Posted on: 22 October 2015
If you regularly carry credit card balances or have outstanding loans for autos, furniture, or appliances, you're not alone -- in fact, the average U.S. household owes more than $7,000 in credit card debt. However, this level of debt is easier to manage when working with another wage-earning adult. After you've just gone through a messy divorce and are working on rebuilding your financial life, you may not know where to begin to tackle your consumer debt. Read on for some tips and tricks that can help you pay off these debts for good and provide you with some well-earned financial stability.
Take stock of your debts
When you know you're carrying a high amount of debt relative to your income, it can be tempting to put your head in the sand and avoid recalling your total balances, interest rates, and term lengths. However, knowing exactly what you're dealing with will help make some tough decisions easier.
First, you'll want to pull a copy of your credit report. Federal law requires the three major credit reporting bureaus to provide you with a free copy of your credit report once per year. This report should list all outstanding debts, excluding private debts (like those owed to family members) whose holders don't report to these agencies. Your credit report should also contain information on each debt's interest rate and the remaining number of payments, which you'll need in order to evaluate which debts should be given priority over others.
You'll then want to organize these debts in a format that's easy for you to navigate. You may opt to list each debt descending from the highest balance to the lowest balance, or list debts with the highest interest rate first. Using an online compound interest calculator to run a variety of repayment scenarios can help you determine exactly how to pay off your debts for the lowest amount possible, whether this means concentrating all your available funds on the highest-interest card or getting rid of multiple smaller debts first.
Decide whether you should cut your losses
If the total amount of outstanding consumer debt in your name far exceeds your annual salary, you may find it nearly impossible to repay these loans and outstanding balances while running your household on a single income. In these cases, a Chapter 7 or Chapter 13 bankruptcy may be your best option. Filing for Chapter 7 bankruptcy will allow you to discharge your debts, while filing for Chapter 13 protection will require you to enter a repayment plan and turn over a portion of your monthly income to the bankruptcy trustee.
While these options can significantly lower your credit score, they'll also allow you to achieve a fresh start from beneath a mountain of debt. Once you've had your debts discharged or entered a Chapter 13 repayment plan, you'll be able to begin rebuilding your credit nearly immediately.
Get help in sticking to a financial plan
If you aren't sure you're ready for bankruptcy, or have relatively low balances but high interest rates, you may instead benefit from debt counseling (at a place like a financial guidance center) or consolidation services. By signing up for debt consolidation, you'll be able to turn over the management of your debts to an outside agency. You'll make a single monthly payment to the debt consolidation agency rather than trying to remember due dates and minimum payments for each of your loans.
Debt consolidation agents can also negotiate with creditors on your behalf, lowering interest rates and even reducing your balances in some situations. If old or expired debts are still listed on your credit report, these agents can help you take the steps needed to have this information removed and improve your credit score.Share