The burden of debt can be an exhausting and frustrating experience which is a very common problem in the U.S. When you are faced with the challenge of paying off heavy debt, the quickest option may seem like the best one. However, debt settlement or even more extreme measures like bankruptcy may not be the safest option at your disposal.
Debt settlement programs involve negotiating with lenders and agreeing on an amount to pay that is often significantly lower than what you owe. From certain lenders' perspective, a settlement is more attractive than crushing you in more debt because they get paid at least a part of the amount instead of nothing. From your perspective, you get to eliminate your debt without paying the full amount. However, this can have a negative impact on your credit score.
The way credit scores are determined vary and the exact algorithms are usually kept secret. However, there are some general truths that can be observed about the way they work. When you accumulate debt and fail to pay your bills you are already doing damage to your credit score. When you start paying back your debts and paying bills you start to rebuild your credit. When you use quick fixes and don't pay back the full amount you can actually hurt your credit. On the other hand, if you can't pay it back in full, eliminating it might be better than continuing to miss payments. Also, depending on the circumstances, a debt settlement companies program may even prompt the lender to take legal action against you.
So before you determine that debt settlement is absolutely necessary, here are some things you should try first.
The Old Fashion Way
Eliminating debt is often compared to losing weight because, as hard as it is to do, the concept is fairly simple. All you have to do is pay back more than you accumulate. Now this is obviously easier said than done and this method is a slow process but people do it all the time. To accomplish this you need to follow a strict plan.
- Make yourself a budget. Calculate the cost of your bills and how they relate to your income. Set aside money each month that goes towards paying off your debt and pay as much as you can afford.
- Tighten your belt. Decrease your spending and look for ways to save money. This can free up more money to put towards becoming debt free.
- Stick to your budget. Don't get side-tracked or discouraged as you pay off your debts. Sooner or later you will be debt free if you stay on track.
The Snowball Method
The snowball method is a tactic used for taking care of multiple debts. This method instructs you to take care of one debt at a time. You stop paying more than the minimum on all but one of your bills and apply all of your resources towards your smallest debt. Set aside money each month to put towards paying the bill and paying towards this debt. When that is paid off, move those resources onto the next largest debt. The idea is that you will gain momentum by freeing up more money to put towards bigger debts.
Talk to Your Lender
Instead of using a company to negotiate to pay a smaller amount than you owe, you can talk to your creditor on your own. Explain that you are having trouble paying your bills and ask for a lower interest rate. Explain that a lower interest rate will allow you to get a better handle on your finances and it will mean that you can continue to pay your bills. This is more likely to work if you call your bank before you stop paying your bills and before you accumulate too much debt.