18 Ways To Dig Yourself Out of Debt
Many people fall into debt, ranging from auto loans to credit card debt. These days, it’s especially hard to stay out of debt as people have either lost jobs or faced pay cuts.
Even if you stick faithfully to your budget, it can be hard to stay out of debt. Unforeseen life circumstances can force you to suffer financially as you try to pay for utilities and other necessities. And then there are the unexpected expenses that pop up in everyone’s lives: car repairs, healthcare costs or a new water heater.
Here are the steps you need to take to get to a manageable debt level with only healthy expenditures (i.e. low or no interest, credit-building debt).
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1. Put Down the Shovel
The first step to getting out of debt is to stop digging yourself further into it. Stop using debt to fund your lifestyle. Pay only with cash and track your finances. Make yourself aware of every dollar spent.
It’s not a bad idea to keep a credit card in case you need one for emergencies, but you can place it in a container of water in your freezer to keep yourself from using it frivolously. Waiting for it to thaw will give you time to examine whether there is another way to solve the problem.
2. Consolidate Your Debt
Congratulations on hitting the brakes on your accelerating debt. Now is the time to use your preparation to actually make a plan. First, get as much debt as possible into the lowest-cost buckets.
You can free up money in your monthly budget by using a personal loan to consolidate higher-interest debt payments into one monthly payment at a lower interest rate. By using a personal loan to consolidate higher-rate debt, you could possibly save hundreds, even thousands on interest.
Many credit cards will offer free debt transfers, or low-cost ones with lower, introductory rates the first year. Even if you already have a good rate, simply putting all your debts in one place reduces the risk of missing a payment or being charged by both card and bank for having insufficient funds.
3. Get It Together
Gather statements from each of the sources of your debt, including credit cards, auto loans, medical bills and more. Make a master list of how much you owe and the total amount of money you’re paying on debt each month. Put them in order from the smallest payoff balance to the largest.
Add up minimum payments, then increase the amount by $100 or whatever you can truly afford. This is the total amount you’ll need to budget each month to get out of debt.
The two most common approaches at this stage are either the snowball method or the avalanche method. The snowball method focuses on the emotional wins of paying off the smallest debts first and relieving the pressure by seeing fewer and fewer open accounts. The avalanche is more logical, and targets the biggest interest and fees, paying that off first to reduce the ultimate amount of money owed. Of course, you could also just spread your payments evenly across your different debtors, but this would have the disadvantages of both approaches without either of their benefits.
4. Set Up Savings as an Emergency Fund
It might seem counterintuitive not to put every penny toward paying off debt. But creating a savings account of just $500 or $1,000 can prevent a credit relapse down the road when you suddenly need a new set of tires or face an unexpected medical bill. Be sure to get a great rate with a high-yield savings account, since you won’t be touching the money. Wouldn’t you rather come back to find it’s grown, even if it’s just by $50?
5. Give Yourself a Visual
Keep your list of debts where you can refer to it often. That way, you can see the progress you’re making as you pay down debt. Or, post a whiteboard in your kitchen or home office and record your current debts. The act of entering lower numbers each time you pay down a debt — and watching the list dwindle as you pay things off — will give you a boost and serve as a deterrent to spending more.Bottom of Form
6. Don’t Pay For Free Financing
Did you sign up for cards offering free financing for a limited amount of time? Pay them off in time so you’ll avoid getting hit with large interest payments. Also, know that new purchases can be hit with regular interest charges right away, according to the Consumer Financial Protection Bureau. Treat those cards solely as low-pressure holding patterns for existing debt.
7. Start With the Smallest Balance
It makes financial sense to pay off the debts with the highest interest rates first. This will save you the most money in interest payments.
However, you might get a bigger emotional boost by eliminating the debts that are the smallest. You can pay off several small debts faster than you can pay off one bigger debt that might have a higher rate of interest. You might be more likely to stick with your debt-reduction plan if you see your list of debts getting shorter.
8. Keep Tackling One Debt at a Time
If the snowball method works best for you, focus all your extra money on paying off one debt at a time and making minimum payments on the others. If you have an extra $100 in your budget, use it toward paying down the smallest balance.
