Debt Reduction Strategies

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!

When creating 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 removed, 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.

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 income increased or any time we had additional funds.

Now we're in catch-up mode. It seemed that we were getting older faster than we were catching up! But we learned about a debt reduction strategy that utilizes personal finance software. This has given us hope and great peace of mind.

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

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