If you desire a brighter financial future, your first priority is to eliminate excessive debt. Much like weeds in a flower garden, too much debt will strangle the vitality and life from your livelihood and budget. Your health may even suffer, as debt can lead to stress. Virtually any competent financial consultant will advise you to reduce or rid yourself of destructive debts prior to implementing any investment plan.
Many companies that claim the ability to change bad credit and erase debt are shysters. They can assist you in reducing or eliminating excessive debt; their techniques usually have just as adverse an impact on your credit rating as does bankruptcy. While you will not repay your debts in full, it is going to much more difficult to get mortgage approval, auto loans, or credit cards subsequently. Carefully consider such a program before committing yourself.
If you are serious about reducing your debt without further credit damage, take these steps:
1. Eliminate credit card debt first. Credit cards are the most expensive form of consumer debt. They have higher interest rates than mortgages, auto loans, or student loans. Start paying off your credit cards with the highest interest rates first. By transferring multiple small balances to fewer larger balances in lower-interest cards, you may boost your credit scores.
There is a certain line of reasoning which holds that you should pay off smaller balances first. Some feel that this will build momentum and encouragement for accelerated debt reduction. The flaw in this reasoning is that it ignores the relative impact of varying interest rates. Higher-rate accounts must be reduced first, irregardless of balances. Failure to do so will result in prolonged excessive interest eating away at funds needed for overall debt reduction.
Use the interest saved to reduce lower amounts faster. Paying off many smaller balances is good; however, the larger amount will mount even faster if its interest is higher. Consolidate smaller balances only if the account to which they are transferred has a lower interest rate than the current smaller balance.
As you progress in your debt reduction campaign, your credit scores will probably rise once your total outstanding balances decrease to 50 percent of their initial amounts. The balance transfer technique cited above will often involve flat-rate transfer fees of 3 percent or so.
Nonetheless, it is well worth this small amount if you can obtain a credit card with 0 percent interest for the first 6 – 12 months. The head start you gain with not having any additional underlying interest more than offsets the transfer fee. If you employ this strategy, first insure that the ultimate interest rate on the card to which small balances are transferred does not carry high interest.
With patience and perseverance, you can reduce or eliminate your debts significantly. Just take a valuable lesson from your financial crises and avoid repeating the overextension error in the future. With this in mind, you are well on your way to much brighter economic horizons.