Having a written debt plan is an important step on our journey to managing your debt. This can be accomplished by following the steps below.
Begin by listing each creditor along with the total debt balance owed, the monthly payment due, months left to pay, any overdue amounts and the interest rate you are paying. Use the chart provided in this issue or blank pages you keep in your credit files to record this information. Be sure to list all debts other than your regular mortgage or rent including the following:
¢ Credit cards – including charge and department store cards
¢ Car loans
¢ Personal loans
¢ Rent-to-own agreements
¢ Educational loans
¢ Home improvement loans
¢ Checking account overdrafts
¢ Overdue utilities or housing
During the next week decide how much you will pay each creditor and how long it will take to pay each creditor. Try to set up a plan to be out of debt within five years. These methods may give you a few ideas about how to decide:
Low Balance Method. Pay off bills with the lowest balance due. For example, if you owe only two more payments on your car or refrigerator, you may want to hurry and pay those off. Then the money you used for those payments can go to pay off other debts. Which debts do you have that you can pay off in two or three months?
High Interest Method. Pay off those debts with the highest interest rate first. Interest charges can be very costly. Interest on some credit cards can be more than 20%. Paying off those debts with the highest interest rates can free more of your money to pay on other loans. Which of your debts have the highest interest rates?
Most Important Method. Pay debts that are most important to your credit rating or to keep your family safe. For example, you need to pay rent or mortgage or you will not have a place to live. If you don’t pay for utilities, they will be cut off. You may need to make a payment on the car to keep it from being repossessed. You may need to pay on a loan to prevent your wages from being garnisheed. Other debts may not be as important and can wait a while. If you owe on store and bank charge cards, try to make some payment on them each month. Sometimes you can put medical bills on hold for a while, but notify the doctor or hospital of your plans and your intentions to pay in the future. Which of your debts are most important?
Percentage Method. You may choose to pay a percentage of each bill due. This is particularly effective for credit card bills. Paying only minimum balances due may keep you in debt for a long time. Paying 10% of each credit card bill should have them all paid off within one year. If you can afford to pay only 5% of each credit card bill, you can still be debt-free within two years. If you can’t afford to pay at least the full minimum payment due on important monthly bills, try to pay as large a portion as possible. Prorate your credit payments. For example, if your income is $800 per month, you can safely afford to use 20% of $800 (or $160) for paying debts. If your credit payments are $210 per month, you could divide the $160 (what you can afford) by $210 (what you owe) and pay about 75% on all your bills ($160 divided by $210 is 76%). If your car payment is $100, you would pay 75% of $100 (or $75). If your store charge payment is $75, you would pay $56. Keep in mind, however, that not paying the full amount as agreed can affect your credit rating.
To use the percentage or prorating method, you need to know how much you can afford and your total monthly credit payments:
New Plan Method. You work with your creditors to set up a new payment plan for your debts. This idea works well with utility companies when you have high winter bills and lower summer bills. Which creditors do you think you could talk to about a new payment plan?
Debt Consolidation. WARNING!! This may appear like a great idea to relieve your credit debt, however, mixing the ‘wrong’ debts could appear on your credit report as you are in debt problems and change your score and ability to get low cost interest rates. You get a loan to pay off all your debts. The payments on the consolidation loan would be less than your current monthly payments now because they are spread out over a longer period. Monthly payments will be lower, but in the end it will cost more because you will pay more interest.