Financial experts may distinguish between “good debt” and “bad debt,” but your circumstances can help determine how to prioritize paying off your debt. Here’s how debts can cost high finance charges and more:
- Pay day loans: These short term loans are offered at astronomical rates; the high rates and penalty fees can make it difficult to pay off pay day loans. If you have pay day loans or cash advances drawn against a bank account, pay them off first.
- Auto title loans: Although it’s possible to refinance your vehicle through a bank or credit union, payday lenders may offer auto title loans at a much higher cost. Using your vehicle as collateral for a loan can lead to a visit from the repo man if you fail to make payments. Taking out auto title loans is risky if you’re already having financial problems.
- High APR consumer debt: The annual percentage rate (APR) is the amount a debt costs annually expressed as a percentage of the debt amount. Many credit cards carry interest rates of 20 percent or more along with penalty and membership fees. This boosts the APR to levels that can make it very difficult to pay off credit card debt.
- Personal loans: Although family and friends may not charge interest or fees for that $100 loan, you want to pay off personal loans quickly. Otherwise, you risk losing friendships and having family problems. Treat personal loans the same as bank and credit card debt, and pay up as quickly as you can.
- Student loans: Ignoring student loans can ruin your credit. If you have several student loans, look into federal student loan consolidation. This rolls several student loans into one loan with one payment at a fixed interest rate. The interest rate for federal student loans changes annually on July 1. Check out the US Department of Education website for more information on federal student loan debt consolidation.
Debt consolidation for people with bad credit includes consumer credit counseling and debt consolidation programs; these services can help you develop a cash-based budget and affordable debt consolidation/repayment plans.
Columnist Brian O’Connell writes in Newsweek that U.S. consumers are expected to file 1.6 million bankruptcies by year end, the highest level since 2005. As the economy lingers in the doldrums, more Americans are going without health insurance. Many families are forced into bankruptcy when meeting living expenses without jobs or paying insurmountable health care costs. Although you may be well and have a job, it’s important to recognize potential signs of trouble in order to avoid appearing in bankruptcy court.
Getting the facts: Knowing what’s real, and where you stand
Having a wallet full of credit cards with high credit lines can provide a false sense of financial security; you figure you can handle unexpected expenses by whipping out the plastic. This may take care of an immediate need, but incurring high amounts of debt on high annual percentage rate (APR) credit cards creates debt that’s nearly impossible to pay off. The first step to avoiding bankruptcy is knowing how much you owe and what it’s costing you.
- Using credit cards to cover household expenses: If you’re using credit cards as a bridge between buying necessities and payday, you’re heading for trouble. Consumer credit counseling and debt consolidation services can help.
- No savings: Although financial experts prioritize paying off high cost debt first, it’s also important to establish a cash cushion for emergencies. Set up direct deposit to a dedicated savings account. Paying yourself first with direct deposit savings can help reduce your dependency on credit cards when unexpected expenses arise.
- Co-signing loans: No matter how much your daughter wants a new car or your boyfriend needs help buying a gi-normous flat screen, co-signing loans for others can lead to bankruptcy. If the other party fails to pay, you are liable for full payment.
- Large home equity loans: If you have a large home equity loan or line of credit, you are at double risk of mortgage foreclosure. If you don’t pay your primary mortgage, your home equity lender can foreclose, and they can also foreclose if you fail to pay them.
- No health care coverage: Increasing numbers of Americans are going without health coverage due to unemployment and employers who do not provide coverage. One trip to the hospital can ruin you financially. Having health insurance (if you can find and afford it) is important to help prevent bankruptcy.
Debt help options include low interest debt consolidation loans, credit counseling and debt consolidation services, and establishing a financial plan with an accountant or financial planner.
It’s important to know your rights when dealing with debt collectors. Instead of being intimidated by debt collectors who harass you, get the knowledge you need to protect yourself.
Familiarizing yourself with the Fair Debt Collection Practices Act (FDCPA) is one way you can protect yourself. This regulation, for instance, prohibits debt collectors from discussing the details of your debt with friends and family, but they can call a relative to ask for a phone number, address, or workplace to contact you.
Here are some other things to know about what debt collectors can and cannot do.
Debt solutions do not involve threats
Debt collectors are not allowed to threaten you or to use abusive language. Report any collector who uses profanity or threatens physical harm. It’s also against the law for them to claim they are are attorneys or government employees, or that you have committed a crime.
Ask for proof of credit card debt
If a collection agency contacts you about credit card debt you owe, ask for documentation. If you mail a letter asking for proof, the collector must stop contacting you unless they send a letter validating the amount of debt your owe.
Control contact with debt collectors
You can limit contact with debt collectors. They are not allowed to call you before 8 a.m. or after 9 p.m., unless you authorize it. They also cannot contact you at work after you’ve asked them not to.
If you have run up a lot of debt it’s your responsibility to pay it off. Get help from a debt counseling firm if necessary. But remember, owing a lot of credit card debt does not make you a criminal and you don’t have to put up with being harassed.