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Managing Debt

Managing debt…isn't the phrase an oxymoron of sorts? Seriously, if you are managing your money, you shouldn't have much debt, or at least what debt you have will be under control. And if you are good at managing debt, does that mean that you have had a lot of experience with it? Hopefully not! Debt management is a skill that should be acquired because you have acquired or plan to acquire debt. The results of debt management should be the elimination of debt, not the ongoing management of revolving debt.

In the workplace, the definition of a good manager portrays a person that can supervise, motivate, take control of situations, provide leadership, allocate resources where needed, and eliminate excess (including expenditures) when and where necessary. Each of those characteristics will help make you better at managing debt, but you don't need to have them all to succeed. This article will help you to acquire skills that you don't already have, and hopefully improve on the ones that you do, as you work to manage and eventually eliminate the debt that you have.

Principles that will be discussed in this article should already be familiar to you. But even if they aren't, you will be able to get a good understanding about what you can do to help put you in a better financial position and continue on that way. Sound principles of debt management, when properly used, will become a long-term asset that will help you accomplish goals that you may have for the years ahead.

What You Need To Manage Debt

Consumer Debt is a problem that has grown so much over the last few years that an economic crisis is throwing a lot of people into a panic. Subprime mortgage lending, stock market declines, energy price increases, and many other things are making those debts incurred under a good economy seem like poor decisions. Frankly, it shouldn't take a failing economy to make one think that a particular debt was a poor decision. But, thanks to those that weren't prepared for economic downfall, we now have one industry that is booming. Which one is it? Debt management companies. And they want to help you out. Before you accept their help, learn about what you can do on your own. You might realize that you don't need their help. But just in case you do, some tips about choosing one are also included in this article. In the meantime, let's focus on helping you manage your debt on your own.

What do you need to be able to manage debt? First of all, you need debt. This article will not teach you how to acquire debt. You can probably handle that just fine on your own. Next, you are probably thinking that you need money to manage your debt. Well, you are wrong. If you had money in the first place, you shouldn't have debt. Unless you win the lottery or inherit your favorite great-uncle's estate, you won't be getting rid of debt real quickly either. That is why you need managing skills. Yes, that is what you need to manage debt: Skills. A little bit of faith and perseverance won't hurt either.

Once you start learning the skills involved, you can get to work on managing your debt. This should be a personal goal. If you don't make it such, you will have a harder time getting control. Goals are what drive humans in the direction they want to go. If you want to manage the debt you have and become debt free, work to get control. If you don't get involved and instead turn it all over to someone else, you are not going to learn what is necessary to keep your debt minimal.

So don't turn to those companies that want to do it for you. Real debt help, the kind you need, is only found in changing your behavior. Changing your financial behavior, and changing your life, is a long-term investment in time and effort. You make a change for the better and continue on that path rather than return to the same problems down the road. True debt management is about your controlling your money.

Will it be easy to make changes and learn the skills needed? No, in fact it will be a bit difficult. But anything that is truly worth having is worth working for. So decide now, do you want to work towards having a lot of debt or eliminating what debt you already have?

Step 1: Making a Plan to Get Out of Debt

Many people who have debt don't think about it. They will get the bills in the mail and make the minimum payments without much thought of paying off the whole balance. This is not how you go about making a plan to get out of debt. Showing an interest in debt elimination and finding out how to create a plan will actually get you there.

Making a plan to get out of debt is much like creating a budget. What, the ugly "B" word? Don't shy away from it because it will be the most powerful financial tool you create on your own. However, since this isn't an article on how to create budgets, we won't go into a whole lot of details about it. We will however mention some budgeting basics that will help you get out of debt.

First of all, you need to figure out what your monthly earnings and expenses are. But take the expenses portion one step further. Write down the different accounts that you have to pay on, the order they need to be paid, and how much money you need to eliminate that debt. Knowing the order they need to be paid is the trickiest part. You may think that the order is already determined by the due dates given on the bills. Well, that isn't necessarily the case.

The order that the debts need to be paid should appear something like this: house or rent payment should be first (don't jeopardize the roof over your head), utilities, groceries, medical care, car payments, secured loans, and then finally the unsecured loans and credit cards. You may think that paying off the credit card is helping you to get out of debt, right? If you have the money to pay all of your bills, then yes. But what happens if you fall short on money (because of an unexpected circumstance) and you aren't able to make a house payment or buy food to eat because you paid off the credit card? There are times when debt management means that you don't pay off a debt so that your money is managed in the best way possible.

