Is your debt a problem? A financial stress test
You've heard about "stress tests" for financial institutions. What about a stress test for your own household?
The American Bankers Association has an online "Financial Stress Test" that lets individual consumers find out if their debt is a problem. It's simple and quick, with questions such as:
- Are payments to creditors taking up increasingly more of your monthly income?
- Do you have to choose which bills to pay and which to put off?
- Do you make only the minimum payment month after month or skip payments?
- Do you use your savings to pay current bills and everyday expenses?
- Are creditors starting to contact you for payment?
- Do you worry a lot about money?
While many people worry often about money, if you answer "yes" to any of the questions above, the American Bankers Association advises tackling your debt problem head-on. Achieving relief from debt is never easy, but the best way to attack debt is to get your arms around the problem, then consider debt relief options.
Steps to debt relief
If you're faced with unmanageable debt, try these steps:
- Get organized. Running away from your debts will only make it worse, so the first steps is to gather your statements and list all your debts. Include the monthly payment on each and the interest rates.
- Create a spending and repayment plan. If you feel you can build the discipline to handle your debt yourself, create a budget that includes payments to draw down your different debts. If you have multiple credit card balances, a car loan, student loans and more, you may be unsure which debt to tackle first. There's no one best way, so read about debt relief and choose a method that works for you.
One strategy is to pay the minimum payment on all debts to stay current, but to focus all extra repayment cash on the highest-interest loan until it's gone -- then turn to the loan with the next highest interest rate.
Another popular method is financial expert Dave Ramsey's "debt snowball", in which you use every available dollar to pay off the debt with the smallest balance first, then focus on the next-largest balance. This "debt snowball" helps individuals who get motivated by hitting these milestones of extinguishing debt. As each account gets repaid, you add the payment from that card to the next.
- Consult a credit counselor. If your credit problems seem overwhelming, a nonprofit credit counselor may be able to help. You can find one through the National Foundation for Credit Counseling.
- Apply for a debt consolidation loan. If you are a homeowner with enough home equity and good enough credit, you may be able to wrap your debts into a debt consolidation loan. Just be sure you have a plan to make those payments and avoid getting back into debt. To see if you qualify, you can fill out the form on this page with basic information about yourself and your home.
- Refinance your home. If you don't have enough home equity to consolidate your debt, you may still benefit from a home refinance by reducing your mortgage payments and applying your savings to your credit card debt.