Good debt management is a crucial for those who want to maintain a positive credit history, as well as pay back their creditors. If you're financially savvy and disciplined, you might be able to employ your own debt management strategies to decrease the influx of bills that pour into your mailbox each month. However, there are other options for those who need assistance in managing their debts and overall finances.
Begin With a Budget
Debt management begins by developing a budget (see Resources). List all of your sources of monthly income as well as your monthly expenditures. Your goal is to have enough money to cover basic living expenses, such as rent/mortgage, food and maintaining insurance payments. After you find out how much money you have left over at the end of the month, this is the amount you have to work with. You might have to tighten up if the sum of your expenses are more than your income. Credit.com advises getting rid of expenditures such as clothing, vacations, cable TV and other forms of entertainment.
Ways to DYI
The best debt management technique involves taking on one debt at a time, advises Credit.com. Start with unsecured loans first, such as those for credit cards or medical bills. Write down the balance, your minimum monthly payment and the interest rates applied to each debt. Credit.com suggests two ways to pay down these debts. You can choose to tackle the debt with the highest interest rate first or the debt with the lowest balance. Make the minimum monthly payments on all other debts, applying any money you have left over to the designated debt until it is paid in full. Then tackle the next debt, regardless of whether it's the one with the highest interest rate or lowest balance.
The Debt Management Plan
If you can't work within your budget or adhere to own debt management technique, the Federal Trade Commission suggests taking the next step--seek the services of a reputable credit counseling organization. One program offered by these organizations is a debt management plan (DMP). The National Foundation for Credit Counseling (NFCC) describes a DMP as a "systematic" approach to debt management designed to help you work within your means while paying creditors 100 percent of the debt. The consumer who agrees to enroll in a DMP makes monthly deposits with the credit counseling organization, which acts as trustee of the account. The organization then pays the consumer's debts from the account in a timely, regular manner. During this time, a credit counselor might require the consumer to suspend credit card use or refrain from taking out loans.
DMP Pros & Cons
DMPs have distinct advantages over other forms of debt management. Credit counselors often negotiate with credit card companies to lower interest rates and waive over-limit and annual fees. A successful DMP offers a comprehensive approach to the consumer's overall debt rather than offering a quick fix for certain types of debt. However, completion of a debt management plan takes time. According to the NFCC, it takes an average of 36 to 60 months to pay off the debt, if the consumer makes her deposits to the organization in full and on time. A key ingredient to getting debts paid off with minimal costs is to work with a reputable credit counseling organization that won't hit you with hidden fees. The NFCC notes that credit counseling organizations should charge no more than $50 for a one-time set-up fee, which is later applied to your debt, and monthly fees of about $25, both of which are waived in cases of hardship. Start by selecting a member organization of the NFCC in your area (see Resources).
Outcome
Risky ventures, such as debt consolidation and debt settlement, should be avoided. Bankruptcy is considered a last option for those without a possible way of paying back the debt. Bankruptcy comes with serious negative repercussions. Not only is it a matter of public record, it generally stays on your credit record for 10 years. The goal of a successful debt management plan is to pay off debts in a way that maintains or even improves your credit history and credit score rather than adding black marks.
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