Refresh

STEP 3: REFRESH

As discussed in Step 2: Revitalize, a healthy budget will typically have an expense-to-income ratio that is less than 90%. This means that at least 10% of your income each month is available to be saved or to be used to reduce the balances on your unsecured accounts. If your expense-to-income ratio is above 90%, then you should make a concerted effort to modify your spending habits.

MODIFYING YOUR BUDGET

There are several key points to remember while reviewing your budget items for expense adjustments. First, your secured items are unlikely to be easily adjusted. Mortgage payments, automobile payments, etc. have established payment terms that cannot be modified without refinancing the original loans. Likewise, the minimum payments required on your unsecured expenses (credit cards and personal loans) are not likely changeable. Therefore, it is necessary to focus on your normal living expenses in order to make reductions.

Most items on the living expenses section of your budget can be edited and some can even be eliminated. If you have little or no disposable income, you should attempt to set spending boundaries for those items that are not necessities. These items include magazines, beauty supplies, entertainment, clothing, etc. Reducing or eliminating unnecessary expenses is always the first action to take when facing financial difficulties. Keep in mind that these reductions must be carried out in order to be effective.

The next step is to reconfigure your budget based upon the expenses you will be reducing. If you used the CCMS budget worksheet, simply replace the current amounts with your projected amounts for the items you will be reducing. After reconfiguring your budget you should then re-assess your expense-to-income ratio and disposable income amount. If you still show a deficit or have very little expenses then you may need to seek financial assistance.

REDUCING UNSECURED EXPENSES

There are several ways to reduce your unsecured expenses. The following options may be available to you depending upon your expense-to-income ratio, credit history and financial needs.

  • Home Equity Loans and Second Mortgages

    Home equity lines of credit and second mortgages are an option for those with above-average credit history. These loans may allow you to pay off your higher interest cards and consolidate your debts at a lower APR; however, they require your home as collateral. It is not advisable to accept these types of credit if you have little disposable income and are having difficulties paying your monthly obligations because late payments or missed payments can put your home in jeopardy.

  • Balance Transfers

    If the current APRs on your accounts are preventing you from paying down your debt, then a balance transfer may be an effective means of consolidating your debt and reducing your finance charges. However, balance transfers should be used sparingly and should not be treated as a permanent fix. Most creditors will reduce your APR for a short, finite period of time after transferring balances (typically 6-12 months). After the period of low interest has expired your APR may return to its normal level. Therefore, it is not advisable to transfer balances if you have little disposable income and are unable to make significantly high payments during the months following the transfer.

  • Debt Management Plans

    A debt management plan is a viable option if you have little disposable income, high APRs or are currently behind on your credit card payments. Most creditors are willing to lower both your monthly payments and APR, suspend late and over limit fees and provide you with a fresh start on paying off your accounts through such a plan. Debt management plan is effective for those consumers that show reasonable financial need. If you are currently struggling to pay your bills or are unable to make a dent on your high interest balances, then you should examine this alternative.

  • Debt Settlements

    A debt settlement is an agreement made between you and your creditor where your creditor agrees to relieve you financial obligation upon receipt of an agreed amount that is less than the original balance. Debt settlements are typically negotiated for anywhere between 40 to 80 percent of the current balance. Settlements carry long-term negative effects on your credit report and can stymie your future purchasing power. Moreover, most consumers are unable to pay the large, one-time payments that are required for settlement. Therefore, it is never advisable to negotiate or accept a settlement offer.

  • Bankruptcy

    Bankruptcy is generally regarded as the last resort for financially distressed individuals because the results are long lasting and far-reaching. A bankruptcy will stay on your credit report for 10 years, making it difficult to acquire new credit and purchase major items like a new home or automobile. Those who are able to obtain credit after a bankruptcy will almost surely be subjected to extremely high interest rates and low credit lines. While bankruptcy can provide the fresh start to those in extremely dire situations, it should be utilized only if all other resources have been exhausted.

TAKE CONTROL

After reviewing your options and determining the best course of action to fit your needs, it is now time to act. Financial hardship cannot be cured by passive observation. If you are having difficulties making payments, have very little or no disposable income or have high interest accounts, then it is important to know your options. More importantly, however, is that you use this knowledge to make improvements to your financial well-being.

The previous tutorial should be used as an introduction into exploring your financial options and improving your financial health. This tutorial should not be used as a substitute for professional counseling and assistance. If you have any questions regarding your financial situation please contact CCMS at (800) 920-2262. A CCMS credit counselor will review your current financial situation, answer your questions and provide you with a recommended course of action that fits your needs. All counseling sessions and personal information are kept strictly confidential.