Getting out of High Interest Debt the Right Way

I received an email from a listener asking whether or not I thought that it was a good idea to seek consumer credit counseling and get all of this debt consolidated? As always, my typical answer is that it is not a good idea. Those services are usually not as advertised and can make a situation much worse.

I asked the listener to just send me a synopsis of his debt situation. After looking at it, going to one of these services would have been a tragic mistake for the following reasons. First, it was not an enormous amount of debt. Second, he was able to make the monthly payments. Third, his credit scores were such that he had other options. Finally, he could actually pay the debt off in a reasonable timeframe.

So if you are facing this situation, here are some questions that you need to ask.

Are you able to make the payments? The answer has to be yes. As long as everything is current, you do whatever you have to do to keep it that way. So figure out a way to stay in the good graces of the creditors.

Do you know how long it would take to get out of debt? This is crucial. Regardless of your interest rates, you need to know how long it would take, at your current pace, to get out of debt. Simply use a debt calculator and calculate how long it will take to pay that amount of money off. Then use the debt funneling method of getting out of debt.

Debt funneling is a process that can help you get out of debt faster. When you look at your debts, they come in all shapes and sizes. The smaller ones will pay off first. Once you pay off a debt, you take that monthly premium payment and then apply it to the highest interest rate card. You keep repeating that process until the majority of the money is going to the highest interest rate card until everything is paid off.

Do you know your credit scores? Many times, a person’s credit score is good enough to transfer and combine all of that debt into a low interest rate card. Without knowing your credit score, it is impossible to know if that is an option.

The ideal credit score is above 700. Between 650 and 700, you still have options. However, they start factoring many more things into the equation. If you can get that low interest rate card, then you really have gone a long way to solve your problem.

What if your credit scores aren’t any good? Then you start the process of rebuilding your credit scores. You pay everything on time and talk to your card companies about what it will take to get those interest rates lowered. Some credit card companies have programs for this type of thing.

The keys to getting out of high interest rate debt are:

1) Stay current with your payments – at all costs
2) Work on your credit scores so that you can decrease your interest rates
3) Determine what options are available to you to lower interest rates
4) Commit to the process and accept the fact that it will take a period of years to complete
5) Understand that debt consolidation is a convenience and not a prudent strategy unless your overall interest rate is lowered
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.