Debt Plans
- Many forms of debt, such as credit cards and loans, carry an interest rate that is charged by the creditor for financing. This is how creditors make money, but interest can keep people in debt for a long time. Given that interest accrues and you pay more in the long term on account of interest, one plan for dealing with debt is to start paying the debts with the highest interest rates. Doing so will help prevent your total amount of debt from growing at the highest rate.
- When you have debt that comes from several sources, one strategy for eliminating debt is to first pay off the one that has the smallest balance. Then you move to the next biggest, and so on. The advantage to this approach is the sense of accomplishment that comes from eliminating each source of debt. This provides motivation to continue the process, while at the same time reducing the total amount of creditors.
- Another strategy for dealing with debt is consolidation. Consolidating debts with a private firm means that you put your debt in the firm's hands and it works with the creditors and establishes a monthly payment for you. So instead of paying several creditors, you write a monthly check to one place. The rationale for choosing this is that it makes the process simpler and enables you to pay a lower interest rate. However, financial guru Dave Ramsey says on his website that "if you stay in debt longer, you pay the lender more."
- When all else falls and your debt is overwhelming to the point of not being able to handle it, then it is time to consider declaring bankruptcy. This particular debt strategy should be a last resort, as it will have a profound impact on your credit score. There are different kinds of bankruptcy. In Chapter 7, a court wipes out all unsecured debts. With a Chapter 13, debts are reorganized, and you make monthly payments.