Where to start...getting out of debt??

Question

My husband and I are about to start our journey of getting out of debt. I want to lay our situation out and see if I can get some advice on our best options for getting out of debt. First of all we do not have any major debt such as mortgage,etc...just alot of self inflicted debt. We currently have one vehicle that we pay monthly and we owe about 1 year or so on it. We have four "bad credit" credit cards that we pay only the minimum on with balances totaling under $1000. We have several charge off's and collections between us two on our credit also. Nothing more than a couple of thousand if that. Now it seems easy to just split it all up and pay monthly but we are barely making ends meet paying our everyday bills (gro,utility,etc) We live on a budget and still have it hard. We have 2 children (2 and newborn) that we want to provide a decent life for. We would like to take a large loan and pay off everything and pay one lump sum, but how with bad credit? Help? Please shed some light...

Answer 1

Awesome question, and hard to answer because everyone's situation is slightly different! The biggest problem is that getting one big debt consolidation loan won't help if you don't correct the problems of overspending that got you into the situation in the first place. What typically happens is that people consolidate, then something happens (car engine blows up, kids need braces, etc) and you end up putting that on a card and end up owing even MORE than prior to consolidating!

I like Dave Ramsey's approach to personal finance. He defines a 7-step program for personal finance in his "Total Money Makeover" book. The 7 steps (known as "Baby Steps" are:

1) $1,000 to start an Emergency Fund
2) Pay off all debt using the Debt Snowball
3) Three to six months of expenses in savings
4) Invest 15% of household income into Roth IRAs and pre-tax retirement
5) College funding for children
6) Pay off home early
7) Build wealth and give! Invest in mutual funds and real estate

There's not enough space to go through everything here, but the idea is to build an emergency fund that you can use to handle unforseen issues that might come along. Once that's funded, you start knocking off debt, getting one item paid off and then focusing on the next (letting it snowball). Once that's done, then you build a larger emergency fund.

I know I haven't given it justice, but I've followed a similar program and I know it works. I'd recommend getting a copy of the book (you can buy it for about $10 from www.daveramsey.com), but you can also educate yourself by listening to his radio show (you can listen to it via his site or find a station in your area).

Good luck!

Answer 2

Evenif you get a loan, guess what - you're still in debt. You'd just owe it to a different company at a different interest rate, and that may or may not work to your advantage.

If you can, transfer your balances to the card with the lowest interest rate.
Focus on paying off the card with the highest interest rate first, since you are accumulating the highest additional debt there.

Call the American Consumer Counseling Center - unlike a lot of those "debt solution" places, this is a non-profit and won't take your money. They can give you some great counseling and advise you on the best options for your particular situation.
American Consumer Counseling Center
http://www.consumercredit.com/ or 1-800-769-3571

Also, get down to your local library tonight and start checking out personal finance books - they can be wonderfully empowering and inspiring, and most are written in simple, easy-to-understand terms.
-The Complete Idiot's Guide to Personal Finance in your 20s and 30s
-The Complete Idiot's Guide to Managing Your Money
-“Smart Couples Finish Rich” by David Bach
-any Suzy Orman books

Answer 3

Taking a large loan to pay everything off might just dig you in deeper.

You sound like you can get dug out of all this. I'd work on getting the credit cards paid off - the interest there will eat you alive. Try and put a little extra each month on the one with the highest interest rate until it's paid off, then work your way down. And in the meantime, don't charge anything that isn't an absolute necessity. If the babies need milk, that's a necessity. A new shirt isn't. And even for clothes for the babies, you can get them at yard sales and keep them clothed nicely, but inexpensively.

No point in worrying about the chargeoffs until you get the credit cards paid off.

In another year the car will be paid for - that will free up some money every month.

Good luck. Life won't be easy for awhile, but you'll get dug out of this.

Answer 4

First, make sure all the information on your credit report is accurate.

Second, try to pay off all or any accounts that are currently in collections or make payment arrangements with the creditor to pay off the balance monthly.

Third, any credit card that is over 50% of the available credit line should be paid down to under half of your total credit line. Your credit score is lowered when your available balance is over 50% of your total credit line.

Finally, if you have bad or no credit and have no credit cards try to obtain two credit cards and make sure all of your monthly payments are made on time. This will help increase your credit score. If you cannot be approved for a unsecured credit card, obtain a secured credit card.

Answer 5

I recommend Dave Ramsey.com
Or listen to him on XM 165 3:00-6:00 PM