Paying Down Consumer Credit Debt More Important Than Ever

   

Posted: Sep 17, 2009

Paying down consumer credit debt benefits people in many ways, from lower monthly interest burdens to higher credit scores.

Lower debts are especially important in the current economic climate, with many people either currently unemployed or worried about their long-term job security. Many Americans have also experienced pay cuts or are seeking new ways to boost their income to keep up with what has been a rising cost of living.

With that in mind, various media outlets are offering consumers different pointers on how to reduce their overall debts.

For example, a recent report in U.S. News & World Report offered some tips on debt reduction. The article encouraged consumers to cut spending and to keep better track of debts by creating a balance sheet that lists their monthly expenses against their income. The report noted that people can often make a significant dent in their monthly expenses by cutting out things like eating out at lunchtime or buying coffee.

Other options offered in the U.S. News & World Report article include credit counseling, ideally through a nonprofit service, because non-profit groups are believed to be less likely to scam consumers out of payments or inflict additional damage on their credit score. In turn, debt settlement companies may benefit some consumers with serious financial problems by negotiating with creditors to reduce a client's overall debt, although these efforts don't always work and can often be harmful to one's credit score even when they do work.

Also, the magazine warns consumers against taking out home equity loans to pay down their credit debts, and suggests that people should take the time to talk to their creditors to try to secure more favorable terms and interest rates. Bankruptcy is presented only as an option of last resort.

Elsewhere, Susan Tompor, a personal finance columnist for the Detroit Free Press, recently offered some additional advice on ways to pay down debts.

The advice includes working to bring monthly debt payments down to 20 percent of one's take-home pay, and creating a budget that focuses on paying down these debts while keeping up with individual expenses.

Ms. Tompor notes that one-third of a consumer's credit score is based on payment history, which helps underscore the importance of keeping up with all monthly payments. Another third of a credit score is said to be determined by how much debt is actually carried on a consumer's overall credit accounts, further highlighting the importance of staying on top of debts and steadily paying them down.

By making on-time payments, people will pay down debts even faster, because it will help them avoid late fees that in some cases can approach $40 or even more. Until federal reforms take effect in February 2010, consumers unable to make on-time payments may also find themselves susceptible to sudden interest-rate hikes as high as 30 percent, which can have a devastating effect on their financial situation over time.