personal debt

A Guideline for Reducing High Personal Debt

Image courtesy of Tax Credits via Flickr

In the United States, the majority of personal debt comes from mortgages, credit cards, and student loans, all contributing to a total debt balance of $11.85 trillion. Mortgages make up the largest component of personal debt, with average mortgage debt standing at $155,371.

Across the country, average student loans and credit card debts are at $31,946 and $16,140 respectively, according to a recent report.

With such high personal debt on average, how are people working to manage and reduce it? Here are some methods to get debt under control:

Establish a budget:

Adding up monthly expenses indicates how much money is earned versus how much is being spent. If you’re spending more than you make, a list of purchases and recurring bills will show what expenses are excess, and what can be cut out or reduced.

It can be useful to calculate a person’s debt-to-income ratio, which determines his or her ability to make payments.

This ratio compares gross monthly income (earnings before taxes and other deductions are taken out) with total monthly debt payments. A high ratio could mean more trouble making monthly payments.

Consolidate debt:

One of the factors that can contribute to the deepening of personal debt is interest. High interest rates can extend debt as a person makes small payments over a long period of time.

To avoid this, some suggest that a person transfer debt to a zero interest credit card deal. These types of cards start out as interest free, making the debt cheaper to pay back. After the predetermined interest-free period ends, however, this type of card reverts to a standard interest rate.

Image courtesy of NerdWallet

Debt can also be consolidated using personal loans. This method puts all of the debt together, and allows for a lower interest rate on the debt sum.

Personal loans come with fixed repayment plans, which means that after the determined payback period, the debt will be dealt with. There are drawbacks to this method, however, as personal loans can work out to be an expensive option.

Beware of scams:

In dire straits, a person can turn to a debt counseling service. These services can help to work out a budget and payment plans, and negotiate lower interest rates on your behalf.

[contextly_sidebar id=”lGnBSCW3BjTxUxBy2rxKkkArdH6SNJoo”]While these companies can provide help, those that offer to settle up consumer debts can land a person in even worse debt, or scammed out of money. A loan from a payday lender is quick and easy, but carries a high risk, with the potential for interest rates between 300- 4,000 percent.

The U.S Department of Justice warns against services that offer to settle up debt through smaller negotiated rates that are paid through monthly payments held by the settlement company.

These companies may have large upfront fees or hidden fees or hidden fees, and there have been instances where they have done little to no work at all toward reducing a person’s debt.

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Cheyenne MacDonald