“Financial Health: Debt management” |
| Financial Health: Debt management Posted: 24 Oct 2010 12:56 PM PDT Financial Health: Debt management There are several statistics that claim the average American household has approximately between $8,000 and $15,000 in credit card debt spread over an average of approximately five credit cards. If the average household income in the United States is $46,000, then it would mean the debt level for each household is anywhere between 17 percent and 32 percent. This level of debt should immediately have one considering a debt management plan. Debt consolidation is an option for a debt management plan. Debt consolidation is essentially taking out a loan to pay off the balances on all outstanding credit cards. As with almost everything in life, debt consolidation has its pros and cons and significant thought should be put into a debt consolidation plan for it to be efficient and effective. Some of the favorable arguments for debt consolidation are: Its gives just one payment; It clears the balances on the credit cards providing a source for emergency spending. There also are potentially negative arguments regarding a debt consolidation loan. The interest rate on the consolidation loan may be higher than on the credit cards and, as such, you end up paying more interest. If you choose an option such as a home equity line of credit, you have now placed your home at risk. A credit counseling agency also is an option for a debt management plan. In return for a fee, the credit counseling agency will negotiate with your creditors to reduce either the principal and/or interest rate and implement a fixed payment plan to clear the outstanding balance on each credit card. This usually has a negative short term impact on your credit score. In most instances, the creditor will also terminate the credit card. The payment plans are also very rigid, and the creditor may waive the reduced principal and/or interest rate if you were to miss even one payment. There is also the "free" do it yourself option for debt management. This approach however requires detailed planning and discipline. The first task is to figure out how you got into the debt and then alter or eliminate the reasons you got into it. The second goal is to develop a budget that will allow you to pay off these debts. You should try to target a period of between 24 and 48 months to completely pay of your debts. A shorter payment period will be more favorable since you will end up paying less interest. You will still have the option to negotiate with your creditors if you opt for the do it yourself plan. If you choose to negotiate with your creditors you will still have the short term negative impact to your credit report as well as the creditor may opt to terminate the credit card. Let us assume that you make it through the 24 to 48 months and that you have completely paid off the balances on all credit cards. The number one question that most persons ask is whether they should now close some of the credit card accounts. Closing credit card accounts especially if they have high limits will typically hurt your credit score. Another option to consider therefore, especially if you want to eliminate the temptation to use the card for frivolous purchases, is to just cut up the cards. This will keep the accounts open but unused. Whatever you decide to do, successful debt management is essential for your financial health.
Kaysia Campbell, PhD with the Department of Finance in the College of Business at East Carolina University This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read our FAQ page at fivefilters.org/content-only/faq.php |
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