I still have a good credit score, been paying minimums mostly but spend 45% of my take-home on credit cards. Not in trouble yet but can see it coming with the cards jacking up their interest rates.
In the last 4 years I’ve had layoffs, underemployment and no health insurance which has contributed to the debt, but primarily I think I just live beyond my means. I’ve increased my debt by 50% in that time. Do I buckle down (finally), work hard and make sacrifices to take care of it- as I’ve read of people doing, or enter a DMP?
DMP or buckle down?
This is one of the hardest questions to answer. You see debt repayment is not about just the technical aspects of paying down debt. If you approach it that way, people will fail each and every time.
Debt and money troubles are often the symptom of greater underlying issues. Take you for example, while times have been hard you recognize that you have, at times, lived beyond your means using borrowed money. That contributed to your overall debt.
Buckling down for you will be successful as long as you are willing to make fundamental changes in the way you approach life and what you are willing to do without. If you can emotionally come to terms with going without in order to live within your income, it is possible.
Many people start this journey by making a budget. A budget built on estimates rather than real data is nothing more than a page of lies. But a budget doesn’t have to mean you go without either. It is healthy and appropriate to budget in reasonable fun stuff as well.
Instead what you need is a spending plan. This is a plan that is actually based on how you really spend your money. You can find detailed instructions for this in my book, Eliminate Your Debt like a Pro. If you follow that link you can download it for free. Start on page 81.
Instead of immediately making all sorts of cuts, spend a month tracking how you do spend your money. From that data you can make good informed decisions on where you want to make cuts.
When preparing what your expenses are each month you need to add in health insurance and savings. Even when digging out of debt you need to save money. If you don’t have any money saved and something comes up that you have to pay for, what are you going to do, put it back on a credit card you’ve worked so hard to whittle down. Plan to put at least $50 a month in a boring old savings account. And health insurance is necessary as well. One unexpected illness can wipe out all the debt reduction progress you will have made.
Now, if you track your cash, make a spending plan, factor in savings and health insurance and you can’t afford the minimum payments on your credit cards, the answer has been made for you. In that case a debt management plan won’t work for you.
If you can afford at least the minimum payments on your cards at that stage then maybe a debt management plan is something to look into. The advantage is that your creditors will reduce your interest rates. The disadvantage is that it will hurt your credit.
If you want to get out of debt and improve your credit report and credit score, pay at least the monthly minimum payment and pay the debt off in full.
Let me know in the comments section of this question if you think that sounds like a reasonable approach to you.