Debt Strategies For People With Credit Problems

Many Americans from all walks of life have at one time or another had problems with bad credit and too much debt. If you have large credit card balances and are unable to keep up with your payments (because of unemployment, new expenses such as medical bills, or just bad household budgeting), creditors will report missing or late payments to the credit bureaus and your credit rating will suffer. This means that it will be more difficult for you to access credit and your interest rates may rise. It is a vicious circle, and breaking free can be a challenge.

One way to reduce your debt may be to consider debt consolidation. Here's the basic theory. The amount of a given monthly debt payment is determined by three factors: the amount of your debt, the interest rate, and the period of time you have to pay off the debt. Changing any one of the three components will influence how much you pay each month. The goal is to lower your monthly payments so that you can pay off your debts without incurring new debt.

If you have a poor credit rating (if your FICO score is 580 or below), then your creditors will not extend you new credit. You will not be able to lower your principle due and you will not be granted a lower interest rate. What options do you have?

Negotiate with Your Creditors
The first thing you should do is call each of your creditors. Explain that you are in financial distress. Ask to be put on a payment plan. For example, if your VISA card is maxed out and you are paying an APR of 25%, you can call the card issuer and ask to have the card suspended and to be put on a payment plan. This will mean that you can not use the card (probably a good thing) and if the card issuer agreements, your interest rate will be significantly lowered and you will be given the opportunity to pay off the debt over a longer period of time. Your credit rating will take a hit, but not as bad as if you had continued to miss payments or defaulted.

Debt Consolidation Loans
Another tactic is to take out a new loan in order to pay off your debts. The goal is to lower your monthly payments. To accomplish this, your new loan has to have a lower interest rate than your old loans. For example, if you have six credit card debts totaling $ 20,000 and you're paying an average APR of 20%, you are paying a minimum of about $ 530 each month. If you can consolidate this balance to a simple personal loan at 12% over 10 years, you will pay $ 286 per month. You take out the loan and pay off all the expensive credit card debts. Then you just make one monthly payment to your lender.

The challenge is to get a debt consolidation loan that offers a lower interest rate. This can be difficult if you have bad credit or no collateral. You need to shop around carefully and read the fine print of your debt consolidation loan.

Beware of debt consolidation services. They do not have any more influence over your creditors than you do. And never pay a fee up front. If the service requests for a fee in advance or tells you to stop paying your debts and pay them instead, think twice before signing on the dotted line.

More importantly, for a debt consolidation plan to work you need to change the spending habits that created the shortfall in the first place. Statistics show that many people who take out debt consolidation loans, either in the form of home equity loans or personal loans, end up defaulting on the new loan. Do not let this happen to you. Balance your household budget and make paying off your debts your highest priority.

Source by Beth Stewart

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