Debt Prioritization

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Debt Prioritization: Too little money for too much debt
3 years ago
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With adjustable mortgage rates, varying credit card interest rates and other forms of fluctuating debt, sometimes even the most well-planned budget may not have prepared for unexpected payment increases. When this happens, most people tend to choose three options: payment neglect or delinquency, filing for bankruptcy or debt reduction. In order to keep a good credit score, consumers should try to avoid the first two choices whenever possible, as most creditors will only help those people who are not seen as a credit risk.

Debt prioritization begins by making a credit inventory. Monthly household income coming in and going out needs to be listed and, for the outgoing income; the list needs to be sub-divided by expense/creditor, interest rate and payment due. After the detailed list is made, be sure to pull your credit report. This will show any delinquencies on your credit and could be a possible explanation as to why your monthly revolving debt payments have increased; as credit card companies reserve the right to raise interest rates based on repayment performance.

If there are no late payments, contact all of your revolving debt (credit card) issuers to ask for a lower interest rate. While many may be reluctant to do this at first, ask for the retention department and express your desire to remain a loyal customer, however you will take your business elsewhere if unsatisfied. For those will excellent credit, apply for a 0% APR credit card. Shift all balances using a balance transfer option but do not close the paid-off accounts. This available credit will help lower your debt-to-income ratio. Be sure when choosing a 0% interest rate credit card to note any promotional rate terms and fees.

Since having a lower rate, whether it be 0% or a reduced one though creditor negotiation, will free-up more money in the monthly budget, this extra money can be used to pay extra on the promotional interest rate credit card, pay-down the lower interest rate credit card faster or be saved as a down-payment on a mortgage refinance. Prioritize though, as the 0% APR credit card's promotional period ends and the interest rate will skyrocket; so be sure to pay that card off as quickly as possible.

After credit card options have been explored, people with good credit can try to perform a mortgage refinance. This will help lower monthly debt also, but in some cases may require a hefty down-payment. If trying to refinance a home recently purchased (in the last few years), the home may be worth far less than a bank values it. In this case, unless the home already has a high amount of equity or you are prepared to put down an amount of money requested by the bank, refinancing may be a more costly option upfront with long-term rewards. Should a mortgage refinance option is too expensive, or if there is no mortgage to refinance, consider exploring an auto refinance. If owning a vehicle purchased within the last two or three years, ask your bank if an auto refinance is a viable option. Interest rates have come down and the monthly payment savings can be used to pay off revolving debt faster.

Finally, as a last resort to catch-up on all debt, student loan holders can seek a loan forbearance. This will allow a period of temporary payment stoppage; however the interest will still accrue during this grace period. When prioritizing debt, having a student loan forbearance choice is the best option to keep current on all other debts while exploring credit card negotiation and auto/home refinancing options. Remember though: a borrower can only ask for a loan forbearance just twice during the lifetime of the loan; so use this option only when necessary.

By prioritizing debt and exploring debt-lowering techniques, consumers can stabilize their credit while being able to hold on to their autos and/or homes.

by A. Morris
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