How to han­dle debt

Dif­fer­ent ways to zap your debt: Which is for you?

Austin American-Statesman Sunday - - MONEY & MARKETS EXTRA -

American con­sumer debt has re­bounded to pre­re­ces­sion lev­els, and the cat­e­gory that in­cludes credit cards hit a record $1.02 tril­lion this sum­mer. Maybe your credit card debt has crept up too.

It makes sense to pay par­tic­u­lar at­ten­tion to your credit cards, be­cause their in­ter­est rates are typ­i­cally higher than other types of debt, like stu­dent loans or a mort­gage.

If your other types of debt are man­age­able, but your credit cards feel out of hand, you need to as­sess your sit­u­a­tion. Then you can choose a way to han­dle that debt, whether it's a self-guided pay­off strat­egy or some type of debt relief.

1 Fig­ure out your start­ing point

First, take stock by: Mak­ing a list of all your credit card bal­ances. Note the in­ter­est rate and min­i­mum pay­ment for each.

Com­par­ing that debt to your in­come. Add up your total credit card debt and di­vide it by your an­nual in­come. For ex­am­ple, if you owe $5,000 on your cards and make $50,000 a year, your credit card debt is 10 per­cent of your in­come.

De­ter­min­ing what you can pay monthly. See if you can pay ex­tra on top of your min­i­mums.

The path you pick from here de­pends on your debt level and whether you can pay more than the min­i­mums.

2 When to try DIY

If your credit card debt is un­der 15 per­cent of your in­come and you can pay more than the min­i­mums, take a do-it-your­self ap­proach.

Two com­mon meth­ods are “debt avalanche” and “debt snow­ball.” Here's how they work. Avalanche: Ar­range debts by in­ter­est rate and pay off in or­der from high­est to low­est. Keep­ing your fo­cus on the most-ex­pen­sive debt saves money on in­ter­est.

Snow­ball: Ar­range debts by bal­ance and pay them off from small­est to largest. This can give you some quick vic­to­ries to build momentum to­ward tack­ling big­ger debts later.

3 When to con­sider debt relief

Debt relief, which means get­ting a lower in­ter­est rate or a re­duc­tion in what you owe, can make big­ger debt loads more man­age­able. You may need it if you're hav­ing dif­fi­culty pay­ing the min­i­mums or your debt has ex­ceeded 15 per­cent of your in­come. Pick from three com­mon op­tions: Debt con­sol­i­da­tion. Sev­eral debts are rolled into one at a lower in­ter­est rate, of­ten by get­ting a per­sonal loan or us­ing a bal­ance trans­fer credit card.

Debt man­age­ment plan. You work with a non­profit credit coun­sel­ing agency to set up a struc­tured re­pay­ment plan over three to five years in return for lower in­ter­est rates.

Debt set­tle­ment. Typ­i­cally, a debt set­tle­ment com­pany di­verts your pay­ments to an es­crow ac­count. As late pay­ments mount, your cred­i­tors may agree to ac­cept less than the amount owed. But dam­age to your credit is sub­stan­tial.

This ar­ti­cle was pro­vided to The As­so­ci­ated Press by the per­sonal fi­nance web­site NerdWal­let.

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