Managing debt is an essential component of maintaining sound financial health. There are right and wrong ways to use debt, so it’s important to understand how to properly manage credit to make it work to your advantage instead of hindering your progress toward other financial goals. Whether you have multiple debts or a single debt, proper management can help you pay off your balances and build wealth in the future.
Debt management involves working with a credit counselor and creditors to come up with a repayment plan that fits into your budget. The program typically involves discussing your debts with creditors to negotiate lower interest rates, waive or reduce penalty fees and establish a monthly payment that is affordable.
You should choose a reputable company with good consumer reviews and accreditation from the National Foundation for Credit Counseling find out more or the Financial Counseling Association of America. Generally, nonprofit debt management agencies are considered more trustworthy than for-profit companies, as their credit counselors undergo extensive training and are required to adhere to strict ethical standards. Regardless of the type of agency you choose, be prepared to provide your credit history and current balances and expenses.
Some types of debt are not necessarily bad, such as a mortgage that can help you own your home and may increase in value over time or personal loans that allow you to take out money for educational pursuits or emergencies. However, too much unsecured debt can be a burden on your finances and prevent you from pursuing other goals, such as saving for retirement or purchasing a new car. Debt management can help you dig out of the hole and change your behavior so that you can avoid falling back into it in the future.
Before contacting a debt management company, prepare by creating a list of all your bills, including the amount you owe to each creditor and the minimum payments due each month. Having these details handy will ensure that the company can help you identify a feasible plan. If you decide to participate in a debt management plan, look for an organization that does not charge an application fee, membership fee, upfront fee or per-creditor fee. Also, be sure to check your monthly statements to confirm that the counseling agency is paying your debts on time and according to the agreement you made with them.
Missing debt payments can be expensive, as many creditors impose late fees and interest charges on past-due balances. A debt management plan can help you stay on track by allowing you to make one monthly deposit that is divided among your debts and credited according to the agreed upon schedule.
Other options for managing your debt include a debt consolidation loan; using the debt avalanche or debt snowball methods to pay off your balances; or, in extreme cases, filing for bankruptcy. While these strategies can negatively impact your credit score, they can also be more affordable than the alternative of missing payments and facing collections or even lawsuits.