Are you a “Do-It-Yourself” person when it comes to broken windows or leaky faucets?
How about credit repairs?
Yes, fixing your finances could be as much of a DIY project as tackling window and faucet problems.
One of the most popular and effective ways to deal with credit card bills, medical bills, and other unsecured debt is to contact a nonprofit credit counseling agency and apply for a structured debt management program.
But if you’re a do-it-yourself kind of person and want to tackle it on your own, a DIY debt management plan may be right for you.
Unsecured loans generally have much higher interest and revolving credit – it becomes a cycle that seems like it will never end. But you can end it with some hard work and a proven strategy.
This page will walk you through how to manage your debt, providing a template for a do-it-yourself debt management strategy.
Yes, you can. You’ll have to take a deep dive into your spending habits, budget, and what you owe. It also involves calling your creditors and requesting reductions in credit card interest rates and fees. That may seem daunting, but many banks are willing to work with individuals and will take your call.
“Chase is committed to providing customers who are experiencing financial hardships with the right solutions based on their individual situation,” said Chase Bank media relations officer Lauren Francis. “We encourage customers to call us to discuss options that may be available to them including but not limited to payment arrangements, payment programs, and debt settlements.”
Nessa Feddis, deputy chief counsel for the American Banker Association said, “Each bank has a different policy and each case has to be considered on an individual basis, but customers might get a better answer if they go directly to a bank. It might depend on what kind of history they’ve had with the bank and the situation they’re in.”
She said that if their credit issues are an aberration because they lost a job or just went through a divorce, the bank might take that into account. “It’s also a positive if you have a checking account, or have taken out a car or home loan,” she said. “These are things that might work in their favor as far as getting a positive resolution.”
Banks are also aware that some people can’t do it on their own.
“But at times, we will suggest that customers meet with a reputable credit counseling agency if their financial situation exceeds their ability to pay,” Feddis said.
There are specific steps to a debt management plan that all must be followed with care to make it work:
Nothing about reducing debt is easy, but, if you follow these steps and stick to it, your plan will be effective.
Keeping track of payments and balances is important, so download the free InCharge debt reduction spreadsheet, which will help you calculate your repayments and keep track after you input your balances, interest and payments.
Organize unsecured debts by name, balance due, interest rate, monthly payment and due date. If you don’t know who you owe, get a copy of your credit report from AnnualCreditReport.com.
In another area of the spreadsheet, organize monthly expenses that need to be paid first, such as rent, utilities, food, car payment, student loan payment, childcare — all your necessary bills.
List all sources of monthly income. Then subtract monthly expenses from monthly income.
What is left is how much you have available in discretionary income to pay off debt.
The two most common methods to pay off debt are “debt snowball” and “debt stacking,” which we like to call “debt wrecking ball.” The difference is in what you pay off first.
With both approaches you make minimum payments on your other balances while aiming a larger payment at one balance.
With the snowball method, you’ll see some immediate success, which builds momentum and confidence. But while the small debt is being paid off, larger debt is expanding because of interest.
The wrecking ball method may feel slow, but it will cost you less money in the long run.
It’s important to keep track of what you’re paying and how quickly debt is being reduced.
You can’t automatically erase your debt, but you can reduce interest and fees, which will make your payments work harder for you. As mentioned before, a key part of the do-it-yourself debt management strategy is to call the card companies and negotiate lower interest rates.
Many people find this difficult to do, but keep in mind that you’re advocating for yourself and lowering your debt.
It’s important to do your homework before you call, including knowing what you’re paying both in interest and monthly payments. Some other tips are:
The best thing you can do is to put away your credit cards, otherwise you’ll be back where you started and your plan won’t work.
In a traditional debt management program, you’d be required to stop using all your credit cards. To make your DIY debt management plan work, you must do the same thing. So, close all your credit cards.
Don’t apply for any new cards or acquire new debt until all your cards are paid off. Get a budgeting app for your phone or tablet to help stay on track.
