If you have incurred substantial personal debt, consider these options: budgeting, debt consolidation, credit counselling from a reputable organization and working with your creditors. You will need to choose a debt reduction method that will work best for you? The method you use will depend on your level of debt, how much spare money you have, your level of discipline, and how quickly you want to get out of debt.
1. REALISTIC BUDGETING
The first step towards taking control of your financial situation is to do a realistic assessment of your income and expenditure. Work out how much you earn (your total income) and write this figure down. Then total your expenses. This is how much you spend each month for rent, fuel, food, clothing, heating, water, electricity and other bills. The difference between your total income and your total expenses is amount of money available to pay your creditors or lenders.
Decide if there are any monthly expenses that you can reduce or live without. Focus on lowering your expenses so that you can increase your income. You'll be amazed at how many things you can do without.
a) Debt Reduction Methods
Choose a debt reduction method that fits your situation and gives maximum benefit. You could choose to focus on repaying debts that are most important to your credit rating or to maintaining your family's safety. Or you can start by paying off those debts with highest interest rate thus reducing total spent on interest charges and increasing amount available to pay off debt.
Alternatively, you could focus on paying off bills with lowest balances. Then money used for those payments can go to pay off other debts.
If your credit payments (excluding mortgages) exceed 15-20% of your take home pay, you can work with creditors to set up monthly instalments that are more in line with your income.
b) Credit Cards
Transfer your credit card debts (balance) to a card offering an introductory 0% interest rate for balance transfers. Make sure you keep up repayments and then just before your 0% introductory offer is up, apply for another 0% card, transfer balance over before you starting paying interest Ė and repeat. With a good credit record, you could do this for years, moving your debt from one card to another until itís paid off.
3. DEBT CONSOLIDATION
This is when you use a new loan to pay off multiple debts. Your monthly payment will be lower because repayment is spread out over a longer period of time. This will usually eliminate hassle of having multiple creditors, multiple bills, and multiple payments to make. It's very important not to take out any additional loans until your consolidation loan has been repaid. Borrowing against your home is a cheap way to raise money, but itís risky. If you canít make payments - or if your payments are late - you could lose your home.