Four Factors That Will Affect How You Eliminate Debt
By Space Coast Daily // October 30, 2018
Debt elimination is a process. First, there’s the challenging step of acknowledging your debt and making the commitment to tackle it head-on. Given that it’s very easy—and understandable—to slip into debt denial, it’s important not to underestimate the importance of laying this groundwork.
After all, you will only be able to choose the best debt relief strategy if you have a realistic picture of your financial situation.
Then it’s time to determine how you can best eliminate your debt based on a number of factors. Here are four things to consider when you’re deciding how to pay down your debt.
Factor #1: Type of Debt
First, consider the nature of your debts. People borrow money for a wide variety of causes, each with its own set of unique characteristics: student loans, medical bills, credit card debt, mortgages, auto loans, etc. How you handle your debt will be ultimately contingent on its type.
It’s typically more imperative to prioritize high-interest debts, as these have the potential to grow quickly as your original balance accrues interest. For instance, the average household with credit card debt owes $15,482 in this category alone.
Seeing as credit cards tend to carry relatively high interest—often more than 15 percent—it would be prudent to focus on tackling this before, say, increasing the amount you’re paying toward your vehicle or home loan.
Sit down and assess the types of debt you carry, then sort them by interest rate and fees. This will help you get a better idea of the order in which you should address them.
Factor #2: Amount of Debt
The amount of debt you’re carrying will inevitably affect the options available to you. Some debt relief strategies require a minimum balance to enroll, like a debt settlement program. These programs negotiate with creditors on behalf of clients in an attempt to reduce the amount owed.
Meanwhile, consumers pay into a dedicated account to save up enough to begin the negotiation process. If creditors accept, consumers use the money they’ve amassed to pay creditors, hopefully resolving their debt for less than the original balance. However, leading programs like Freedom Debt Relief typically require consumers to carry $7,500 or more in unsecured debt to be eligible for enrollment.
Factor #3: Credit Score
Your credit score may also affect your eligibility for certain types of debt relief. Only consumers with credit solid enough to get a personal loan at a lower interest rate than their current debt can feasibly pursue debt consolidation. Bankruptcy, on the other hand, is open to people with poor credit but declaring it will inevitably cause serious, long-term damage to your score.
Factor #4: Income Flow
The amount of income you have flowing in each month will determine how much you can devote to debt repayment—and which method you should ideally pursue.
If your cash flow is high enough to repay more than the minimum amount due each month, you may even be in a position to handle debt repayment on your own.
If this is the case, consider the merits of the snowball plan—ordering debts from smallest balance to largest balance and working your way upward. Like a snowball, you’ll gain momentum as you pay off debts, freeing up more money to pay off larger balances as you go.
Long story short, there’s simply no one-size-fits-all approach to eliminating debt. What works for one person may not be the best approach for another. Instead, you must take a look at your unique financial standing, including credit score, income, type of debt and amount owed to determine the best course of action.
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