How Does a Debt Plan Work?
A get out of debt plan often depends upon how you got into your debt in the first place. It also depends upon how much debt you owe on various other credit cards. If you own a credit card, you may be eligible to get out of the debt you owe on that card by making smaller payments each month.
One of the things you will need to do before you begin your debt plan is to take a look at your credit score. You can find out your credit score by getting a free copy of your credit report from one of the three major credit reporting agencies (Equifax, TransUnion, or Experian). With your credit score, you will want to know how much debt you are really carrying on your credit cards and other lines of credit. For example, if you only have a few credit cards with balances on them, that probably does not matter as much as one card with several thousand dollars of debt. That is why it is important to know your score before you begin your debt settlement discussions.
Once you know your score, you can start to work out a monthly budget. Your budget will need to include your mortgage payment, any debts you have that are being consolidated, your car payment, any other expenses, etc. You will need to know how much money you have coming in each month to make sure that your debt plan will be able to accommodate any changes that may occur in your household income. You will also want to make sure you know how much money you owe on all your debts.
Most debt management companies require you to make your first payment in three months. That payment may not be exactly the amount due on each bill. The bill collectors may add a little more to your monthly payment to make sure they will get their money. However, make sure you understand the debt plan and make your payments on time. If you don’t make all your payments in the time period allotted, the company will send a late charge to your account until you catch up.
You must also decide what type of budget you will use for your debt plan. You will need to list your income, list your monthly expenses, and list your financial goals. This will allow your debt management company to provide you with an accurate projection of where you are at this very moment in time. It will also help you to make sure you are on track with your financial goals.
One of the main ways a debt plan helps the consumer with high-interest credit cards is by lowering the interest rate on the outstanding balances. It is important to remember that if you keep paying the same amount of money every month, then you are going to get nowhere fast. To truly pay off your credit cards, you will need to be paying extra on your high-interest credit cards. This extra payment will be made each month until the payoff amount is covered.
The best advantage of using debt management plans is that they usually provide a lower monthly payment than what you would have had to pay with one of the high-interest credit cards. For example, credit cards with annual fees of $50 or more will likely end up being more expensive than a personal loan of three hundred dollars. On the other hand, debt management plans with a twenty-year payoff term can end up being less expensive than paying off a personal loan with fifteen years term. Therefore, it is a good idea to combine your debt management plans with an extended budget so you do not run into debt again within a short period of time.
To summarize, a debt plan will help you reduce your current level of debt and will increase your monthly budget by about two percent. By paying extra on your credit cards and paying extra on your personal loans, you will be able to pay off your debt in about six to twelve months. Be sure to include all the costs that go along with this debt repayment plan. Your goal is to pay off your debt as quickly as possible and to stay out of debt as long as possible.