Undertaking the steps to get out of debt can be spookier than Halloween. To help keep your existing debts from “haunting” you into the holiday season, we wanted to give you three helpful tips to get out of debt. If you want to improve your credit score, rebuild your credit rating, make a new purchase this DIY consolidation article is for you.
Here are the three steps on how to get out of debt sooner.
1. Evaluate Long-Term vs. Short-Term Debt
Debts with higher amounts like your mortgage and a student loan can be paid off over the long-term. Debts with lower amounts like your credit card and payday loans can be paid off in the short-term. Figuring out a timeframe as a goal to assign to each debt is key.
Keep in mind the difference between “good credit” vs. “bad credit”. “Good credit” on a revolving account is any amount under 25% of the card limit. When you’re looking into your debts, see which accounts are closest to their maximum spend and how quickly you want to pay off the balance. Address lowering those card balances first. That’s because your credit score and credit limit are related to each other. Remember, paying down your balances is often more important than paying it off. It will reflect positive credit history being applied towards your credit score. Just like missed payments, negatively affect your credit score.
Knowing what revolving charge accounts and loans are dragging down your credit score will make it easier to plan a payment strategy that will improve your credit rating and rid you of the financial burden.
2. Look at Your Budget
Next, take a look at your monthly expenditures for budgeting. The quickest way to get your finances in order is to track how your money is spent week-to-week. Start by keeping receipts and writing down your fixed monthly expenses. The fixed expenses, including mortgage/rent, childcare, car payments, groceries, and utilities. Compare the expenses to the income you generate after paying taxes. There you’ll be able to identify areas to reduce spend. For example, if you typically spend $200 per month on groceries and $10 a day on lunch there is an opportunity there to reduce spend. The more money you’re able to reallocate, the more money you’ll have to put towards paying off your debts.
If your monthly expenses are too high relative to your income, you will find yourself living paycheck to paycheck strapped for cash. The following are common areas of spend that go unnoticed and quickly chip away at finances monthly.
Downsize Your Lifestyle and Be More Frugal
Being frugal doesn’t mean being cheap. It means spending your money wisely over the long-term. Once you’ve decided to downsize, start with the most costly items first. If your family has two vehicles, ask yourself whether you truly need that many or whether you could get by with just one.
You can also downsize spending for the short-term, too. Take some time to audit all the subscriptions you’re paying for, the membership you never use, and the spur of the moment weekend adventures that go on your card. Paying off account balances is easier when being more frugal with your spendings. Limit discretionary spending like takeout meals and trips to the spa. You can reward yourself with those once you have your debts paid off.
Reduce All Spending, Especially Credit Card Expenses
Buckle down and reduce your spending until you have your account balances under control. Give yourself a weekly cash allowance to cover weekly expenses. The cash allowance should be able to cover necessary items between pay cycles such as transportation fare, gas, or miscellaneous drug store items that may be needed during the week. If overspending is your problem, limit your credit card expense by using it less often. Lock your credit card away or cut it up. Do whatever it takes to show restraint and get your debts paid off once and for all.
3. Avalanche Method: Figure Out Which Debt is the Largest
To pay off your debts sooner, it helps to put a strategy in place. I’m a big fan of the debt avalanche method. With the debt avalanche method, you’ll prioritize paying off the debts with the highest interest rate first. The debt avalanche method involves three simple steps.
1: Pay the minimum amount on all your credit accounts.
2: Put as much extra money as you’re able to towards your debt with the highest interest rate.
3: When the debt with the highest interest rate is paid off, focus on the debt with the next highest interest rate and so on until all your debts are paid off.
Do the Math: Multiple balance by interest rate pay larger debt first
Take the time to do the math to find the larger debt. A simple exercise in mathematics can help you determine which debt it makes sense to pay off first. Simply multiply account balances that you owe times the interest rate. Aim to pay off the larger debt first, by keeping all the accounts current with minimum payments, adding additional funds resourced from budgeting towards the largest debt.
Let’s take a closer look, from a financial perspective first gather all of your revolving account statements the open your spreadsheet software. Plug into the columns headings “outstanding balance,” “annual fee,” “interest rate” and “monthly/minimum payment.” Do it for all your debts, including your car loans, personal loans, credit cards, lines of credit, and payday loans. Furthermore, note the minimum payments as well as any additional funds will accelerate the ability to get out of debt quickly.
While you should certainly still make the minimum payment on them, don’t think about making any extra payments until you have no more debt. The avalanche method requires you to pay more than the minimum to a creditor until the balance is manageable. Set a goal of always paying more than the minimum towards the largest bill whether it’s your credit card or line of credit using the avalanche method. Sometimes putting an extra $50 a paycheque towards debt could mean paying off your debts years sooner and saving thousands in interest.
Try to Negotiate Lower Interests’ Rates of Current Debt and Refinance Options
Another way to speed up repayment is to negotiate refinancing options. Lower interest rates and extended financing terms on current accounts will lower payments and monthly dues. The difference of minimum monthly payments can go towards paying off the larger balance owed on revolving accounts and personal loans. There are often requirements to be met prior to approaching creditors to lower interest rates and refinance options such as being a good longstanding client or an improved FICO score.
If that doesn’t work, you might consider a credit card balance transfer for a better interest rate. Sometimes, credit cards often offer promotional rates when you transfer existing credit card debt. If you do that and aggressively pay it down, it can save you a lot of interest and be debt-free sooner. Another way is with debt consolidation. By refinancing your mortgage, you could roll your high-interest debts into your mortgage and pay them off a lot sooner.
Taking the steps to get out of debt requires help and resources. Speak with a credit counsellor today. Learn about alternative options available on the market to help pay off debt such as debt management programs. If your accounts are past due may be debt settlement solutions or bankruptcy consolidation information might interest you. Call (855) 965-1672 to learn more.
Related to: DIY: 3 Steps To Get Out Of Debt