Managing Your Debt
Frequently Asked Questions
How can I reduce my debt quickly?
How fast you can pay off your debt depends on your budget and how much you’re willing to sacrifice each month in order to make bigger debt payments. Plus, there are many ways to pay off debt that will work best for different people. The first step to paying off debt in general is knowing exactly how much you owe. Once you’ve tallied the total, you’ll want to make a budget. This way, you can take a look at your expenses compared to your income and decrease spending in certain areas.
One common way to get out from under debt faster is to lower your interest rates so you can put more money toward paying down your principal. The three ways to do this are through a balance transfer, debt consolidation, or negotiating a lower rate with creditors.
What is a debt management plan?
A debt management plan (DMP) is administered by a nonprofit credit counseling agency in an effort to help consumers pay off their debt in full, under reduced interest rates and a simplified payment schedule. Enrolling in a DMP can help you tackle unsecured debt from credit cards, personal loans, or medical bills. While a DMP can provide structure and help you save money over time, it also has its drawbacks. Not everyone qualifies for a debt management plan, as it is based on income and budget, and only about half of those who do qualify successfully complete the repayment plan. Plus, there are many fees you must play, including a set-up fee and an on-going monthly fee.
Is debt management bad for your credit?
How you handle your debt has an impact on your credit score. For example, if you miss payments because you can’t afford your debt, you’ll lose credit score points. Choosing debt settlement or bankruptcy to deal with your debt will also result in credit score damage from which it takes several months, or even years, to recover. The debt consolidation process can hurt your credit score too. That being said, some debt solutions are still worth considering. Being debt-free is good for your overall financial health, and you can rebuild your credit score over time.
What is the best way to get out of debt?
There are many strategies for getting out of debt, and the best one will depend on each individual’s personal and financial situation. Generally, though, the best way to get out of debt is to take small steps like avoiding new debt and building an emergency fund in order to build a strong financial foundation. No matter the debt you are trying to repay, tracking your progress along the way will also keep you on track to paying off your debt.
What happens to a debt after seven years?
Seven years is the length of time that many negative items can be listed on your credit report, as defined by the Fair Credit Reporting Act. This includes things like late payments, debt collections, charged-off accounts, and Chapter 13 bankruptcy. After this time frame, the debt will fall off your credit report. Certain other negative items, like some judgments, unpaid tax liens, and Chapter 7 bankruptcy, can remain on your credit report for more than seven years.
The debt avalanche strategy involves paying off debt starting with the highest interest rate loan. When that is paid off, you apply that payment to the loan with the next highest interest rate.
The debt snowball strategy helps you pay off your debts by tackling the smallest balances first and building momentum toward the larger ones. Paying off your smallest debts helps you stay motivated to stick with your plan, as you build momentum toward becoming debt-free.
A debt collection is a severely past-due credit account. In fact, it's one of the worst types of entries you can have on your credit report. Having a collection on your credit report, especially a recent one, can affect your credit score and make it harder to get approved for credit cards and loans.
When an individual, couple, or business feels like they are no longer able to repay all of their debts, they may seek to file for bankruptcy. Although there are several different types of bankruptcy and different qualifying factors for each, the end goal is the same: to be discharged from debts and get a financial fresh start.
Collateral represents something you own, of value, that you offer to a lender as security in return for a loan. If you fail to pay the loan, the lender can legally claim your collateral as part of its effort to recover at least some of the amount you borrowed.
Defaulting on a Loan
Defaulting on a loan means you have failed to make sufficient payments for an extended period. Lenders will deem a loan in default when you haven't paid the minimum required payments for a certain number of months in a row, as detailed in your loan contract.
A debt collector is a person or company that collects payments for past-due accounts. They may be hired by a business or buy debt from other companies. Usually, a business will try to contact you for several weeks or months to get you to pay your debt. If you do not, that's when the account gets sent to debt collection.
Credit reflects your reputation for repaying your debts based on your record for borrowing and repaying funds. If you have a reliable borrowing record or credit history, you are said to have "good credit.” Good credit signals to lenders that you are "creditworthy" or likely to be able to repay money you borrow.
Debt restructuring is a process that begins when an individual reaches out to a creditor to negotiate either a lower interest rate or an extended payment schedule for their outstanding debt. An individual may decide to pursue debt restructuring on their own or with the help of a reputable debt relief agency.