Being underwater with debt problems is absolutely devastating. Sadly, debt is a way of life for most people. There really is no way to avoid it either. However, there are smart reasons to go into debt. Buying a house is a very good reason to go into debt, for example. Credit cards are a necessary evil. We need to build up credit, and one of the only ways to do that is by taking out a loan or line of credit and making regular payments.
As your credit continues to grow, it becomes very easy to add additional lines of credit and keep spending. Before you know it, you can have 19 bills coming in the mail, all expecting you to pay off your principal amount plus interest. Below, you'll find examples of several different schools of thought when it comes to relieving your debt problems. By following one of these methods, you'll find a way to tread water in an overwhelming sea of debt.
For the first scenario, we'll start with a last resort. Debt consolidation means that you go through a debt management firm and hire it to contact your creditors and take on your debts itself. Essentially, instead of having several different creditors, you now have only one, so you just make one monthly payment. The point of debt consolidation is to relieve your financial stress and possibly take varying interest rates and turn them into one lower interest rate. The negative aspect of this option is that you will end up paying an additional monthly service fee to your new creditor. If you are one step away from declaring bankruptcy, however, this option may save your credit score and help you keep what you own.
The second method is to pay off the debts with the highest interest rates first. Many financial experts see this as the most logical approach to paying back your creditors. It's an unfortunate thing that a majority of what we end up paying is interest on the original loan. This method may save you the most money in the long term, but because your larger loans may have the highest interest rates, you won't see much short-term success.
A very common method popularized by Dave Ramsey is the Snowball method. This plan emphasizes paying off your smallest loans first by adding any extra payment at the smaller amount. Once you pay off a small loan like a credit card balance, you take whatever you would have paid toward the small loan and pay that extra amount to the next smallest loan. The payments roll over to the next one, hence the snowball analogy. The downside to this method is that you will pay more interest over your debt cycle, though many argue that paying off a debt, no matter how small, is a victory and becomes a personal boost on your way to becoming completely free from debt.
There is nothing worse than owing someone money. Creditors are like friends who lend you cash when you needed it, except that they gouge you with interest rates. It's time to find the best way to break free of these creditors be in the black financially instead of in the red. Once you're free of debt, you can finally take your family to Disneyland and spend the money you would be paying in interest on overpriced churros.