Track progress on your spreadsheet and keep an eye on your credit report to monitor the positive impact your hard work is having. You can check your credit report for free once every 12 months with each of the three credit-reporting agencies: Experian, Transunion and Equifax.
You can also use free offers from several credit-related websites to track your credit score progress.
You may wonder how all the numbers come together to form a do-it-yourself debt management plan. Let’s walk through an example, using a fictional consumer we’ll call Beth.
Traditional debt management plans usually take 3-5 years, and a do-it-yourself plan should have a finish line, too. After going through her budget and finances, Beth determined she could pay off her $12,000 in credit card debt in five years, which means 60 monthly payments.
If she were just paying the principal, that would mean a $200 a month payment. But, of course, interest payments have to be included, too.
Beth’s hypothetical credit cards are with Bank of America, with a balance of $3,500. The principal over 60 monthly payments is $58.33 ($3,500 divided by 60). She originally had a 22.5% interest rate, but she negotiated it down to 9.99%.
The balance of $3,500 multiplied by the new interest rate (.09), is $315. Divided by 12 (for 12 months, because it’s annual interest), is $26.25. Add the principal and the interest payment together: $58.33 + 26.25 = $84.58.
That’s Beth’s monthly payment on that one card, just a little more than a quarter of her debt. Imagine if the interest were still 22.5%! No wonder it’s so hard to pay down credit card debt.
Beth repeated the exercise with her three other cards, and figured out a monthly payment that fit with her budget. She had to fiddle with different time frames to do it, and came up with the five-year goal as one she could afford.
The interest payment will decrease each month as the balance gets smaller, but Beth decided, rather than reducing the payments as the interest payment decreased, she’d keep paying a set amount. Doing that made the balance melt away as the interest declined.
It may seem like a lot of tough math, but it’s worth the effort to build a budget that works.
Once you’ve worked out your payment schedule, contact a nonprofit credit counseling agency. Ask if you could enroll in their debt management program, and get an estimate for a consolidated monthly payment.
How does it compare with what you negotiated on your own?
If your payments are higher than the estimate, that may mean you didn’t get the same interest rate concessions the credit counseling agency received. It might make financial sense for you to pay for a nonprofit agency to administer your debt management program.
If your payments are lower, congratulations! You did the work yourself and saved some money that can be applied toward paying off your debt even faster.
You may also decide you’d rather have someone else tackle the math and budgeting. A nonprofit credit management agency, like InCharge Debt Solutions, administers the program, works with creditors to consolidate your payments and create a monthly payment plan that you can afford.
It’s up to you to decide what works for you. DIY debt management plan may be great for some people, but not be a good option for others, depending on spending habits, financial obligations, credit history and level of commitment.
Some of the pros are:
But there are also considerable cons.
If a DIY debt management plan doesn’t seem like a good fit, you may want to consider credit counseling, which could lead to a traditional plan.
After going over your finances, you may also feel your situation is too difficult to tackle on your own, or you’re too deep in debt to make it work. You may have tried negotiating with credit card companies, but you weren’t successful.
Creditors agree to lower interest rates for credit counseling organizations like InCharge. That allows InCharge to consolidate your payments, and create a monthly payment plan that you can afford. It does all the things the DIY program does, only InCharge administers the program, takes your one payment each month and distributes it to your creditors in agreed upon amounts.
Credit score is not a factor in joining a debt management program, so even if you have bad credit, you can still take advantage of this debt-relief option. There’s usually a small monthly administrative fee, but otherwise it costs as little as DIY.
A traditional plan also has account management software so you can track all your payments, balances and interest. There is someone available to call for help when you have issues with your statements or creditors and provide education on budgeting, saving money and being an informed consumer.
There are drawbacks. If you miss a payment, you may lose whatever concessions card companies have made; you must stop using all your credit cards; and finally, smaller banks, some department store and gas station card companies don’t always agree to debt management programs.
As mentioned before, paying off debt isn’t easy, even when you follow the plan, use a spreadsheet and stick to a budget.
Some tips that can make it easier and help you stay motivated:
Just don’t make it an expensive one that will put you back into debt.