Debt is a way of life in America. Few people can afford to buy a car or a home in cash, so we borrow from banks for these items. And there’s nothing wrong with responsible debt. (Besides, having a car to drive and a home to live in are almost non-negotiable in this day and age.) There’s not even anything wrong with having a balance on a credit card. The problem comes when we have debt we just can’t seem to pay off; usually several credit cards. Having crushing debt can feel almost as though you’re fighting an addiction; it can feel beyond your control. But there are ways to take charge of your debt and pay it down. Read on for five tips to help you get out of debt.
1. Getting out a Debt by Budgeting
Many people in debt do not have budgets which they actively adhere to. They may know how much money is coming in and from where, but they’re unclear as to where they’re money is going and in what proportion. Creating a budget will help you scrutinize your every expenditure and point you in the right direction to cut costs and direct those funds toward paying off your debts. Consider keeping a ledger or a spreadsheet and recording every expense so you can see in black and white exactly where your dollars are going instead of toward paying off your debt.
2. Prioritize the Highest Debt First
Familiarize yourself on how to pay off credit cards and eliminate debt. Arrange your credit card bills from the highest interest rates to the lowest. Make the largest payments you can on the highest rate cards while making at least the minimum payments on the lower rate cards. As you pay off one, use the same strategy on the next most expensive and so on. Another thing to consider is transferring your high-interest cards to a lower interest one. (Some banks and credit card companies would rather make some money from you than none at all.) Consider refinancing your house if you’re in the position to do so. If you are, in fact, able to do this, remember that while you’ll save money in the long run, there will be somewhat substantial fees involved in the initial process. This tactic can also work for your vehicle loans. A different bank might offer you a lower rate because they want you paying them instead of their competitors. Credit unions are great places to check for these kinds of opportunities.
3. Make More than the Minimum Payment
Paying the minimum gets you absolutely nowhere. The minimum payment is usually 1% to 2% of the total balance and most people are dealing with an average interest rate of about 15%. With a minimum payment, you’re not even making a dent in the interest. Commit to paying more than the minimum and don’t be willy-nilly about it. If your minimum payment is $100 a month, pledge to pay $200. And remember, credit card companies don’t impose a penalty on cardholders who make several payments a month. If you discover that you saved $20 at the grocery store this week, send it to your credit card company. You’d be surprised how much every little bit helps.
4. Stop Using Your Credit Cards
While this may seem like a no-brainer, many people with overwhelming credit card and other debt find it hard to stop buying on credit. The simplest solution to this is to leave your credit cards at home when you go shopping. Without a credit card, not only are you relegated to using debit or cash, you can’t apply for new or additional credit. Just remember to keep an eye on your checking account and how to prevent overdraft fees. Even if you have credit cards that give you cash back or other gifts, leave them home. The rewards simply don’t outweigh the risk of increasing your debt.
5. Debt Relief with Bonuses
Yippee, you got a bonus from your employer. Do yourself a favor and instead of going on a vacation, take a lasting break from some of your debt. The same applies to tax refunds or even loans repaid by friends and family. Another way to reduce debt is to automate your savings. If you have direct deposit, have a portion of your paycheck deposited into a savings account specifically earmarked for debt reduction. Keep your endgame in sight at all times and remember how great you’re going to feel when you have manageable or even no debt.
When you reach your goals, don’t be tempted to go out and spend on a fabulous party to announce your accomplishment. Instead, reward yourself with the knowledge of a very difficult job accomplished and celebrate with a B.Y.O.B. potluck at your house. Most friends and family are glad to be invited to a party even if it means they need to bring a tuna casserole and a bottle of moderately priced wine.
Now that you’ve learn how to get out of debt, you can get learn about 5 Ways to Save Up to $5,000 a Year.