Craft a Personal Debt Management Plan in 5 Easy Steps
This strategy can prove if you can eliminate debt effectively on your own.
For most people, we prefer to handle financial challenges on our own. We’d rather put in a little extra work to do something ourselves rather than reach out for help. It’s a natural instinct. Still, when it comes to debt elimination, do-it-yourself isn’t always the wisest option. A personal debt management plan may not be the most efficient or cost effective method.
So how do you judge if you can eliminate debt effectively on your own or if you need help? The strategy below walks you through do-it-yourself credit card debt elimination step by step. It also explains how to evaluate your debt management plan to see if it’s the best option. If you have questions or would like to compare your plan to consolidation through a credit counseling agency, call us. You can call to speak confidentially with a credit counselor at no charge. You can also complete an online application to request a free consultation.
Step 1: Assess your debt
The first step is usually the most painful. It’s also part of the reason people avoid making personal debt management plans. You have to sit down and take stock of your debt. It may not be pretty, but you must know where you stand in order to effectively plan to move forward.
Answer these questions:
- How many credit card balances do you carry over month to month?
- What’s the current balance on each card?
- What’s the interest rate applied to each debt?
- How much credit card debt do you have, in total?
- What’s your total monthly credit card payment?
- What percentage of you income does that use?
Make as detailed of an account of your debt as possible. You can use our free Debt Worksheet to help you spell it out.
Step 2: Evaluate your budget
This next step helps you determine how much budgetary flexibility you have for debt elimination. In order to eliminate debt effectively, you need cash flow. The more income you have for debt elimination, the faster you can accelerate a personal debt management plan. If you’re barely able to make ends meet, then you may have limited options for implementing any kind of elimination plan.
Ask yourself these questions:
- How much income do you have available each month for debt elimination?
- Are all of your debts current, are you worried about falling behind or have you already fallen behind?
- If so, by how much?
- Do you have any discretionary expenses that you can temporarily cut to bolster a debt management plan?
Cash flow is critical to any debt elimination strategy. In addition, if your debts are current so you haven’t damaged your credit, then you may have options available to consolidate debt.
Step 3: Reach out to each of your creditors
In many cases, the main reason credit card debt is such a challenge to eliminate is due to high interest rates. With interest rates in the teens or even twenties, over 2/3 of every payment you make goes to cover monthly accrued interest charges.
It naturally follows that by reducing the interest rates that apply to your debt, you make it easier to eliminate. This means there’s significant value and great potential benefits in calling your creditors to discuss rate reductions.
Here are some tips for negotiating rates effectively:
- Know your credit:
- Do you have any negative items in your credit report?
- What is your credit score?
- How much has your credit score improved since you opened each account that you have?
- Know your history as a customer:
- How long have you been an active credit user with that company?
- Have you missed any payments?
- If not, how many years have you paid on time?
- Know current rates – today’s average credit card interest rate is 18.76%
Each interest rate you negotiate effectively makes it that much easier to eliminate your debt effectively. Now, with your rates lowered, you can implement an effective debt management plan.
Step 4: Prioritize your debts for elimination and calculate the payoff
An effective personal debt management plan focuses your efforts and cash flow on eliminating one credit card debt at a time. Spreading your efforts out to try and eliminate all of your debts equally at once is not efficient. This is especially true when you consider that the higher APR applied to some of your debts means those debts cost more.
Consider this example:
- Let’s say you have a $1,000 on each of two credit cards
- One credit card has 15% APR and the other has 22%
- On a regular minimum payment schedule:
- The debt would take 97 months to eliminate at 15% APR; total interest charges would be $636.94
- At 22% APR it would take 150 months to eliminate with total interest charges or $1,591.37
As you can see, debts with higher APR should be prioritized for elimination. You pay the minimum requirement on all of your other debts while putting as much money as possible towards the highest APR.
Each debt you eliminate frees up cash flow, because you have one less bill to worry about. So once you eliminate the highest APR debt, you move on to the next on your list. And you gain momentum as you go.
Follow these steps to calculate your payoff date:
- Organize your debts from highest APR to lowest.
- Use a debt repayment calculator to determine how fast you can eliminate each debt, making the largest payments possible.
- Do this for each debt you have and then total them up.
- This is your estimated payoff timeline.
Ideally, you should be able to pay back everything you owe within 5 years. If it takes longer, look back at your budget and monthly expenses. Is there anything else you can cut to free up to eliminate debt faster? If not, move on to Step 5.
Step 5: Compare your plan to other options
The final step in cementing your personal debt management plan is to compare the timeline to other options you have available. Is there a debt relief option out there that would allow you to pay off your debt faster and with fewer interest charges? If the answer is yes, then you should go that route instead of trying to eliminate debt on your own.
Weigh your debt management plan against the following:
- Could you qualify to transfer your balances to a balance transfer credit card with 0% APR?
- If so, could you pay off the debt in full before the introductory APR expires?
- Can you get approved for a debt consolidation loan at an interest rate at or below 5% APR?
- If so, could you afford the monthly payments if you set the term of the loan at five years or less?
- Are you eligible for a formalized debt management program through a credit counseling agency?
- If so, are the payments lower than what you’d pay on your personal debt management plan?
- Will the payoff take more or less time?
Comparing personal debt management to assisted management through credit counseling
If you notice the last option for debt relief has a similar name to the personal plan you develop following the steps on this page. A debt management program is an assisted form of debt consolidation. You work with a credit counseling agency to set up a plan that works for your budget. They negotiate with creditors on your behalf.
In some ways, assisted debt management and do-it-yourself debt management are largely the same:
- Both solutions prioritize debt repayment so you maintain most debts in good standing while you focus payments on eliminating your largest debts
- You reduce or eliminate interest charges to make it easier to repay what you owe
- With both options, pay your debt back efficiently to minimizes interest charges and save your credit
The difference with a formal debt management program is that you have a credit counseling agency acting on your behalf. That’s important because the agency may have more success in negotiating with your creditors. Alumni often report an agency was able to get creditor approval for lower interest charges even where the borrower failed.
In addition, a formal program allows you to make just one payment. With a do-it-yourself debt management plan, you still have to juggle all of the individual bills. One of the benefits of a formal program is that it consolidates your debts into a single monthly payment plan. This simplifies repayment so you’re not stressing over which bills to pay.