People take on debt for many different reasons, including to buy a home, pay for unexpected expenses or fund a college education. Others fall into debt without meaning to by overspending or falling victim to rising interest rates or financial hardship. Eliminating debt, including home mortgages, helps improve an individual's credit record and makes it easier to borrow in the future.
One reasons that debt can be so difficult to pay off is the fact that is grows each month as the lender charges interest on the principal. Consumers who take steps to reduce their interest rates make debt easier to pay off. In the case of a mortgage, this may mean refinancing to get a new mortgage with a lower interest rate. Mortgage borrowers can also ask the lender for a mortgage modification, which may reduce interest or extend the payment period to make the loan easier to pay off.
Consolidating debt by combining two or more accounts into one is another way to reduce debt and make it easier to pay off. One example of consolidation is transferring the balance of a high interest credit card to another credit card account with a lower interest rate. Homeowners can refinance to get a mortgage that incorporates other debts and provides the borrower with a single monthly payment instead of several. Student loans are another type of debt that borrowers can consolidate, combining loans and eliminating those with the highest interest rates.
After getting interest rates as low as possible and consolidating debt, the road to becoming debt- or mortgage-free involves making payments each month to reduce the debt little by little. Making minimum payments may seem like an attractive option, but this does little to reduce debt. Minimum payments may not even cover the cost of interest, meaning that even with monthly payments, the total debt continues to rise. This is known as negative amortization. Doubling monthly payments, or increasing them to the highest affordable level, drastically speeds up the pay-off process and also reduces the total cost of interest over the life of the loan.
Borrowers with more systemic problems may want to seek credit counseling to learn about how to avoid debt and what the best methods are for paying off current debt. Credit counseling services, many of which operate as nonprofit organizations and offer free or low-cost counseling, teach consumers how to consolidate debt and work out more affordable payment plans with lenders. A credit counseling service may also be able to suggest lifestyle changes to avoid accruing debt in the future.
One of the changes that a credit counseling service is likely to suggest involves cutting back on spending. Getting rid of an unnecessary monthly expense, like a second phone line or cable television bill, means that much more money can go toward paying off debt. Making charges to a credit card that already has a balance means that purchases cost more than the initial price due to interest. A new household budget with an ample allowance for paying off debt can help make sure that money is available at the end of the month to make the payments.
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