How To Pay Off Debt Without It Going Horribly Wrong

Where do you stand on the spectrum of debt? This spectrum ranges all the way from owning $100 on a credit card and $5000 on an auto loan to owing thousands and thousands of dollars on credit cards, medical bills, personal loans and the like. If you're on the left or low side of the spectrum, congratulations! This means you're probably doing a bang up job of managing your debt.

But what if you're more on the right side of the spectrum? Maybe you owe, say, $20,000 on credit cards plus an auto loan and mortgage. If your credit card interest rate is 19% your minimum payment would be $800 and it would take you 194 months for you to pay off the debt – assuming you didn't run up any new charges. You can see that your life would be much simpler and less stressful if you just knew how to pay off debt.

How to pay off debt the wrong way

couple pay off debtThere are a number of ways to pay off debt but many of them are the wrong ways. Take a debt consolidation loan. It's a very attractive way to pay off debt because all you need to do is get a loan, pay off your lenders and presto! All those other debts disappear. But wait! You haven’t really paid off any debt. You’ve just moved it from one set of lenders to another. Of course, you should end up with a lower monthly payment than the sum of the payments you’ve been making and you would have only one payment to make a month. But that bugaboo of debt would still be hovering over you.

Another wrong way to pay off debt

A second how to pay off debt is via consumer credit counseling. This is where you go to a credit-counseling agency where you are assigned a counselor that will help determine how much you can really afford to pay monthly on each of your debts. He or she will contact your creditors to see it if they would be willing to accept those payments. Assuming that they say yes, you will then have a debt management plan (DMP) whereby you will send one payment a month to the credit counseling agency and it will pay your creditors.

Why is this a wrong way to pay off debt? For one thing, it will probably take you five years to complete your debt management plan. Also, if you were to violate any terms of the plan or miss a single payment, the counseling agency could cancel your program and leave you grasping at straws – financially speaking. For that matter, nearly half of the people that begin a debt management plan fail to complete it.

File for bankruptcy?

Probably the worst possible way to pay off unsecured debt is by declaring bankruptcy. This would dismiss most if not all of your unsecured debts. However, a bankruptcy would leave a stain on your credit reports that would last either 7 or 10 years. It’s likely that you would not be able to get any new credit for at least two and probably three years. You would have a hard time renting a place to live and it would be practically impossible for you to buy a house for 10 years. Plus, a bankruptcy will stay in your personal file for the rest of your life. Some people are even checking each other’s credit before committing to marriage so you could end up losing the love of your life.

Settling your debts

This is a sort of gray area because debt settlement could be a good how to pay off debt. It’s become very popular especially since the Great Recession. This is where you contract with a BBB accredited company like National Debt Relief to settle your debts for you. It’s also a way to consolidate debts because in the case of National Debt Relief you’d have a payment plan you should be able to complete in two to four years depending on the size of your debt.

How to pay off debt by snowballing them

Quite possibly the best how to pay off debt is to use the snowball method that was created by the financial guru Dave Ramsey. It’s very simple to use and could help you pay off just about every one of your debts with the exception of a mortgage. All you do is order your debts from the one with the smallest balance down to the one with the highest. You then concentrate all of your efforts on paying off the debt with the smallest balance as quickly as possible. Of course, you will want to continue to make the minimum payments on all your other debts.

Once you've paid off at first debt, you'll have additional money available to pay down the second debt. There are people who have paid down as much as $20,000 in debts in just 27 months using this method. Why, you ask is it called the snowball method? Think about rolling a snowball through the snow in your backyard and how quickly it turns into a boulder– versus trying to make the boulder by hand. If you can visualize this you’ll know why it’d called the snowball method.

As you can see, there are good and not so good ways to pay off debt. Do your research and find the plan that will work best for your situation. Make sure you can stick with your plan and keep up with the monthly payments. You can also call us for a free debt analysis and see what your lower monthly payments will be and how soon you can pay off your debt.