Trimming the Fat on Debt

If you feel like you're hurdling over bills that seem to keep growing, you're not alone. Many people face a financial quandary at some time in their lives. Although debt can feel overwhelming, it can be overcome. If you do some research and make a commitment to work on your issues, your financial situation doesn't have to go from bad to worse.

There are several options you may consider: credit counseling, debt consolidation, or bankruptcy. How do you know what the best choice is for you? Your total debt, your level of discipline and your plans for the future are all contributing factors and should be carefully considered.

Examine Your Credit

First things first. It's important to start out with a clear idea of your credit picture. Even if you don't have a poor credit history, experts recommend checking your credit regularly. Getting a copy of your report allows you to scan it for inaccuracies, see how much you owe, and learn about where you credit stands.

Credit Counseling

For credit counseling, you may want to enlist the aid of a local branch of the nonprofit National Foundation for Consumer Credit (NFCC). The NFCC offers free or low-cost debt counseling, financial education, budgeting assistance, and other financial services for consumers. To locate an office nearby, you can check the NFCC website at or call toll-free 1-800-388-2227 for 24-hour automated office listings.

The NFCC also offers Debt Management Plans that can sometimes lower your payments, fines, or interest. A Debt Management Plan offers a systematic way to pay down outstanding debt. The NFCC can often negotiate reduced or waived finance charges and fewer collection calls, so you might be able to bring your debt under control more quickly.

Debt Consolidation

If you have the discipline to work out your finances on your own, you may be able to lower your cost of credit through specialized loans. Taking out a home equity loan is a popular way to consolidate debt. The advantage of these loans is that you enjoy certain tax advantages that are not available with other kinds of credit (consult your tax advisor for details). However, think carefully before using your home's equity to pay off debt. If you can't make the additional payment, you could lose your home.

A debt consolidation loan is another common way to consolidate debt, but you have to remember that you are simply transferring the debt to a new lender. A debt consolidation loan at a low interest rate could save you money, but for many consumers, a debt consolidation loan increases their overall interest rate, commonly with increased penalties if you fail to pay the loan.

The costs of these consolidation loans can add up. In addition to interest on the loan, you may have to pay "points" to get a lower interest rate. And be careful not to start charging on cards, because you'll end up having to pay your debt consolidation loan as well as your mounting credit card bills, putting you deeper in debt.

Debt Repayment Programs

If you don't own a home or are reluctant to borrow against your house, there are other consolidation options. A Debt Repayment Plan is also an option for diminishing your debt. This option requires you to deposit money each month with a credit counseling agency, which in turn pays your creditors according to a set payment schedule. Some credit counseling agencies charge little or nothing for managing the plan; others charge a monthly fee.

With a debt repayment plan, your credit status may be affected by the plan itself. This information about your accounts can stay on your credit report for up to seven years. However, if you can avoid filing bankruptcy, a debt repayment plan may be worth the trouble.