Tips for debt management (9/15/06)

Wow, it's been a long time since my last story. I mentioned toward the end of the last story that I would go over some possible debt reduction tips in EXTREME situations. Keep in mind, these are to be used as a last resort.

1. Call the creditor: If you're late on your credit card payments and the minimum interest due is more than you can afford, you'll begin getting calls from their collection department or a collection agency hired on their behalf. If you've gotten this far, you're in big trouble and they know it. Your interest rate has probably been raised to 20+% and late fees have begun to mount. You need to stop this bleeding or you'll drown.

While many collection agents don't seem like it, they are human beings and may have mercy on you if you're proactive. Call them and tell them your story. They may not care about your story but your proactiveness will go a long way. They hate it when customers avoid them. Try to speak to a supervisor if possible. Supervisors are typically aware of the bottom line of the company and will make a greater effort in getting their money back by providing more solutions to your particular problem.

You can begin by asking them to lower your interest rate. They know they're already making a lot of money and there's a shot they may honor your request. You can also ask to amortize the debt, meaning that you can create a fixed payment that will work within your budget to payoff the debt over time.

In the end, the credit card companies want to provide every opportunity for you to pay them back. The last thing they want to do is charge off the debt or see you declare bankruptcy. These two instances negatively effect their profits.

2. Balance transfer. Many people will transfer their high interest credit card debt to new lower interest credit cards. I wouldn't recommend doing this too many times. The credit card companies will be onto you. Transfering to a new credit card once or maybe twice is enough. Don't use this method to avoid paying off your debt. You'll lose in the end.

3. Debt consolidation. I'm sure you've heard of debt consolidation loans. These are good things if used in the correct manor. The most common debt consolidation loans uses your home as collateral. By using your home as collateral, you'll get a decent interest rate, typically better than your credit card rate. If you do decide to go this route, you must have enough equity in your home to cover the debt you'd like to consolidate. Many lenders are willing to go up to 100% of the value of your home. If your home is worth $200,000, and your first mortgage is $150,000, then you could borrow up to $50,000 for a debt consolidation loan. In many cases, they won't give you the $50,000 outright. You'll be required to bring in your bills and the lender will pay off your pre-determined debts. They won't trust you to do it yourself.

I have only one warning concerning debt consolidation loans. Don't use this as a band-aid. Use this as a tool to help you paydown your debt. Many people erase their credit card debt using this method, then continue to rack up more debt.

4. Credit counseling. I don't know much about this, but I've heard nothing but good things. They have the ability to negociate with your creditors and work out a payment plan for you that stays within your budget.

5. Bankruptcy. As long as I live, I'll never recommend this. Many people say it stays on your credit report for seven years. It will hurt you long after that. See the banker's story dated December 2005 titled, Change in Bankruptcy Laws. Bankruptcy went from bad to worse last year. Consult a bankruptcy attorney before you go through this option.

This is the one Banker's Story I hope no one needs to read. But if you do, I hope it helps. Feel free to call contact me if you have any questions.