Budgeting is important when trying to get yourself out of debt, and that involves keeping track of your debt and creating a plan for your spending. The Liberty Mutual website suggests a way to estimate your out-of-pocket spending each month is to track everything you buy over the course of a week, then multiply the total by 4.3.
Add your recurring monthly expenses, such as rent or mortgage payment, utility bills, cell phone bill and credit card bills. Compare your total expenditures with your income. Determine where you’re overspending, and consider ways to cut back so you can contribute more to paying down your debt.
Once you’ve determined how much you can contribute to paying down your debt each month, you need to develop a plan of attack. There are two methods to address the issue. One method emphasizes first paying off the debt that has the highest interest rate, to avoid paying extra money on debt that increases as a result of interest. The other method, which is advocated by Dave Ramsey on his website, is to pay off the debt with the lowest balance first. Seeing your balances decline rapidly with this method may provide the motivation you need to continue your debt-reduction plan over the long term. You must decide which method best accommodates your financial management type and remain dedicated to it until your debt is paid off.
Someone who has fallen behind on debt payments or who needs help finding ways to pay down their debt may benefit from credit counseling. A credit counselor helps you develop a reasonable budget and may offer debt repayment options, including debt consolidation, settlement or a debt management plan. In debt consolidation, all your debts are gathered under one loan with one interest rate; however, you must be fully committed to not adding to your debt while utilizing the consolidation loan. With debt settlement, your counselor tries to negotiate a lower payoff balance in exchange for a one-time payment, but this may have severe negative consequences for your credit rating. Under a debt management plan, your counselor negotiates lower interest rates or a lower payoff balance with your creditors, then creates a time frame over which you will pay off the entire debt. Debt management does not damage your score, but may make it difficult to obtain new credit in the future. Each option has its benefits and drawbacks, and you should discuss the details of your options with your credit counselor to choose one that best suits your financial situation. The National Foundation of Credit Counseling website lists reputable credit counseling agencies.
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 made several changes to the way creditors conduct business, including the way your credit card statements appear. As a result of the CARD Act, your creditors must list how long it will take you to pay off your cards with minimum payments, as well as how much you need to pay monthly to pay off your card in three years. This may provide another tool for strategically minimizing your debt. Use your budget to calculate whether you are capable of making the higher payments to eliminate your credit card debt within a three-year time frame.