Once that smallest balance is paid off, take the money you would have paid each month to the newly expired debt and apply the cash to the bill with the next smallest payoff. You’ll be amazed how fast the debt disappears.
9. Streamline Your Budget
Write a list of each monthly expense and total it. Draw a line through any monthly expenses you can eliminate. Start with things you pay for each month, but seldom use. These might include gym memberships or online news subscriptions. And look for overlapping expenses, such as paying for cable, streaming services and premium channels.
10. Pay On Time
Paying a day — or with some cards, even a few hours — late can trigger the dreaded late fee. While online apps such as Mint Bills can send you reminders, they’re not infallible. Keep a whiteboard calendar where you can easily see it, and use the board solely for recording bill due dates. Keep track of due dates and amounts owed for each day, and you’ll never be late again.
If you like a hands-off method, set your automatic payments a couple days before the due date, and then schedule reminders on your phone to confirm they went through.
11. Don’t Let Windfalls Blow Away
Use your tax refund, gift money from Grandma or holiday bonus to pay down a chunk of debt. Although it might be tempting to use the cash on a big splurge, paying off debt will give you a psychological boost without any buyer’s remorse.
12. Eliminate Consumer Debt First
Credit cards typically come with a higher interest rate than student loans, auto loans or mortgages. Eliminating all your credit card debt first will save you a bundle in interest while you’re working to pay down debt.
This is why you might want to consider consolidating your credit cards through a personal loan or a balance transfer credit card. It’s worth considering if you’re being held down by high-interest debt with big payments.
13. Trim the Fat
Make coffee at home instead of buying a cup. Stock a week’s worth of meats, cheeses, vegetables and bread in your work refrigerator for making sandwiches and salads instead of eating out. If you already have food on hand, you won’t end up eating out. Free up extra money by eliminating unnecessary incidentals. If you need something for the home, check on community message boards where people give away unwanted items for free or cheap. Thrifting what you need will not only save money, but offer a low-cost, fun activity that feels like a treasure hunt.
14. Stop the Madness
Eliminate the temptation to open new accounts by opting out of preapproved credit offers through OptOutPrescreen.com. Also, unsubscribe from department store emails alerting you to sales that might lure you to “save” money by spending on your store credit card. You’ll find the info on how to do so in tiny print at the bottom of the email.
15. Make Biweekly Payments
Many major banks allow you to pay half your minimum payment every two weeks. The advantage? Since you’re charged interest on your daily balance, reducing the balance biweekly will lower the amount of interest you pay over time. At year’s end, you’ll have made 26 payments — the same as 13 months — making it a good strategy for reducing debts on the cards where you’re just paying the minimum. You can also do this with an auto loan to extract, say, six more months of credit card payments from an abbreviated five-year auto loan term.
16. Ask For an Interest Reduction
If you have a record of making payments on time — and your credit is in decent shape — ask your credit card company for an interest-rate reduction. Start with the card you’ve had the longest; customer loyalty counts. If you’re turned down due to your credit score, try again once you pay down some of your debt and your credit score improves.
Tip: Keep those cards you’ve paid off open and out of sight in your sock drawer. Having a larger pool of unused credit and older average age of your cards will raise your credit score, giving you more negotiating power on the interest rate.
17. Negotiate Medical Debt
If your overall debt picture includes medical bills, don’t be afraid to ask for a discount. Go to the hospital billing office in person and offer to settle the bill for what you can afford. Even if the hospital won’t meet your terms, it might offer you a significant discount. If you can’t pay the bill all at once, ask for an interest-free payment plan.
18. Lower Student Loan Payments
If your student loan payment takes up a large chunk of your monthly budget, check on the U.S. Department of Education’s Federal Student Aid website to see whether an income-based repayment plan can lower your monthly payment.
Although paying less per month extends the term of your loan, your student loan interest is likely less than what you’re paying on consumer credit cards. After eliminating your credit card debt, you’ll have freed up a significant amount of money each month to apply to your student loan and chop it down quickly.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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