Charles H. Miller
Writing about personal finance stuff puts us in a specific position where we get to receive questions from folks on a regular basis. Some of these questions we have already addressed in articles published on Wallet Weekly, some we failed to talk about (but we’re working on it). Today, we are going to answer what we deem are the 5 debt management questions. Some of them are not easy to grasp, but are important nonetheless. Let’s get going…
1. How to deal with a massive credit card debt?
There is no universal cure for this, but the goal of all strategies and tactics is the same — to repay as much debt as possible and keep the debt under control.
To that end, you can try some of the following:
- Move debt to a credit card with a lower APR to save on interest payments – there are cards offering an introductory period of 0% APR.
- Talk to your creditors to lower your APR.
- Get a low APR loan to pay off your other debts, and then have only one loan to deal with.
- Significantly trim your costs and budget for everything.
- Create a repayment plan.
Ultimately, you will have to change your behaviours in order to find room for savings that could then be used to repay what you owe.
2. How to improve your credit score?
Somewhat related to the previous point as the level of debt tends to correlate with your credit score.
In order to improve your credit score, you need to get your finances back in order. This means owing less money and paying off your debt in a timely manner. The same goes for any bills, including your mortgage/rent, utilities and so on — it is crucial to pay them on time, every month.
Then comes your credit utilization ratio — ideally you should use up to 30 percent of your credit limit, with the goal to get that number to 0. So if your credit limit is $10,000, you should have balance less than $3,000 to deal with.
Also, you shouldn’t open a new credit card account every now and then — that’s what credit bureaus classify as “new credit” and it can impact your score.
Doing this from one month to the other will have a positive effect on your credit score. It won’t come overnight, but all this effort will come with a big reward at the end.
For start, get a copy of your credit report from AnnualCreditReport.com. It’s free, and it will provide you with a starting point.
Related: 5 Factors With The Biggest Impact on Your Credit Score
3. What’s a good debt?
You may have heard that every debt is bad, but that’s not necessarily the case. We live in a complex world, and sometimes you need to use your credit card to buy things you need immediately. Things like a new laptop when the one you use suddenly dies — it’s a business tool and you need it in order to make a living.
As long as you end up paying what you owe, making monthly payments that are more than mandatory minimum, you are good to go. You don’t want to carry too much debt on your credit card(s) and you don’t want to use too much credit.
Also, a mortgage is a good debt — you use the money borrowed for a home to live in. The same is true when taking a loan for a new (or used) car and for financing your studies. These sort of loans do create some value.
In addition, by having some debt that you service on a regular basis, you will show your credit card company — and credit bureaus for that matter — that you are a responsible customer and they will be willing to support you and even reward you with a credit score increase over time.
4. When to declare bankruptcy?
Simply put, the bankruptcy provides means to restructure your debts, working with creditors to pay what you owe whilst getting a level of protection that won’t leave you penniless. The process provides those in debt with a way to settle debts, as we have seen with some very famous and wealthy people who have taken this route.
The timing can be determined by a few factors, but mostly – one should take this route if he/she can only make minimum payments on credit cards, and may be even using them to pay minimums on other cards. Also, those living from paycheck to paycheck who can’t pay bills, are about to be evicted, and have absolutely no savings, are on the list of likely “candidates” (if we can call them like that).
Another way to know whether it’s time to take the plunge is to compare all of your assets to all of your debts. If you have way more debt than assets, it may be time to declare bankruptcy.
5. How to declare bankruptcy?
The most “famous” Chapter 11 is reserved for businesses, leaving individuals with two options: Chapter 7 and Chapter 13.
Chapter 7, also called a straight bankruptcy, is easiest to grasp. It involves liquidation of your current assets to pay off as much of the debt you owe as possible. The remaining debt is then haggled over. Some can be forgiven, and the remainder is put into a repayment plan. The major drawback with Chapter 7 is that you may lose almost everything you own.
On the other hand, Chapter 13 — known as a reorganization bankruptcy — is better suited for anyone with property. It is also mandatory for folks with higher annual income who can’t qualify for Chapter 7.
Both options start by filing a two-page petition to your district bankruptcy court, alongside supporting forms and a fee of about $300. It is suggested to find a local bankruptcy attorney to have some guiding hand along the way.
