How far are you knowledgeable regarding managing your debts and choosing the right debt relief options? Well, you do not have to speculate much. Here are 7 questions which you may answer to test your knowledge. You do not have to be a financial expert to answer these questions. Taking this quiz and going through the illustrations will also clear your doubts, which in turn, will help you manage your debts better and improve your financial life.
1. Which debt relief option is better for your credit score?
a) Debt settlement
b) Debt consolidation
Answer: b (Debt consolidation)
If you are able to make the required monthly payment on time, then debt consolidation is better than settlement, since the former may help improve your credit score to some extent. This is because you are paying off your outstanding debts in full, when you opt for consolidation to repay your existing dues. On the other hand, you actually get rid of your debts by paying less, in case of debt settlement; therefore, your credit score may drop to some extent.
2. What option should you choose when you want to get rid of your debts fast?
a) Debt settlement
b) Debt consolidation
Answer: a (Debt settlement)
If you have answered debt settlement, then your knowledge regarding this aspect is clear. When you opt for settlement, either you or the debt settlement company negotiate with your creditors to reduce the outstanding balance so that you can pay a certain one-time amount and you're free of all your debts one after another. You also get rid of your debts comparatively fast since you have much lower amount to pay off. However, you should opt for settlement when you are unable to make the required payments to repay your debts in full.
3. At least how much you should save monthly for the rainy days?
Answer: b (10%)
You should always try to save at least 10% of your monthly income; however, it is always better if you're able to save 15% or even 20%. But, every month it might not be possible due to some sudden expenses. So, it is a better practice to deposit 10% of your monthly paycheck into a savings account and to not take into consideration that amount when planning your monthly budget. Then, try to save more by following your budget. And remember, do not use that amount unless it's a real emergency situation.
4. What is the best option to avoid credit card debt?
a) Making outstanding balance payment every month
b) Paying only the minimum amount
c) Paying 50% of the outstanding amount
Answer: a (Making outstanding balance payment every month)
If you have answered âa' and you follow it, then you're on the right track as far as your credit card debts are concerned. It is always best to repay the outstanding dues every month. Doing so, you do not have to pay interest on the outstanding amount and so, you save your hard-earned dollars. It is a good practice to use your credit card for the amount which you're able to pay every month. However, in a month, if you're not able to pay the entire amount, then pay as much as you can but it should be at least or more than the minimum amount.
5. Which is the better option when you want to stay motivated to repay debts on your own?
a) Debt snowball method
b) Debt avalanche method
Answer: a (Debt snowball method)
Both debt snowball and debt avalanche are good options when you want to repay your debts all by yourself. However, if it is difficult for you to remain motivated, then the first strategy, that is, debt snowball, might work for you better. In this method, after making minimum payments on all your debts/ bills, you make an extra payment towards the smallest outstanding debt you owe. This helps you repay that account fast. Once you pay off the account with the smallest debt amount, you repeat the process with the next smallest debt, until you are debt free. In case of avalanche method, you make that extra payment towards the debt with the highest interest rate. It usually takes longer to repay the debt with the highest interest rate since the outstanding debt amount may also be quite high. Therefore, to stay motivated, using the debt snowball method to repay at least 1-2 of your debts, might be a good option.
6. What, amongst the following options, is the best way to choose a settlement company?
a) Take reference from your friends
b) Check BBB ratings
c) Go for the company that offers services at lowest rate
Answer: b (Check BBB ratings)
Though each of the options is considerable, however, the best is to check the BBB ratings before you get professional help in solving your debt problems. This is because the ratings given by the Better Business Bureau (BBB) are most authentic since they consider several parameters before offering an âAâ rating to a company. You can first take referral from your friends to shortlist the debt relief companies. However, going for only the lowest rate might not be a clever way to choose a debt relief company. Offering the lowest rate can be a parameter to choose such a company, however, you should make sure that they offer the required services.
7. Which debt relief option lets you make just one payment every month towards your multiple debts?
a) Debt avalanche method
b) Debt snowball method
c) Debt consolidation
Answer: c (Debt consolidation)
You are right if you have answered consolidation. Debt consolidation is the option with which you can repay your multiple debts just by making a single payment every month. It does not matter whether you enroll in a consolidation program, take out a consolidation loan or opt for balance transfer method. In any of these three options, you need to make a single monthly payment towards paying off your multiple bills.
It does not matter much whether you have answered all the questions correctly or some of them. At least, now you know the correct answers regarding managing your debt and choosing the debt relief option(s) appropriate for your financial situation. So, follow the correct strategies to achieve financial success and be out of debts.