How can you find the right debt management solution? Nearly everyone needs a good debt management solution, whether it’s one they developed and use on their own, or through the services of a professional debt management company.
The ability to properly manage debt is one of the primary determinants of an individual’s, and many businesses, financial success or failure. Managing debt correctly will allow you to effectively use leverage, one of the most powerful wealth generating financial principles.
Effective debt management will minimize extraneous fees and other charges that chip away at your financial well being, and competently managing your debt will allow you to keep a high credit score. The importance of a high credit score cannot be understated, especially in the really ugly credit situation that has developed over the past couple of years. Don’t get me started on that, please.
What is the right debt management solution for you? Determining that requires looking at your financial situation and taking stock of not only where you are, but how you got there. Debt management is one of the things that, to put it bluntly, many people screw up royally. Get it right and you could be living in fat (phat?)city. Get it wrong and bankruptcy could be a few short stops down the line.
One of the biggest problems is that too many people simply don’t manage their debt at all. They don’t look at what’s causing them to be in debt, and they put little or no planning into getting in debt or getting out of it. They’re not proactive, they just react to their next Visa bill with a mixture of fear and derision. You can avoid being part of that vicious cycle by actively planning what level of debt you’ll take on, and why. Include a percentage for emergencies. How much emergency debt you’ll provide for varies depending on your financial situation.
Here are some debt management rules that will help you develop a personal debt management solution -
Debt Management Rule 6
Avoid going into debt for depreciating assets. Unfortunately few people can manage this step as they use one of their largest depreciating assets to get them to work everyday. As the average price of a new car has gone above $25,000, few people can afford to purchase one without an attending rise in their debt level.
There are some ways to mitigate this. You can purchase a used car. Depending on the car, a large percentage of depreciation is gone after the first 2 years. Buying a car that is 2 to 3 years old will still get you a solid, reliable car, with years of trouble free service ahead, and much of the depreciation behind it.
The wrench in this works is very low or zero percent financing. You can get low interest, incentive financing plans with some manufacturer’s certified used car programs, and promotional financing offers change daily, so check into these before you take on more car debt.
Other depreciating assets are nearly anything besides your house or certain investments. That is where many people make a huge mistake. Not only do they go into debt purchasing depreciating assets, they also violate debt management rule number 5.
Debt Management Rule 5
Don’t go into debt for non-essential items. Sadly, much of America (and the rest of the world) completely ignores this debt management rule, treating the next sale at Macy’s or Bloomingdale’s as a date not to be missed. In the majority of cases, this pilgrimage to the pillars of modern consumerism is financed entirely by debt. Not just any debt mind you, but the 17%, plus a hefty annual fee variety. Although many would argue vigorously the other way, that new sweater just doesn’t qualify as an essential item.
Debt Management Rule 4
Time your debt correctly. Timing of debt is very important. Too many people put something on a credit card or other type of credit account when they could have waited one or two days and paid for the item with cash. This is poor debt management. You’re increasing your debt levels unnecessarily, and in most cases it is magnified by simultaneously violating debt management rule 1 or 2 (possibly both).
Debt Management Rule 3
Make your debt payments automatic. This automates a good part of your debt management tasks. It will help prevent you from making your payments late or forgetting to make a payment; two of the sins of debt and credit that can follow you around for years. Not only that, but it’s a heck of a lot easier than writing all those checks every month.
Debt Management Rule 2
Make money on your debt. Only go into debt when you will earn a higher return on your debt than it costs you. If you go into debt at 7%, you should earn at least 8% on the debt. If you can do this, you’ve won the debt management game and debt is your friend. You can go deep into debt and come out ahead; way ahead. Unfortunately the majority of people are never able to put this rule into effect, and suffer instead form years of oppressive credit card and other high interest consumer debt that costs, rather than pays, them money.
Debt Management Rule 1
The number one rule of debt management is spend less than you make. That will allow you to follow all the other rules, and use debt rather than having it use (and abuse) you.
You may not be able to effectively develop or implement a personal debt management solution. You may have to retain the services of a debt management professional. There are all sorts of pros, and like any other profession, some are very good, and others border on criminal.
Due to the circumstances surrounding individuals seeking debt management services, the industry can attract more than its share of the latter, so be careful. There are definitely benefits to using a good firm. They can get you out of debt comparatively quickly and help increase your credit score.
Keep in mind that there are two definitions to debt management. Some debt management firms negotiate down your debt with the credit card companies or other creditors. After they’ve done this, they then put you on a strict payment plan through the debt management agency itself. While this can result in your getting out of debt much more quickly than you would otherwise, be prepared to take a fairly large credit score hit, and heaven forbid you should miss a payment or two. You could lose much or all of their fees or other money you’ve paid in.
Other debt management firms are more akin to credit counseling agencies. Here’s what to look for if you’re contemplating using a debt management solution company. Although this is not a hard and fast list, and there may be some excellent firms that do not meet some of the criteria, it’s a great place to start.
Make sure the company is a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Although it’s not mandatory, look for non profit firms (Don’t ever confuse non-profit with free).
Make sure they show exactly what will be required of you and give you a list of their fee structure. Get from them exactly what services they provide and when they’ll provide them. In most cases paying for all their services in advance is huge red flag and you should run like the wind should they ask you to do so.
One thing a good debt management firm can do for you is to get your account ‘re-aged’ where it no longer appears as past due on your credit report. This takes some sweet talking to the creditor, but if they have a good relationship with said creditor, it is often done.
Debt management and a good debt management solution can often be the difference between coming out on top financially and slogging through years of huge Visa bills. It’s up to you.