Is your emergency fund less than $300? Are you taking out new loans to pay off your old ones? Are you paying only the minimum amount due on your credit cards each month? If your answer is yes to one of these questions, your credit debt situation likely needs trimming. The important thing is to act before it becomes a problem and the aftereffect gets out of your control.
The first step in the credit cropping process is to figure out just how much you owe. You will need to list all of your credit sources, the amount you owe for each, the months left to pay, the annual percentage rate and your monthly payment. If your credit payments are beyond your available resource, it is time to think about which debts to pay off and how to do it. Here are a couple of methods that may prove helpful.
Using the low balance method, you would pay off a bill with the lowest balance due first. As you pay off the balance on a debt, apply the money that you formerly used for that payment to the debt with the next lowest balance. You would continue that process until all of your debts are paid.
Credit interest rates can be more than 20 percent. Interest costs can add extensively to the cost of your loans. The high interest method calls for paying off those debts with the highest interest rates first. After you make the final payment on any one debt, you should use those dollars to pay off other, lower cost loans.
The method considered should be the one that works best for you, and one that coincides with the goals you set in paying off debt. This method should be based on your self-discipline and persistence in following through until the debt is paid. A goal may be preserving the family's safety, health or having a good credit rating as a top priority. Using the most appropriate method will require determining which payments must be made now and which you could delay. For example, you may need to make a car payment to keep it from being repossessed or making a rent or mortgage payment to avoid foreclosure or eviction.
You may want to choose to set up an alternative payment plan with your creditors. Utility companies often arrange budget plans that help even out the seasonal high and lows in energy bills.
Consequently, complex credit situations may require debt consolidation, in which you obtain a loan to pay off your debts. The resulting monthly payments could be lower, but would likely be spread over a longer period. In the end, of course, you will pay even more. However, we have not advised this method if you do not change your bad money handling practices. Instead, continue as before in paying your debts, and you will end up in the same situation. You could return to accumulating other debts due to consolidation giving you the illusion that extra money is available. Only this time it is worse because rather than having one debt, now you have two, and perhaps no other way out of this newly created situation.
Just remember, you will gain both financial and emotional stability when you set goals, organize your credit obligations, and develop a systematic plan to reduce financial demands on your life.