible is the amount you pay before the insurance company pays for a loss. By asking your insurance company to raise your deductible, you agree to assume more for each loss.

Remember to set aside the increased deductible amount in your emergency fund which should equal 3 to 6 months of basic living expenses.

Pay high interest debt first. Focus your repayment efforts on the debt with the highest interest rate. When you have identified your highest interest rate debt, continue making the minimum required payments on your other loans but apply available excess cash to paying down your highest interest rate obligation first. Once you have paid it in full, take the payment and extra principal you were paying on that loan and apply it as additional principal payments on the remaining loan that has the highest interest rate. As each debt is paid in full, you will have an increasing amount of cash to use toward paying in full the next one.

Sell assets. Consider selling possessions that are no longer wanted or needed and using the cash to pay your debt in full. Spare appliances, an extra vehicle or rarely-used exercise equipment may all be items for sale that will simplify your life while also raising funds for debt reduction.

If your debts are well above recommended levels, consider redeeming investments or using your savings to pay down debt. Generally, you should only do this if the expected return on your investments or savings is lower than the interest rate you are paying on the debt. Because selling investments may have tax consequences, you may benefit from consulting a financial planning professional.

Downsize. For many consumers, house and vehicle payments make up the majority of their debt obligations. If your debt is above the recommended thresholds, consider downsizing to a less expensive home or vehicle. In addition to reducing your debts, you may find additional savings resulting from lower insurance premiums and maintenance costs.

Where To Get Help
The nonprofit Consumer Credit Counseling Service (CCCS) offers budget planning and debt repayment plan administration. Consumer Credit Counseling Service counselors will develop your budget with you to determine how much is available to repay debt. Then they will negotiate on your behalf with creditors to develop a debt repayment schedule.

Visit the site: www.nfcc.org

Source: USAA Ed Foundation