In December 2020, over 5 million Americans were unemployed and claiming benefits each week. Losing your job can have an immediate impact on your finances and if you already have consumer debt to pay it can be hard to see a way out. Here we explain what debt management is and how it can help you reduce your debts.
Put simply, debt management is the proactive plan you put in place to pay off your debts in a realistic and achievable way. It helps you stay in control of your debts and use credit effectively. By being totally aware of the outgoings you need to make, the financial commitments you have, and your monthly income, you can ensure you don’t fall behind on debts such as loans or credit card payments.
However, debt management often goes wrong when circumstances change such as losing your job, you start to take on more debt than you can afford, or you lose control of your spending. That’s why it’s best to have savings and a contingency plan that will give you extra security.
If your debt is becoming harder to manage you may also be able to reduce how much you need to pay each month with these options:
With a debt consolidation loan, you can pay off your debts with a new personal loan and pay a single monthly payment. It can be used to pay off unsecured debts such as credit card bills, medical bills, and other personal loans. A debt consolidation loan can reduce the monthly amount you need to pay however, it will also mean that you will be paying the debt off over a longer-term.
It’s important to remember that a debt consolidation loan should only be used to pay off your existing debts and make your future payments more manageable. If you use the loan as extra credit this will negatively impact your credit score.
Interest rates change which means you may find that refinancing your debts is beneficial. You could take out a new loan with a lower interest rate to replace debts you already have. For example, by refinancing student loans you can combine one or more of your existing student loans into one new one with a new repayment schedule.
Similarly, remortgaging your house to a deal with a lower interest rate could help. Before refinancing loans it’s important to work out the upfront costs of doing this and whether the money you save over the long term outweighs them.
If you don’t ask you don’t get. Often people are afraid of speaking to their creditors to let them know they are having problems paying back their debt, but this is exactly what you need to do. If you are open with your creditors you can work together to find a solution. You may be able to re-negotiate the length of your finance agreement to lower your monthly costs, pay less than your minimum payment or skip a monthly payment.
However, this could all have a negative impact on your credit score which will mean you may find it harder to get credit later on, and your debt will take longer to pay off and incur more interest.
If you are having problems managing your debt there are agencies you can approach to help. Consumer credit counselors provide advice and training on how to manage your money. They are regulated by The Federal Trade Commission (FTC), which is the nation’s consumer protection agency.
It’s important to check that the credit counseling service is accredited by either the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA).
Debt Management Plan
A Debt Management Plan (DMP) can help you get your debts under control. A consumer credit counselor can help you with this. With a DMP you deposit money with your credit counselor’s agency each month and they use it to pay your debts according to the payment schedule you and your creditors have agreed.
A Debt Management Plan can only be used for unsecured debts such as credit card bills. The benefit of a DMP is that your creditors may agree to lower interest rates if they know you have committed to one. However, there is nothing stopping you from talking to each of your creditors yourself and arranging a payment plan with them, so you have full control.
Remember, credit can unlock opportunities that enrich your life, and by having a financial plan and managing it carefully you can use debt positively and remain in control.
While you’re here, do read our blog on ‘5 steps to take control of your personal debt’
Firstsource Advantage, LLC is a third-party debt collection agency that services accounts on behalf of the creditor. Please check our Consumer FAQ’s https://www.firstsourceadvantage.com/consumer-faq/
If you are currently experiencing hardship or an impact due to COVID-19, you may contact a free consumer debt counseling company such as Consumer Credit Counseling Services (http://credit.org/cccs/) and Money Management International (http://www.cccsintl.org/) who may be able to assist you with your current situation.