Debt is a problem most commonly found among low income minorities, college students, and young people beginning full time employment. In spite of recent changes like the CARD Act, consumer debt has increased significantly increased due to the weakened economy. When monthly income isn’t adequate to cover bills, consumers often turn to high interest credit cards to finance their lifestyle. As of May 2011, total consumer debt increased to over 2.4 trillion. With so many households encountering debt problems, what can the average family do to break free of their financial struggles?
Increasing Income
One surefire way to reduce a household’s debt load, is to bring in more income. Generating extra cash flow to pay down debt can be done by selling unused items at an estate sale, getting a second job, or doing freelance work over the internet. A extra couple hundred dollars a month, applied to this debt, can have a significant effect on your monthly bill payments. As more of the debt’s principle is payed down, the amount owed monthly will drop substantially.
Targeting High Interest Debt
Certain types of debt can be much more expensive than others. With an average interest rate of 15%, credit card debt is one of the most high-priced types of debt that consumers can hold. It is also one of the easiest types to fall into. Paying off outstanding balances will also improve credit to debt ratios and most likely help to repair damaged credit scores. When trying to reduce total debt load, it makes sense to tackle the most expensive debt first. By focusing on high interest bills, a balance will be reduced in much less time. As the overall balance is reduced, monthly interest payments will become less and less. Over time this will reduce the amount of monthly income that is wasted on interest.
Set up a Strict Budget
Creating a strict monthly budget will help keep spending from getting out of hand. A budget will also put household finances into clearer focus. The site mint.com, offers a free platform that can be used to track your income and bills. Establishing a budget will reduce the chance that you will fall further into debt. A budget will also help make sure that bills are paid and payments are on time.
Low Interest Loans to Pay High Interest Debt
The enemy of any budget is high interest debt. In some cases, it may be a good option to use a low interest bank loan to pay off these balances. A low interest loan can simplify your monthly bills by consolidating them into one payment. This will help avoid late fees and penalties. This can be effective, but there are some negatives to this strategy. A bank loan will usually require some form of collateral in order to gain approval. In some cases, the borrower may be required to put up their home in order to qualify. This may or may not be the right move considering your circumstances. Risking your home in order to pay off unsecured debts might lead to a situation that a homeowner never anticipated. It may be wise to speak with non-profit credit counselor, before deciding to take a loan to make these payments.
Jeremy works for the website GreatCreditScore.org. The site includes information on topics such as the economy, investing, credit and debt.
