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How To Become Debt Free!
Path 2.1 Better Rates & Terms
Ask For a Better Rate
Getting better terms can be as easy as calling the customer service department of your credit card company and asking them to lower your rates, but maybe not. If you are current on your payments you may have a shot. If you’re behind on your payments you may get shot. Well not literally but it might wind up feeling like it. But since there is no penalty for asking go ahead and try.
Another option if you’re credit report is in pretty good shape is the balance transfer. But be careful, there’s potential danger ahead. First the good parts. If you are following Path One and have a debt payment plan in place then opening an account that has a low or zero percent balance transfer rate can make sense. You transfer the balance from a high interest rate card to the new one. While the new card’s interest rate is low attack another card that still has a high balance or interest rate. Now here’s the danger.
If you use the new card for anything, this is generally the way it works, for specifics read the fine print in your card member agreement, oh what fun, then you will be charged interest on your purchase and all of you payments will be applied to the low/zero percent balance transfer. Meaning if it takes you nine months to pay off the transferred balance then your new purchase will rack up nine months of interest before you start making payments on it. So don’t do that.
Danger point number two. When you transfer the balance from your original high interest rate card you’ll now have a card with a zero balance. Oh, if you have learned you lesson well and don’t ever use it again you will feel so good. But if temptations arises, and you’re sure you can just use it a little bit, it really won’t hurt because you’ll pay off the balance in full and even if you don’t the minimum monthly payment will be so small that…yep, before you know it, it will be maxed out again and you’ll have eve more debt.
So before you transfer, read the fine print and make sure you know what you’re doing and most importantly know that you have yourself under control
Re-Aging Your Accounts
If you made some late payments and not only got hit with late payment and/or over-the-limit fees but had your interest rate increased too, you may have found yourself in an unexpectedly bad situation. Well, I guess you didn’t read your card member agreement because it’s all there in the fine print. One thing that’s probably not in the fine print is the ability to re-age your accounts, but most credit card issuers have this policy available.
If you have been a good customer and hit a bump in the payment road your credit card company may forgive your sins and waive your fees and even roll back your interest rates. This is called re-aging the account. You basically have to throw yourself on the mercy of the court, in this case the customer service department. If you can show a new pattern of consistent payments they may bless you with a return to normal. But they will only do this once.
They don’t have to do this but since there is no penalty for trying if you got behind but can now catch-up then it’s worth a call.
Path 2.2 A Consolidation Loan
This can be one of the best options or one of the worst. Of course you have to be able to get a loan to begin with. While there are different types of consolidation loans available, the most common is the home equity line of credit.
The benefits of a home equity line of credit is that you’ll have enough (we hope) to pay off all your bills and make an additional payment to your mortgage company that is smaller than you were paying to your creditors. Also you’ll probably have some tax benefits. Smaller pay out and tax benefits, so this is a great path to take, isn’t it? Well yes it is. Provided that you can get the loan and you can avoid the huge pitfalls. Pitfalls?
The pitfalls are, you’ll have all of your credit cards paid off. Hey, paying off my credit cards is a good thing, what are you talking about here? Paying off your credit cards is a great thing, that is, if you cut them up and never use them again. If you take the opportunity to use your credit cards for just one or two small things then you’re in big, big trouble. You’ve just traded all your unsecured debt for secured debt and if you now run up your cards again and can’t pay your bills your house is in serious jeopardy. And you could wind up being the big loser.
Unless you’re sure you’ve found the self-control to avoid those nasty credit cards forever, run as far away from this path as possible. For those who have found control this can be a wonderful path - just be sure you know what you’re doing before you start.
Here's more information on debt consolidation loans.
Path 2.3 Consumer Credit Counseling Services
A consolidation service, also know as consumer credit counseling, is another viable path out of debt. These companies work independently of, but in co-operation with the credit card companies. They will help you get back on your feet if you've temporarily fallen and can't get up by yourself. They do this by negotiating a reduced interest rate on your credit card payment. This will reduce the amount you have to pay every month and can help you through a financial crisis. They will also try to have late payment and over-the-limit fees forgiven. This generally takes place once you've established a six month track record of good payments.
If you are to stay in this type of program until all of your bills have been paid, you will pay the full amount that you owe plus the interest and this generally takes a while to accomplish. Your credit report will indicate that you’ve been through credit counseling. While this indicates less the perfect credit, most, if not all, services will require that you complete a credit counseling course. This will help you better manage your credit and your money in the future.
That's why I believe that this path may be best for folks who have fallen but once they've gotten up are fine on their own. In other words if you're behind a little bit on your bills and need some temporary help this path will work for you. Also if you just want to turn the process over to someone and you don't care about paying a little more for the service in the long run, use this path. Be careful, however, that you do not allow the ease of the program to allow you to get complacent. You must take control of your finances and live within your means for the program to work and to have the skills needed to stay out of debt when the program is over.
Here's more information on consumer credit counseling services.
Path 2.4 Chapter 13 Bankruptcy
This path is a Chapter 13 Bankruptcy, a court approved re-organization plan. A chapter 13 bankruptcy is normally for people with too much income to file a chapter 7 or for those who have a lot of non-dischargeable property. Chapter 13 bankruptcy is for consumers or small businesses who want to repay their creditors while protecting their real estate and personal property and avoiding harassing collections efforts. You cannot file a Chapter 7 if you have filed a 7 or 13 within the past 6 years (unless you paid off at least 70% of your unsecured debts in a previous 13 filing). However, you can file for Chapter 13 at any time. A trustee would propose a 3-5 year plan to creditors where the debtor would repay part of his debts out of future income. The trustee calculates how much you can afford to pay each month after considering your living expenses, income, and disposable income. At the end of the plan's period, you would not be liable anymore for your debts.
In a Chapter 13 you end up paying back at least 50% of your debts and in some cases, the entire amount. If a payment is missed you could be forced to pay the whole debt back. A Chapter 13 doesn't stay on your credit report as long as a Chapter 7 and there are some debts that can be discharged in a 13 that can't be discharged in a 7.
I'm going to talk more about Chapter 13 in the Bankruptcy section.
If you're going to file bankruptcy, you're going to need an attorney.
The Ultimate Solution
No matter which path you take the ultimate solution to debt is found by taking control of your life, and your money. Just figuring out where the money goes isn't enough. You must have internal control over your emotions, thoughts, and actions. By doing this you will gain the ultimate control that will allow you to build the life of your dreams.
The ultimate solution to debt lies in creating and living a debt-free and prosperous life. I invite you to start you inner journey to wealth by reading The Art of Prosperity.
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