1st Strategy: Debt Consolidation
This strategy has been used for years and in some people’s minds this is the only way to get out of debt. With this method, all of or a portion of the person’s debts are combined into one loan. Many times, this is down with a mortgage and tied to the person’s Real Estate. Other times it is done through a signature loan or other credit card with a high interest rate. The Debt Consolidation industry is a huge industry.
Many times if a person has enough bad debt their credit is not going to be the best and they may not be able to get a mortgage. In this situation the person is likely to get a higher interest rate and/or pay higher fees. They may even be required to have insurance for the lender in the case of default.
There are other companies that promise to consolidate debt and actually negotiate that debt down for you. The promise is that they will get the creditors to take less and thus the borrower will pay less overall. In this situation, many times, the debt consolidation company will take a payment from the borrower and just not pay the creditors. Once those creditors get desparate enough, they will take less for the debt. The downside is that during this time, the creditors are reporting the borrower late to the credit bureaus. The person’s credit is then severly damaged. Be very careful when you are dealing with these companies.
2nd Strategy: High Interest First Debt Payoff
With this strategy, you will pay off the highest interest rate debts first. This method should allow you to pay the least amount of interest over time. It is fairly simple to set up. The first step is to arrange your debts by interest rate. Step two is to pay off the highest interest rate debt with all available income first. You will continue to pay all other bills in the meantime. Paying the highest rate debt first will lead to that one being paid off first. When it is, you will use the money you had devoted to that debt in addition to the money you are already paying on the minimum amount of the next highest rate. You will continue this until all debts are paid off.
3rd Strategy: Dave Ramsey Debt Snowball strategy
Dave Ramsey has been pushing this method for years. In a nutshell, you will put all available funds to the smallest debt first. You will then pay off that bill first. Next, take the money you were paying on that debt and add it to the next in line. You will continue to do this until all debts are paid off. Mr. Ramsey says that this debt snowball helps to build momentum and encourages the debtor to continue because they are so excited.
The bottom line is that no one strategy fits everyone. You will need to choose the strategy that works best for you. It should be the one that you are most likely to stick with.