As of 2023, the average balance on a credit card is just under $5,589. This can make purchases easy using borrowed credit, but managing your debt and making timely payments isn’t always as easy.
Many strategies to manage your debt include the debt snowball method or working with a credit counseling organization. In any of these cases, you will create a debt management plan that fits your budget and financial situation.
Credit cards can be helpful when used correctly, but it’s important to be mindful of the potential downsides of carrying a balance. By staying aware of your spending and creating a plan to pay off your debts, you can avoid falling into financial difficulty.
Manage Your Debts
Debt management is a crucial tool for anyone trying to get their financial situation under control. By creating a budget and following a few simple steps, you can drastically lower your current amount of debt and eventually be free from them entirely.
There are two ways to manage your debts – you can either do it yourself or seek professional help through credit counseling. Both have advantages and disadvantages, so weighing your options before deciding on a course of action is important.
Self-management is usually the simplest way forward, but it can be difficult to stick to without outside support. Credit counseling provides that extra level of accountability but comes with additional fees.
How Does It Work?
Debt management plans can help you avoid unsecured debts like credit cards and personal loans. With a good plan, you can pay off your debts and get back on track financially.
Do It Yourself
There are many benefits to DIY debt management, including creating a budget that works for you and paying off debts in a way that suits your financial stability. Two popular methods for doing this are the debt snowball and debt avalanche.
Different people have different approaches to debt repayment. Some people prefer the more disciplined approach of making monthly payments and paying the debt in full, while others may find this method too difficult to stick to. However, there are advantages and disadvantages to both methods.
Making monthly payments and paying off the debt in full can help you protect your credit rating by ensuring that you make timely payments. You also have the opportunity to create a realistic plan that includes milestones and a debt-payoff date to keep you motivated during the repayment journey. However, you won’t have insight from a professional on the best way to get out of debt, and creditors may not be open to negotiations.
On the other hand, negotiating with your creditors to try and lower your monthly payments or interest rates can help you get out of debt faster.
Working With A Credit Counselor
There are a few different ways to go about managing your debts, and one of them is through credit counseling. You can find a credit counselor in your area through the National Foundation of Credit Counselors. There are nonprofit and for-profit credit counselors out there, so be sure to read reviews and understand any fees you might be charged before signing up with one.
A credit counselor will help you develop a plan to repay your balances and negotiate a debt management plan (DMP) with your creditors, which may include lowered interest rates, reduced monthly payments, or fee waivers. Depending on your circumstances, the creditor may close your accounts as each debt is paid off to avoid creating new debts. With a good credit counseling plan, you can get out of debt within three to five years.
Although a debt management plan may be more cost-efficient to get out of debt than paying creditors directly, some disadvantages exist. You may not have access to your credit accounts for the duration of the DMP, and you’ll relinquish control of your debts to the counseling agency. A single monthly payment, which may include a monthly fee, is made to the agency each month and distributed to your creditors.
Debt Relief Companies
Debt relief companies offer a for-profit service to help resolve outstanding unsecured debts by negotiating with creditors and lenders. These deals usually involve paying less than what is owed on the outstanding balance.
When customers sign up for this service, they will make monthly payments into an account held by the debt relief company. In the meantime, many debt relief companies advise their customers to halt payments to creditors and lenders to speed up the negotiation process.
Once a settlement is reached, it will be presented to the customer. If they agree, funds from the account they have been paying into will be used to make the payment. The debt relief company will also collect a settlement fee from this account.
Debt relief could be a good option for people struggling with unsecured debt. With debt relief, you could potentially lower your monthly payments and get out of debt faster. However, there are some potential drawbacks to be aware of. Creditors and lenders are not required to accept settlement offers, which could result in a court case, and your credit score will likely be impacted by settling your debts. Additionally, you may owe federal income tax on any amount forgiven that is over $600.
How Can Debt Management Affect Your Credit Score
Debt management can be a helpful tool for getting your debt under control. However, it can also negatively affect your credit score.
Hard Inquiring
Regarding debt management, hard inquiries can occur in certain situations. For instance, requesting a lower interest rate may prompt a hard inquiry into your credit report. These inquiries stay on your report for two years and can temporarily lower your credit score by one year.
Fortunately, this is only a short-term effect and can be easily offset by other factors. For example, lowering your interest rate and consistently paying your monthly bill on time will positively affect your payment history, which makes up 35 percent of your credit score calculation.
Missing Payments
Your credit score will take a significant hit if you miss any payments, so it’s important to be consistent with your payments. However, you may be able to negotiate a better rate by withholding payment from your creditor, although this will likely cause your credit score to go down.
Credit Utilization Ratio
Your credit utilization ratio is a key factor affecting your credit score. This ratio, which makes up 30% of your score, compares the amount of debt you have to your available credit. The ideal credit utilization ratio is between 10% and 30%. Your debt should equal 30% of your available credit across all accounts.
Consolidating all your debt into one bill can be beneficial for paying things off. However, closing some of your accounts will affect your credit mix (10% of your score) and your credit history (15% of your score). So make sure you weigh the pros and cons before making any decisions.
Alternatives To Manage Debt
Consider a few things before deciding how to handle your debt. Debt management is one option, but others are also worth considering. Think about your current financial situation and choose the best option for you.
Personal Loans
A loan can be a great way to consolidate your debt and get it under control. You can pay off all your outstanding debt in one lump sum by taking out a loan. This can save you money on interest payments and help you get your finances back on track.
Loans typically have a repayment period of two to seven years, so you will need to make sure you can afford the monthly payments. Your interest rate will depend on your credit score, so shopping around for the best rates is important
Balance Transfer Cards
Card balances can be transferred to a zero percent interest card, which can help repay debt without accruing additional interest. However, fees are often associated with this type of card, including a fee for each transfer. Additionally, unless the transfer is to a pre-approved card, there may be a hard inquiry on your credit report.
Those with good to excellent credit scores are usually eligible for a balance transfer card, but those with lower scores may not be approved. It is also important to plan how the debt will be repaid before the zero percent interest period expires. After that point, the regular variable APR will apply to any remaining amount.
Is Debt Management The Right Option?
Debt management can help pay off debts, but it is not a perfect solution. It does not address secured debts, like mortgages. However, it could be an option to explore under the following circumstances:
- You have multiple high-interest, unsecured debts like credit cards.
- You are nearing or at the maximum credit limit for each account.
- You have a reliable income to make your payments.
- You do not anticipate needing to open a new credit account during your DMP.
- You prefer that an agency or company negotiate your DMP rather than DIYing it.
- You have addressed risky financial habits, like overspending.
Final Thoughts
Debt can be a heavy burden, and finding a way to get rid of debt can be even more difficult. Debt management options are available, like the debt snowball, debt avalanche, DMPs, and debt settlement, which can provide relief and help you achieve your goals. However, they are not all created equal, as some strategies may have more long-term adverse effects than others. You may also find that another financing option, like a balance transfer credit card or personal loan, is more suitable for your situation. Weigh the benefits and drawbacks of each method to make an informed decision that helps you meet your goal promptly and works best for your financial situation.