Trying to get out of debt, especially high interest and unsecured credit card debt, can feel like an impossible task. If you are struggling to make your monthly payments and want to regain control of your financial future, then a debt management program might be an option. Below are five FAQs about debt management programs and reclaiming financial stability.
#1: What Is Debt Management?
Debt Management, or Debt Management Programs (DMP), are financial plans intended to assist individuals in paying off their debt. Using a DMP often results in paying off debt faster than you would on your own, allowing you to allocate more money for savings and other expenses. It’s important to understand the different strategies and resources available to choose the most appropriate for your financial situation.
#2: What Are Some Resources To Help Manage Debt?
When paying off debt, the goal is to pay it off quickly and with minimal damage to your credit score. Below are three resources that may be appropriate depending on your financial situation.
DIY Debt Management
Do-It-Yourself Debt Management involves forming a budget on your own and making a plan to pay off your debts. Normally, this means targeting specific lines of credit one at a time (see question #3 for specific strategies). If you can currently afford your monthly payments, this approach could work for you. As with all approaches, you will have to be conscientious about your spending habits while repaying. DIY debt management can protect your credit score by paying creditors in full, but you will lack the negotiating power that comes with credit counselors or DMPs.
Credit Counseling
Credit counselors assist you in creating both a budget and a repayment plan for eliminating your debt. By using a credit counselor, you will have financial insight into the most efficient way to tackle your specific debt. They may also negotiate with your creditors for lower interest rates and reduced monthly payments. Chances are that your bank or credit union already has credit counselors available.
Another way to locate a credit counselor is through the National Foundation of Credit Counselors. Keep in mind that not all credit counseling agencies are nonprofit, and they may charge a one-time or a monthly fee. Using credit counselors will help you pay off debt faster than you would on your own, but there’s a chance you won’t have access to your credit during repayment, as the credit counseling agency may take control of it. However, this is dependent on the amount of debt and your specific financial situation.
Debt Relief Companies
If you have a large or overwhelming amount of debt, a debt relief company can act on your behalf to negotiate with creditors and lenders for lower payments and may settle the debt for less than what you currently owe. Debt relief companies take control over your debt, so you make your payments directly to them, and they disperse the funds to your creditors based upon the agreed settlement. Assuming settlements are reached, debt relief companies can lower payments and put more money in your pocket. A disadvantage is the damage done to your credit score by settling for a lesser amount. In addition, there is no guarantee that the creditors will agree to a settlement.
#3: What Are Different Debt Repayment Strategies?
While credit counselors and debt relief companies can help you strategize the best—and fastest—way to eliminate your debt, it’s good to go in with knowledge of different repayment strategies. These strategies are especially helpful for those choosing the DIY route.
Snowball method
The snowball method has you starting with the smallest debt and working your way up to the largest. In this method, you’ll put as much money as possible towards paying off your smallest debt while still being able to make your minimum monthly payments on the others. Once this initial debt is paid off, you move to the next smallest. Trying to get out of debt can often feel disheartening, and this method helps people stay motivated and make the task more manageable.
Avalanche Method
Opposite of the snowball method, the avalanche method has you starting with the highest interest debt and working your way down. High interest debts are the most expensive to maintain and are the costliest in the long-term. Once this high interest debt is paid off, move down to the second highest-interest debt. This strategy might lack the more immediate gratification of the snowball method, but it will save you money as you eliminate the costliest debts first.
Debt Consolidation
Debt consolidation allows you to combine your separate debts into one payment a month. Typically, your interest rate on consolidated debt will be lower interest rate than others, though this can depend on different factors, such as your credit score. You can also consolidate your debt by taking out a personal loan. Moody Bank offers personal loans at competitive interest rates that can lower your monthly payments and save you from high interest rates.
#4: How Will I Know When I’ve Achieved Financial Stability?
Being financially stable does not mean being rich! Financial stability means that you earn enough money to cover your expenses and invest in your savings. It reduces money-related stress and allows you to take control over your financial future—whether that means saving for retirement, education, or even paying off your mortgage early. Financial stability also gives you peace of mind that you have enough funds to cover unplanned or emergency expenses without going into debt.
#5: How Can I Work Towards Financial Stability?
While in debt, financial stability may feel like a pipe dream. However, there are certain things you can do to help yourself achieve your financial goals.
Make Payments on Time
Paying your bills on time not only keeps your credit in good standing, but it saves money on interest and late fees. Falling behind on payments can land you in even more debt.
Track Expenses
Keep record of how much you spend weekly and on what. This will help you see where you spend the most money and how to better allocate it moving forward. Consider the money you’re spending on utilities and other bills as well.
Set Up AutoPay
Most of your monthly payments can be set to AutoPay. This ensures that you will not forget or miss a payment and will help to avoid late fees. And when you use direct deposit, you know the money will be available on time.
Earn More Money
Increasing your income with a side hustle will help you eliminate debt faster and put more away for savings. There are many different ways to supplement your income and put more money towards your debt.
Save As Much As Possible
Having sufficient money in high yield and emergency savings accounts allows you to deal with unexpected expenses without going into further debt. There are many strategies to cut down on monthly expenses and grow your savings. Moody Bank offers a variety of personal savings accounts to fit your needs!
Moody Bank serves the following Texas locations: Houston, Austin, Friendswood, Galveston, Lake Jackson, New Braunfels, Pasadena, Seabrook, Pearland, League City, Texas City, Sugar Land, and Dickinson.
Contact us for more info and open a savings account with Moody bank to begin saving for the future!