While the average American household has acquired approximately $8,000 in debt, finding the right plan is crucial to your success. Reducing and eliminating your debt does not happen overnight. However, if you outline a realistic plan for reducing debt, you can significantly reduce or even eliminate your debt in a few years.
Establish a Plan for Reducing Debt
Before achieving your goal, you must outline a detailed plan for eliminating debt. To begin, gather all your credit accounts and unpaid bills. It is important to have an accurate debt amount.
Record your monthly income and make a list of your monthly expenses. Determine how much income remains after you have paid your bills for the month. This amount is your disposable income. Instead of frivolously spending this income, use the extra money to work towards your goal. If you do not have the extra income to payoff your debts, there are other options available to you.
Make Your Home's Equity Work for You
There are different ways to acquire funds to consolidate debts. Homeowners may be able to use their equity to payoff, reduce, or combine other high-interest consumer debts. The equity in your home is the difference between what you owe and how much it’s currently worth, typically based on the current appraised value. These types of loans are a good tool for debt consolidation because the interest rates are quite low compared to other forms of debt and a portion of the interest can be tax deductible on your home.
A cash-out home loan tends to be easier to qualify for than other types of debt. That’s partly because your property serves as collateral, so there’s less risk than an unsecured loan.
If home renovations are a part of your larger financial plan, it can be helpful to rely on a home equity loan rather than a credit card, especially if you’re also trying to payoff your high-interest debt.
Debt and Your Credit Score
I am sure you already know that debt plays a big part in your financial life. Not only does it affect your spending ability, but it can also have an impact on your credit score and your ability to borrow money.
The amount of debt you have is one of the biggest factors that go into your credit score.
Using your credit cards as an example. The higher your balances are, relative to your credit limit, the more it affects your credit score. Your credit score also takes into account how close your loan balances are to the original loan amounts on other debts as well like your auto loan for example.
How you handle debt will affect your credit. If you quickly pay off your balances it helps raise your credit score, because you’re increasing your available credit. If your debt is too much to handle, your credit score could suffer. For example, if you miss payments because you can’t afford your debt it can drastically impact your credit score.
If you have questions, want to get pre-approved, or would like to learn more about the many programs that could meet your goals, please don’t hesitate to reach out. We are happy to help.