Most of your debts will come in the form of loans. Mortgage loans, auto loans, student loans, etc. These are all great and can be a big benefit when you get them, but they need to be paid off. Part of the plan for getting them paid off is to focus on one debt at a time. You still make regular payments on all of them, but only focus on paying off one at a time. You may want to pay off the loan with the highest balance first. Or you may want to pay off the loan with the highest interest rate first. Which ever method you choose, stick to it. And when it is paid off, you take the money that you had been applying to that debt and apply it to the next debt that you want to pay off.

Step 2: Changing your financial behavior

Ask yourself each of the following questions:

  1. Can I only afford to make minimum payments on my credit cards?
  2. Do I worry about finding the money to make monthly car payments?
  3. Do I borrow money to pay off old debts?
  4. Have I used a home equity loan to refinance credit card debts, and then run up new revolving balances on my cards?

If you answered "yes" to one or more of these questions, you are definitely in need of a change to your financial behavior. Even if you answered "no" to each question, you may still need to change your financial behavior to eliminate the debts that you have. So how will you change?

You may not even know what you need to change without making an assessment on your situation. Look at your debts. Evaluate how bad the situation really is. After all, if your credit card debt exceeds that of a small country, you need to know ahead of time so that you can be prepared. This is something that will actually take place as you create a budget if you are going about it correctly.

As you make your assessment on your debt, you will be able to identify what your spending habits are. Making such identifications will show you where you can cut back. But this step is more than an identification process. It also involves a change in attitude. This isn't to say that you have a bad attitude, it means that the attitude that you take towards certain purchases you make is what needs to change. This type of an attitude change could simply be recognizing that certain purchases are selfish purchases that don't need to be made at all. It is basically a needs verses wants comparison. The attitude change that generally takes place with this process is a realization that you have to sacrifice and give up the things that you want to provide the needs. In this particular case, giving up what is creating debt because of the need to eliminate debt.

At this point the change in attitude, the assessment of debts and spending habits, and the creation of a budget will set you on a path to successful debt management and elimination. Now you should put it all to work and eliminate or at least reduce expenses that are lowest in priority. Doing this will naturally lead you into eliminating bad habits that helped to create the debt you now need to get control of.

Step 3: Eliminate Bad Habits

Okay, by this point you know that you need to change your financial behavior. You've made an assessment of where things stand. You may have even identified areas of spending that you can eliminate. But what about the bad habits you have that affect your credit history and debt levels? There are habits that you may have that add to your debt problems without you even realizing it. Let's look at a couple that could be hurting.

Bad Habit #1:

How often do you get an offer in the mail from a credit card company trying to entice you to get their card and transfer your balances for an introductory rate that is too low to pass up? Unfortunately these offers come too often and even worse, they are contributing to debt problems.

Not that the credit card company is 100% to blame. Actually, if you get their card, make the balance transfer, and don't add additional charges to the card, you could be making a wise decision. But this is an article to teach debt management and so to keep with the topic read very closely: Misusing balance transfers puts you further in debt. Not only that, but the credit bureaus track each time you transfer balances in lieu of making a payment.

Bad Habit #2:

How often do you check your credit report? Do you know where you stand with the three credit bureaus? Have you seen your credit report once before and thought it was good enough that you don't need to worry about it?

If you do regular reviews and know where you stand, congratulations. If not, then you need to break the habit of not knowing. If you have credit cards, you should review your credit report at least once per year. What if the credit card company makes a mistake without you knowing and it ruins your credit score by putting a blemish on your credit report. Not reviewing your credit report on a regular basis causes debt management problems.

If your credit report is bad, you will have to work harder to get out of debt. Interest rates on the credit cards that you currently have may go up, making it harder to pay them off. Request your credit report once per year and review it for inaccuracies. If you find some, report it to the credit bureaus and try to get it resolved so that you can keep working on a good credit report.

Bad Habit #3:

What do you do when you realize that you don't have enough money to cover the bills? Which one doesn't get paid, or gets paid late? Is it going to be the same one next month?

Failure to notify creditors during financial hardship makes debt management more difficult. Usually, if you approach the creditor and explain your situation and why you are having financial hardship, they will be willing to work out a solution that makes it easier for you to pay them back yet allow them to still make their money. It is even better if you are proactive…notify the creditor as soon as you know that their will be a problem rather than waiting until the problem has occurred.

Bad Habit #4:

So how is that budget you created? Didn't create one? You don't like them do you? Hey, you are in good company. Many people don't want to deal with one. Too much work, too confusing, too restricting, and so on. I know that is what you think.

