The Bad Debt Cycle

Bad debt is that which is not backed by assets that have value. You may not even remember what you purchased with some of that credit card debt, because it could have been years ago. You have been making minimum payments and continuing to charge more because you cannot afford to purchase with cash, due to the monthly debt payments. The cycle continues until you are maxed out on all of your cards and you have missed or late payments looming.

Help Comes in Many Forms

The first step in the process of getting help is to sit down and list all of your debt. You need to take a realistic look at your ability to pay it. If your necessities (rent, food, gas, insurance, etc.) are not leaving enough each month to make your payments, you must get back on track right away. There are many options, and you need to pick the one that best fits your situation.

1. If you are not yet late on payments and you have equity in your home, you can access that equity through a cash out refinance or a home equity loan. This is the best option, because the debt will be rolled into one lower interest-bearing loan that will put equity back in your home as you pay it off.

2. Consider debt consolidation. This is relatively painless if you still have an excellent credit score. A bank or credit union will be willing to give a personal loan to someone who has a great credit history and who wants to avoid getting into financial trouble. To ensure the loan is used for its purpose, the lender may actually write individual checks to your creditors, and you now have one lower payment that you can afford.

3. Debt consolidation when credit has been damaged is more difficult to obtain. Getting a new mortgage or equity loan will be almost impossible with a poor credit history, and conventional lenders will consider the debtor too risky. In this instance, it may be a wise move to contact a consolidation professional who works to secure the debtor a loan to pay off the bad debt. The new loan will generally carry a high interest rate and will include the consolidator’s fees, but it gives the relief of a lower single payment which is affordable.

4. Credit and debt counseling is truly important for any consumer who has gotten himself into a position of needing bill consolidation. There are any number of consumer credit counseling agencies who offer these services for free, and it will be important to take advantage of this valuable service. A realistic monthly budget needs to be designed, as well as a plan to change the spending behaviors which resulted in the initial situation. Do not be surprised to be advised to cut up all credit cards but one, which will be used only for emergencies. These agencies will also provide continued follow-up to ensure that you are staying on track.