Debt can bring out the best and worst in people. When you are put in a desperate situation, how you react will determine if the outcome will be to your benefit or not.
Despite your best efforts though, one thing seems to always be affected by debt: your credit score. While different programs have varying effects on this figure, all of them will lower your score one way or the other. Debt consolidation hurts it when you take out a new loan to pay off your other debts. Debt settlement does the same thing because you are required to default on your payments deliberately to get to your debt reduction goal. In bankruptcy – well let’s just say you will suffer a 10 year stigma that will make financial assistance very difficult to come by.
If this is something that you want to avoid (probably because you have plans to get a loan or purchase a home in the future), then you have no choice but to pay off your debts the traditional way. That means there will be no significant reduction on your debts and you will not hire a third party company to help you because that will reflect on your credit history.
While that is a tad bit harder than debt relief programs, it is effective nevertheless. It involves a very simple principle of paying more than the minimum on your priority debts. While you are trying to reduce your priority debts as quickly as possible, you are continually paying for the minimum of the rest. Your disposable income will be divided into the minimum payments of all your debts and anything extra will be put into your priority debt.
There are two types of methods that can be applied here: the snowball and the avalanche.
In a snowball method, you will rank your debts according to their outstanding balance – from the least to the greatest. The priority will be placed on top – which in this case is the least amount of balance that you have. The great thing about this method is it can provide you with encouragement early. Since you are concentrating on the one with the least balance, you will experience payment completion faster. That is known to be more encouraging.
The avalanche method, on the other hand, appeals more to logical thinkers. They list their debts based on the interest rate – putting on top those with the highest rate. Of the two, this is where you can save the most because you are eliminating the debts that will get you to pay more on interest. However, achieving payment completion will be longer. So if you do not have the discipline and you know you need the encouragement to go from one debt to the other, you may want the opt for the snowball method. It will provide you with the satisfaction early on.
While these two methods can help you pay off debt without damaging your credit score, there are certain qualifications that needs to be met for it to be effective. Obviously, a steady income is a must but your debt to income ratio is also very important. It has to be low and you need to be able to cover for more than the minimum payments of your debt. Otherwise, this will not work at all. You may have to default of some debt payments and that will damage your credit score.
If you cannot afford it, you have no choice but to opt for a debt relief program. It may damage your credit score but that is better than not being able to pay off your debts at all.