Debt Reduction Strategies

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If you have ANY debt, including a mortgage, having a debt reduction strategy in place is one of the most important things you can do. The sooner, the better!

Can you imagine what you could do with your money if you didn't have a mortgage payment, car payment, student loan payment, or credit card balances?

When establishing your debt reduction strategies, it is important to evaluate your options and determine if the resources or tools you are considering will really help you.

There are many debt reduction strategies available, all suggesting they are the answer to getting out of debt. Proceed with caution! Some don’t adjust to real-life financial challenges or are simply not something you and your family could keep up with for any length of time. Others will simply waste your money and cost you precious time, putting you further behind.

Beware of debt-relief scams!

Credit Repair Schemes
Some services claim that they can fix bad credit in two weeks or less, for a fee. These programs bombard credit-scoring agencies with claims that various defaults and late payments didn’t happen. That can cause your delinquencies to be delisted, but only temporarily. You should know that they can ultimately be added back to your credit report and, you will only end up poorer than before!

Credit Card Consolidation Companies
Some companies promise to help consumers with ways of paying off debt faster. They claim they will negotiate with debtors to lower the amount of debt and then combine consumer payments into one monthly sum. This is true, but working with these companies destroys a person's credit rating for ten years! Working with debt consolidation companies ruins a person's financial status and he still has to repay the debts. Beware of this debt reduction strategy.

Short-Term, Low Interest Credit Card Offers
Unless the consolidated credit card debt can be paid off within the time frame, it is better to avoid short-term low or 0% interest offers. After the introductory period, the interest rate is likely to be high. For unsecured debt that must be paid off over a long period of time, it is better to negotiate with the credit card company a long-term low interest rate.

Reverse Mortgages
More and more, strapped U.S. homeowners are taking out a “reverse mortgage,” a loan against a house’s value that is repaid when the borrower dies or sells the property. This is typically an option offered to senior citizens. Bruce Williams said in his Smart Money column, “A reverse mortgage for many people is a very viable way to extract cash from their home and still live in it… The older you are the more viable a reverse mortgage becomes.”

Reverse mortgages should be used with great caution because of their high fees. Not only that, but the warnings are increasing because of a rise in fraud.

Second Mortgage
Depending upon the size of the debt and the amount of equity in a home, you may want to consider taking out a second mortgage to pay off other debts. The interest on the second mortgage will most likely be lower than any unsecured debt interest rate. The cash from the second mortgage can go to pay off credit cards, car loans, and student loans. Then all debts are consolidated into one monthly payment to the mortgage company.

Before taking this action, be sure you are able to pay the additional mortgage payment.

Refinance
This type of debt reduction is similar to a second mortgage. Refinancing is re-assessing the terms of your current mortgage. This can allow you to refinance any loan at any time whether it is a home, auto or personal loan.

It is basically taking out a new loan to replace an old one and typically comes with all the expenses that go with a new loan. Before you refinance you should be sure you’ll really be achieving your financial goals.

HELOC
Most of these loans are second mortgages, unless your home is paid off. The interest rate on a HELOC is variable. This means that the interest rate can change over time.

Because the primary collateral of a home equity line of credit is the home, failure to repay the loan or meet loan requirements could result in foreclosure. As a result, lenders generally require that the borrower maintain a certain level of equity in the home as a condition of providing a home equity line.

A word of caution regarding any debt consolidation or line of credit:

Some time ago my husband and I consolidated our debt and refinanced our mortgage. This was great! It freed up some money! Hooray!

Foolishly, we didn’t use the so-called “extra” money to pay down our mortgage. Big mistake.

Our decision to consolidate our debt and refinance wasn’t a bad one, we just didn’t have the foresight to increase the payments as our cost of living income increased or any time we had additional funds.

Now we're in catch-up mode. It had seemed that we were getting older faster than we were catching up! But we learned about a debt reduction strategy that has given us some great peace of mind. Keep reading to learn more.

Before implementing any debt reduction strategies, beware and do your homework!

Basic Debt Reduction Strategies

Develop a budget!

Sell some assets to pay down your debt. Did you know that billions of dollars is earned every year on eBay?

Pay more than the monthly minimum on your credit cards. If you can.

Dave Ramsey's Debt Snowball Plan. Start with the smallest debt and focus on paying that debt off first; pay minimum balance on all other debts; after the smallest debt is paid off, take the extra you were paying on the first debt and put that, in addition to the minimum that was already being paid, to focus on eliminating the 2nd debt, and so on.

Restructure your mortgage payments. Bi-monthly payments can work. But, you should start young and stick with it!

A loan secured on other personal property. If you have an expensive car or boat that you have equity in, consider a loan secured by that asset to get the money you need to pay down your debts.

An unsecured loan. If you don’t have property or assets to use, an unsecured loan may be considered. An unsecured loan usually has a shorter term, normally with a maximum of 7 to 10 years. The monthly payments will be higher, but the debt principal will also reduce more quickly. Because there is no security, expect to pay a higher interest rate. Unsecured personal loans generally require good credit in order to obtain.

If all else fails, there’s still the credit card option. There’s a reason this one is last on the list. If your debts are relatively low and you still have pretty good credit, apply for another card with a 0% or low-interest balance transfer feature. Try to get a 0% balance transfer card if you can realistically pay off all or most of the debt within the balance transfer period.

If you think that there will still be a substantial amount of debt at the end of the transfer period, then choose a card with a permanently low interest rate. And to ensure that you don't slip back into the same debt trap, cut up all those credit cards, but don’t close the accounts. In today’s world, that negatively affects your credit score.

Do you have Compulsive Debt disease? Compulsive debt is like any other compulsive disease. Trying to fix the problem by using credit counseling or other resources is only a short term solution.

If you're not sure, go to Debtors Anonymous.org and check out their 12 signs of compulsive debting. Just like other 12-step programs, Debtors Anonymous has no dues or fees; the only requirement is a desire to stop going into debt.

Debt-Relief Scams

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