You hopefully already know the basic steps that are required to get out of debt: Cut up your credit cards, tighten your budget, and get lower interest rates and payments for your credit cards and mortgages, if you can. Those steps never will change. We also hope that you know what traps to avoid, such as shady debt-consolidation plans that gouge you with ridiculously high interest rates and other schemes that prey on people who are desperate to escape debt.
However, certain debt-relief options are particularly smart for consumers as we approach 2015, because the options are new or because developments make existing steps more appealing than ever before.
If your problem includes credit-card debt, for example, you should know that banks and new online lenders increasingly provide debt-consolidation loans that can come with lower interest rates than what your credit-card company charges. If you want to free up more money to pay off a credit card or other common debt, such as a student loan, then you can pursue mortgage relief that lenders agreed to deliver to settle claims by the federal government that they defrauded consumers.
Such debt-relief help is essential these days. Thirty-five percent of Americans have unpaid bills that have been turned over to a collection agency, according to a July 2014 report by Urban Institute, which is an economic- and social-policy research center. The report says people who have debt that’s in collection owe an average of $5,178 for such cases.
BANK ON IT. Ever since the financial crisis of 2007–2009, debt-consolidation loans have been difficult to get from banks, says personal-finance author and expert Gerri Detweiler of Credit.com, which provides personal-finance advice for consumers. Unemployment rates that were as high as 10 percent in 2009 made it more likely that a borrower who was on the ropes would lose a job and default on the loan. Now, banks seek to restore lost profits from their main line of business, which is lending. As a result, banks are more willing to approve loans that can help consumers to dig out of debt.
New Job Can Mean New Chance to Reduce Debt
In particular, banks now want to make loans that carry higher interest rates than do mortgages, as virtually all unsecured loans do. Some banks provide debt-consolidation loans typically with a 10 percent interest rate, depending on the borrower’s credit rating, which is a significant improvement over the average credit-card rate, which is about 16 percent, according to Bankrate. However, for people who have a low credit score (less than 650), debt-consolidation loan (as well as credit card) rates easily can zoom to 30 percent. The key, of course, is to secure a debt-consolidation-loan rate that’s lower than your credit-card rate is.
A debt-consolidation loan has fixed payments for a set term, typically 3–5 years. The primary benefit of a debt-consolidation loan is that a consumer can save money compared with paying the minimum monthly balance on a credit card. For instance, if you owe $10,000 in credit-card debt and paid 16 percent interest, your minimum monthly payment would be $400. If you paid the minimum of 4 percent of your balance each month, you’d be debt-free in 12 years and 8 months after paying $14,897, according to Bankrate’s online calculator. If you took out a 3-year fixed-rate debt-consolidation loan at 14 percent, you’d be debt-free in 3 years and will have paid a total of $12,304. Although your interest savings will be relatively small ($2,493), you’ll have paid off your debt much sooner than if you had paid the minimum on your credit card. Furthermore, you’d have transformed credit-card debt to a fixed-term loan, which is viewed more favorably on your credit score. That’s because you can’t add to the balance of the loan, and repayments on term loans tend to be better than those that are on credit cards.