Debt is a pernicious monster. It can snowball and interest rates can begin to make it seemingly impossible to ever catch up. Sadly, that is by design. The banks and credit card issuers make money off of your debt. When debts get totally out of hand, people are left with a hand-to-mouth existence in which basic necessities, such as utilities or even food, become endangered. Stress takes its toll on debtors as well.
It certainly does not have to be that way. If you are in the throes of runaway debt, it is time to stop and take stock of your situation. Often, there are solutions, but you may not be aware of them.
The following are some solutions that help debtors get out of debt in a responsible way that will hopefully, in most cases, preserve their credit score and possibly increase it.
Write Down Your Expenses and Debts –
The first step in becoming debt free is to know what your income and all expenses amount to each month. Take special note of what you are paying on each credit card. Is it the minimum payment? If so, how much of the principle is being paid off each month? What is the interest rate of each credit card? Make sure you take into account those yearly expenses, like your automobile registration and a guesstimate of your automobile maintenance and repairs that you can turn into a monthly figure.
Seek Professional Advice –
The debt industry is evolving in the wake of the Great Recession of 2009. Resources that might not have been available then are available today because so many people were burned financially by the economic situation at the time, the job market, and the unscrupulous banks. It is a good idea to consult with debt counselors and other financial advisors that specialize in debt, such as Graylock Advisors. The information you get from trusted financial sources will help you begin to devise a plan of action. As stated by The Motley Fool, it is best to begin taking steps in some positive debt-reduction plan now. Don’t wait until things get dire or bankruptcy is the only option.
Take Care of the Essentials First –
Ensure that your new budget takes care of payments of the absolute essentials first: your rent or mortgage, food, utilities, automobile insurance and gasoline.
Use a No-Fee Debit or Pre-Paid Debit Card to Save Money for Yearly Bills –
A great little trick to help you save for the expenses that come yearly or quarterly is to set some money aside each month in amounts that will add up to the full payment when it comes due. For example, if your car registration costs $160 a year, you can save the approximately $14 a month for that expense in some account that has no or few fees. The American Express Bluebird pre-paid debit card is a good example of a card that will allow you to amass quarterly or yearly bill expense amounts without costing anything.
Eliminate Unnecessary Expenses –
If you are in deep debt, it is time to figure out what kinds of expenses are unnecessary until you are out of debt. A good place to begin is cable tv. Minimally, people pay $75 a month for cable. There are free and lower cost options for television viewing online. Pluto TV is a free television platform that is internet-based. It was created by Viacom and has 100 channels. Many television shows stream for free or low cost. YouTube also carries quite a bit of the content that you can view on television, including a lot of unique content.
Also, you can save a bundle by eschewing Starbucks and dining out. When you are out of debt, you will be able to choose which of those things you really needed and which you didn’t need in the first place.
Can You Reduce Interest Payments? –
There is absolutely no point in throwing money away paying high interest. As AARP notes, some credit card companies will negotiate your interest rate when your payment history has been good for a few years.
If the credit card companies will not lower your interest rates, you can get a temporary reprieve from the high interest rates with a balance transfer card. According to AARP, most balance transfer cards will give you a zero percent interest rate for about a year. During that time, they advise you make higher credit card payments in order to drastically reduce your debt more rapidly.
An even longer-term solution to lowering interest rates is a debt consolidation loan. This type of private, consumer loan allows you to combine your credit card debts and make one payment each month at a lower interest rate. It is important to choose a debt consolidation loan company carefully. Reputable debt consolidation loan companies, such as Graylock Advisors, will keep your interest rates within a single digit. The money you save in interest rates with such a service will help you get out of debt much more quickly than if you continued to try to pay off the credit card at its usually exorbitant interest rate.
Decide How Much to Pay Off on Each Credit Card –
With a better budget in place and some expenses eliminated for now, you can decide what to pay on each credit card each month, if you have not consolidated your credit card debts. Many sources will advise you to use a snowball method, where you pick the card with the lowest amount due on the card and pay more on that each month until it is paid off. The idea behind the snowball method is that you will feel better as each card is paid off, and one less payment will mean more free cash to use for other purposes.
The snowball method is less financially savvy, though, than the avalanche method. According to Investopedia, the debt avalanche method will save you more money and allow you to pay off your debts faster. In the debt avalanche, you pay the minimum payment due on all cards, except the card with the highest interest payment. Once that card is paid off, you can pay off the card with the next highest rate.
Earn Some More Money –
If you have some items you no longer need, you can consider selling them at a garage sale, on Craigslist or eBay. That extra cash can go straight into reducing debt.
AARP suggests that another method to get some extra cash to lower your debt is to commit your tax refund to debt repayment.
With the gig economy so ever-present, one can drive for Uber or Lyft for some spare cash, do freelance writing or rent a room on AirBnB. Monster.com compiled a good list of the side hustles that pay the best.
A Word on the Thing Not to Do –
Don’t use a home equity line of credit to pay off unsecured debt. This is bad because you could lose your home over debt that was unsecured that you changed into secured debt. It may seem tempting, since the interest rate is lower, but it is a trap. Just don’t do it.
Don’t Close Accounts of Cards You Have Paid Off –
One more non-intuitive tip is that you need to leave the accounts of paid-off credit cards open. According to Motley Fool, they lower your interest rate when you pay off a card and then close the account. Fool suggests that you only use the paid off card sparingly and then pay it in full each month. If you know you will be too tempted to use it, you can leave it in a drawer and not take it with you when shopping. The problem with that strategy is that it will not help you avoid temptation for online purchases.
Overall, if you are beginning to have trouble with debt, first assess your entire budget and get some advice from reputable financial advisors, such as Graylock Advisors. Then, you can go through the steps to reduce unnecessary expenses and interest rates, secure more income and pay the debt off in the manner that will save you the most interest. That will allow you to attack the debt and draw it down quickly.
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