14 Time-Tested Debt Management Methods and Debt Solutions
Yara Zakharia, Esq.
Stranded in an ocean of over-the-head daily expenditures, budget-breaking emergency expenses, maxed-out credit cards, and spending sprees, an increasing number of Americans living paycheck to paycheck are struggling to reach a harbor of financial safety and security. Fueled by the ubiquity of credit and lax qualification requirements, consumer debt in the U.S. continues breaking records each year and consuming an ever-growing chunk of the average family’s resources. Here are some of the latest debt statistics tabulated by the Federal Reserve and Census Bureau:
- U.S. consumer debt totals approximately $2.5 trillion, or $8400 in indebtedness per household
- Approximately 33% of all consumer transactions in the U.S. are effectuated via a payment card, such as credit, prepaid, and debit products
- There are more than 175 million credit card holders in the U.S., and collectively, they hold more than 1.5 billion cards
- At least 10% of the U.S. population owns more than 10 credit cards
- American consumers hold an average of four credit cards
- U.S. credit card debt currently tops $965 billion
- Both the debt-to-income ratio for households and the financial obligations ratio (FOR), the latter measuring the percentage of disposable income that is allocated to items such as auto loans, mortgage obligations, and property taxes, exceed 19%.
Getting out of debt necessitates the implementation of sound financial habits, a solid money management plan, and a good measure of self-discipline. By generating a healthy cash flow and achieving a debt-free state, Americans will reap the benefits of economic freedom, peace of mind, and stress relief. What follows are some time-tested debt management methods and proven debt solutions:
1. Elimination of highest-interest debt. One effective approach to debt reduction is to tackle first the credit card balance that boasts the highest interest rate and then pay off the remaining cards in descending order, rate-wise.
2. Balance transfer. This involves the transfer of an existing credit card balance to another card, with the objective of capitalizing on a lower interest rate or low introductory annual percentage rate (APR).
3. Snowball technique. This popular method of consumer debt reduction and elimination involves the following steps:
- Paying off the lowest balance first to knock out some of the debt
- Making the minimum payment on the remaining balances
- Paying off the next smallest balance
- Adding the amount paid on the first debt to the minimum of the second debt and paying this total.
With each payment that is made and each debt that is eliminated, the snowball grows.
4. Credit counseling. Credit and debt counselors, financial planners, and debt settlement agencies assist borrowers in devising a budget and a debt management program and help them identify short and long-term goals. They also teach them how to save and manage their daily expenditures, as well as how to utilize credit wisely, and offer them customized financial management tools to wipe out their debt. By establishing a realistic repayment plan, consumers will be able to make manageable monthly payments while focusing on repaying their outstanding loans. Credit counselors also negotiate on behalf of their clients with the latter’s creditors in order to obtain a debt settlement arrangement, a lower interest rate, and a reduced monthly payment.
5. Debt consolidation. Debt help may also be achieved through a consolidation loan, which enables borrowers to pay off the outstanding debt with a single loan. This results in lower monthly payments and interest charges. Similarly, by consolidating high-interest credit cards into one lower-rate card, debtors can cut their monthly payments and benefit from substantial interest savings. Where the balance is large, a mere percentage point or two can have a considerable impact. Consolidation also enables consumers to better track their spending and repay their debts in a timely fashion. Furthermore, borrowers may quickly improve their credit rating by consolidating their debts and bills.
6. Realistic budgeting. The creation of a detailed, reasonable budget enables consumers to track their expenses and income on a monthly basis. Expenses should be categorized as essential or superfluous. Essential expenses include food, transportation, rent/mortgage, and utilities. Non-essential items include restaurant dining, entertainment, and dry cleaning. Consumers can save than $100 each month by eliminating unnecessary purchases and applying the extra cash to pay off their credit card balances and reduce their debt. Numerous online tools help borrowers reduce their spending and manage their money. Ideally, consumers should maintain their debt-to-income ratio below 20 percent.
7. Savings plan. Consumers should set aside funds for emergencies and unforeseen expenses. Preferably, they should establish a savings plan that will shield them financially for a period ranging from 3 to 6 months.
8. Investments. Another path to debt reduction involves depositing funds into a money market account, IRA, or 401K, which generate interest.
9. Home refinancing. By refinancing their home, borrowers will lower their monthly installments and interest rate and thus have more cash available to pay off their debts.
10. Living below their means. To become debt free, borrowers should not spend more than they earn.
11. Timely bill payment. By paying their bills on time and not using a company’s grace period, consumers can steer clear of debt and maintain a good credit score.
12. Utilization of cash for purchases. A highly efficacious debt management strategy involves refraining from borrowing additional funds and using only cash or checks for all purchases until the outstanding credit card debt is repaid.
13. Verification of credit report. Consumers should request a copy of their credit score from the three consumer reporting agencies- TransUnion, Experian, and Equifax. If there are any errors regarding their credit history, they should immediately make the necessary adjustments.
Payment of more than the minimum monthly payment. Paying more than the minimum monthly payment amount on credit cards can lower consumer debt and increase overall credit rating.