Earlier today I received an email from a terrified reader who was worried she would make the “wrong move” and that it would hurt her credit score. Because she, like many others, had medical debt and credit card debt in addition to her student loans, she wasn’t sure about the proper plan of attack. Problems with Sallie Mae and a brief period of unemployment have complicated things even more for this reader. She wanted to know how to best handle her circumstances and what private loan consolidation lender I suggested for her situation. What follows is my advice to this reader…
When you have a number of debts working against you it can seem overwhelming. One of the best ways to deal with an overwhelming problem is to break it down into smaller, more easily fixed problems. Dealing with debt is no different.
Step 1: Take Care of the Important Things
Credit scores, Sallie Mae, and interest rates may seem like pressing matters, but they are nothing compared to what really matters in life. Getting back your health, putting food on the table and a roof over your head are all far more important. Going broke or mortgaging your future to make sure you are not late on a bill can be just as big of a mistake as ignoring your debt.
As you plan your financial future, the first step should always be to make a budget and track your spending. Your budget doesn’t have to be set in stone, but it must be realistic. Putting things down may seem like a waste of time or at best tedious, but it is essential to making sure that you get your financial ducks in a row.
Step 2: Eliminate the things that are not important
One of the great benefits of putting together a budget and tracking your spending is that you see how things add up. A daily coffee, or the occasional lunch with co-workers can become a huge monthly line item. Things like premium cable or an expensive cell phone plan can easily be trimmed to more manageable numbers.
Every dollar of spending that you are able to eliminate can be used to pay down the principal balance on your debt. Reducing principal means you pay less interest and it gets you trending in the right direction.
Step 3: Put together a debt reduction plan
Set goals and stick to them. When you are paying down a number of different debts, it helps to focus on one debt while just making the minimum payments on the others. Its obviously critical to stay current on all of your debt, but use whatever spare money you have to savagely attack just one type of debt. It can be a credit card or a single student loan.
Once you entirely pay off one debt, you will have more money in your pocket each month and more ammunition to attack the next bill that you choose to focus on.
When it comes to picking which debt comes first, there are a number of different methods. This site has previously discussed two of the more popular ones, avalanche and snowball.
Step 4: Find ways to lower your payments
This is where things like income based repayment plans and student loan consolidation come into play. If you have federal loans, get signed up for IBR or PAYE. Your payments will be lowered to a small percentage of your income and only go up if your salary does.
If you have private loans, your options are a little more limited. This is where private loan consolidation enters the picture. Private student loan consolidation can help, but getting your loans consolidated can be tricky if you don’t have a good income and credit history. As for which company is best, it really depends. At the end of the day, the best company will be the one that saves you the most money in the long run. We have put together a list of the best private student loan consolidation companies, but the individual rates that you qualify for could make one company far better than the others. (Tip: apply with several companies. Whether you apply for one or five, the effect of the credit pull is the same on your credit report… the credit bureaus consider this shopping around and there is no penalty to your credit score if the multiple credit inquiries are within the same small time period)
Step 5: Revise and repeat
It is impossible to plan every penny of your finances for the next 10 years or even just the next year. There are way too many variables. However, as you acquire new information you can constantly be tweaking your plans to put yourself in the best position to succeed.
As your situation improves, you will have new opportunities to save money, and more money each month to address your debt. If you think about it, every day will be better than the last if you stick to your plan. That means if you are finding a way to get by with medical, credit card, and student debt… not only can you get everything addressed, but your toughest days are behind you!