Don't think of budgets as a bad thing. This whole article is about debt management and to be completely honest, budgeting will help you develop the management skills that you need to take care of debt. And, as an added bonus, the budget will help you eliminate debt. What a novel idea. Budgets and Debt Management go hand-in-hand like warm apple pie and vanilla ice cream. They are fine by themselves, but much better when you put them together.

Bad Habit #5:

Did you hear about the new deal at the mall? Your favorite retail store is offering a 15% discount on your next purchase if you sign up for their credit card. Plus, when you use that card on future purchases you will save 5% on each purchase. How can you pass that up? Not passing those offers up will hurt your debt situation.

If you need to use retail store credit cards to take advantage of discounts, the chance of you being able to pay off that balance is not that great. The result? The finance charges and interest on the unpaid balance will negate your savings and delay your efforts to eliminate that debt.

Just like with cards that have low interest rates for balance transfers, only get and use the retail credit card when you know that you will be able to pay off the balance when the bill comes. Better yet, wait until you have the cash saved and don't use a card at all.

Other bad habits that may need to be considered for elimination are: procrastinating the creation of an emergency fund, paying the bills in no particular order rather than in order of priority (housing should always come before credit cards), charging purchases when you have the cash to pay for them (you will probably spend the cash on something else rather than pay the card bill), paying credit cards late (the finance charge will make the balance increase faster than a minimum payment can pay it down), and making only the minimum payment (interest has the same effect as the finance charges).

Debt Management Companies

If you feel that you can't manage it by yourself, that you need to get professional help, you do have that option available to you. But before you move in that direction, you need to know what to expect and what you should ask.

First of all, debt management companies like AmeriDebt and Consumer Credit Counseling Service do not work the same as getting a debt consolidation loan. A debt consolidation loan is managed by you. A lump sum of money is given to you to pay off your debts and you are left with one bill to pay instead of ten. Sometimes the interest rate is better which is to your benefit but in the end you are still paying for all of those debts. If you get a mortgage equity loan to use for debt consolidation, you may have additional tax benefits. But no matter which type of loan you use for consolidation, you still have to manage the debt.

With companies like AmeriDebt and CCCS, you will pay them a lump sum once a month and they will make payments to the creditors you owe. Some debt management companies will make their profits because they have worked out lower rates with your creditors making it possible to cover your bills and allow them some earnings. Wouldn't you like to be in that situation yourself? Look at a consolidation loan. But if you really want some help, visit one of these companies.

There are critics of debt management companies that will tell you to stay as far away as possible. They may tell you that your credit score will be ruined. It may happen, it may not. Some critics will say that using a debt management company is like filing bankruptcy. True or false, I don't know. And since I can't tell you what to think and decide, I would rather give you some information that will help you make that decision yourself.

CCCS counselors can work with you privately to help you develop a budget, figure out your options, and negotiate with creditors to repay your debts. Add to it the benefit of them being non-profit agencies that won't charge you fees. Even better, they work with you, so you get to learn the debt management skills that you will need for the rest of your life. To locate an office near you, call 1-800-388-2227. There are also national credit counseling non-profit agencies that you can get help from. Community Cooperative Extension offices may be able to help as well. You can find these in the government pages of your phone book (if they exist in your area).

If none of these are readily available, you will have to go with the agencies that work for a profit. As you look for help from them, consider the following:

  1. What services do they offer? You should look for an organization that offers a wide range of services, including budget counseling, savings and debt management classes, and counselors who have been trained and certified in consumer credit, budgeting, money management, and debt management. The more services they offer that are geared to helping you develop the skills needed to manage finances on your own, the better off you will be. You can feel more assured that they have your best interest in mind.
  2. Are they licensed to offer their services in your state? Some states require it. You should know if your state is one that requires licensing and then find out if the organization is licensed. If they are not licensed, stay away.
  3. Do they offer free information? You should avoid any organization that charges for information about the nature of their services.
  4. Will you be able to have a written contract? This is very important because there are some scam organizations out there. Do not commit over the phone. Get all verbal promises in writing. Read all documents carefully before signing them.
  5. What are their qualifications? Do they have counselors who are licensed? Are they accredited or certified by an outside organization? How are they trained? You will be better off with counselors that are trained by outside organizations rather than the creditors.
  6. What are the fees? Do the fees change based on the services you sign up for? Have other consumers been satisfied with the service? And most importantly, what do they do to keep your personal information confidential?

The Federal Trade Commission has information to help you with your debt management. They have articles that you can read that will help. They also work to prevent fraudulent organizations and unfair business practices. If you would like to get information about a debt management organization or would like to report unfair practices, contact them at 1-877-FTC-HELP or go to their website at www.ftc.gov. Be informed before you ask someone else to manage your debt.