Living check to check isn’t easy. But living check to check while trying to climb your way out of debt can be even more daunting. According to NerdWallet.com, the average U.S. household has $15,355 in credit card debt and about $129,579 in total debt. Many Americans are in need of financial solutions to ease debt relief, help save for retirement and move them closer to home ownership.
I recently chatted with Joyce Tan, a compliance officer for Christian Credit Counselors, a nonprofit organization that helps people avoid bankruptcy and improve their financial health. Budgeting was the biggest topic of our discussion. Here are five tips worth remembering.
Nail Down Your Budget
“Budgeting is the key to making people aware of how much they can afford on expenses. It also helps nail down their current spending habits,” Tan said.
Budgeting is the process where you record your monthly income and expenses on paper or in a spreadsheet. A budgeting exercise is critical for pinpointing which expenses need to be cut down.
“Sometimes life happens; medical emergencies come up or your car breaks down,” Tan explained, “but if you haven’t budgeted funds to cover incidentals, it can make emergencies more difficult.”
Explore a Debt Relief Program
Tan shared advice she learned from clients in their debt relief program. Her average program participant takes three to five years to become debt-free.
“When clients contact us, the first thing we need to do is understand how much debt they have and how they got into debt,” said Tan. “Our program seeks to lower our clients’ interest rates through a ‘snowball’ pay-down method for their debt.”
This debt reduction strategy suggests starting with the smallest balance owed, while paying the minimum payment due on the larger debts. Then once the smallest debt is paid off, move on to the next smallest balance owed, and so forth.
Tan suggests lower-income earners take advantage of programs that simplify payments. Tan’s nonprofit provides a free budget and debt analysis before her team works with creditors to lower interest rates and consolidate bill payments into one monthly payment.
“Program participants only make one fixed payment to us, then we disperse their money every month. This helps them to get one step closer to debt relief,” she said.
Financial Literacy Classes
“Classes are a great way to learn how to get control of your finances,” Tan suggested. “They help with basic tasks like how to read your credit report or understand your credit score.”
Tan’s organization provides free classes on credit and budgeting, student loans and even special classes for military service members. Their education team offers classes in person, online or via conference call. Consider searching for financial literacy or coaching classes in your area.
“Without some solid solutions, debt can become a never-ending cycle because of the interest that builds on credit cards and from late fees,” she said.
Get Educated About Credit
Sonny Douglas, a senior Fresh Start consultant with Quicken Loans, said he thinks there’s room for more credit education when it comes to debt relief. He helps clients improve their financial situation so that they can boost their credit score and achieve homeownership.
“One of the biggest things that I see is people not knowing what debt to pay down or off first,” he said. “A lot of clients believe they should pay off collections or installment loans and then start closing credit cards out. But the only way paying off collections helps to increase your credit score is if the collection is deleted once paid off.”
Douglas recommends his clients try using less than 10% of the available balance on their credit cards.
“I tell them if they plan to pay a credit card off and close the account, then they’ll lose the payment history they may have built up over time,” Douglas said. “Some people don’t realize that closing out all of your credit cards can hurt your score.”
He also recommended some clients pace themselves when paying off debts – one debt at a time.
“Probably the best advice I can give is that less is more. The less credit you have to work with, the easier it will be to control,” he said. “A $10,000 credit card can help your credit in the same way as a $100 credit card if you use it correctly.
Double-Check Resource Credibility
Douglas suggests avoiding quick and easy debt solutions that may cause you to fall deeper into a financial hole.
“Sometimes I talk to clients who hop online and reach out to the wrong resources,” he said. “Credit is extremely tricky and there aren’t many places clients can go to get the help they need. Beware of the many scams out there.”
Douglas often refers his clients to CreditKarma.com because the company allows you to update your credit report weekly. We also use AnnualCreditReport.com because anyone can go there to get a free report and score once every year.
If you have limited funds, tackling your debt may seem like a tall mountain to climb. But these tips will help manage your bills or limit monthly spending. Credible resources are available and credit counseling is a great place to start. If you have questions or other valuable debt-relief solutions, please share them below.
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