Unfortunately, as much as you may try to ignore your debt, it will continue to follow you until you deal with it directly and strategically. Rates of consumer debt in the United States are high, so you should realize that you’re not alone and that your situation is very common.
Taking control of your personal finances often begins with admitting that an issue exists. Once you accept that you’re in debt over your head, you can begin to think about the best strategy for your situation and create a realistic plan for getting yourself out of debt. Below are some of the key tips for overcoming debt that you may want to consider as you create such a strategic plan.
Pay more than the minimum.
When it comes to credit cards or other forms of debt, making minimum payments often translates into years of indebtedness, even if you don’t make any purchases on the account. Remember: the longer you take to completely pay off a debt, the more interest you will pay. If possible, try to make payments that are double the minimum, plus any new charges that may exist on the card. Making such a large payment may involve sacrifices like bringing lunch from home rather than going out, skipping a vacation, or forgoing other luxuries that we build into our budgets. With a few sacrifices, you may be able to get out of debt and then slowly reintroduce those luxuries as your budget allows.
Eliminate debt before investing.
While it may seem foolish to some people to use savings to pay off debt rather than make investments, the numbers affirm why this is a good plan. Say that you have a debt with a 12 percent interest rate. At this rate, an investment would need to make more than 18 percent after federal and state taxes to be worth an equivalent amount. Virtually no investment will pay this high of a return, which means that the most effective way to use your money is to pay off that debt sooner and avoid some of heavy interest fees. Of course, if a loan has a fairly low interest rate, such as a student loan, then it may make sense to invest before paying it off. Spend some time doing the math and figuring out what makes the most sense for you.
Renegotiate debt terms with creditors.
If the threat of bankruptcy is looming, you may want to make some calls to your creditors. If you declare bankruptcy, your creditors won’t receive any payments from you, so some may be willing to renegotiate terms if they’re aware of the situation. After all, something is better than nothing. Some lenders may offer new, lower repayment schedules or reduce the interest rate on a particular debt. When negotiating, you can remind creditors that they will receive no payments if you declare bankruptcy. Even if a lender is not willing to renegotiate, it is often worth the 30 minutes on the phone spent trying to cut a deal. In addition, there are a number of organizations that are able to renegotiate on your behalf.
Learn how to snowball payments.
Many people have success paying off their debts when they snowball their payments. To snowball payments, look at your credit cards and see which one has the lowest interest rate. Then, you can transfer balances from higher-interest accounts to that one for a single, lower-interest bill. If the entire balance cannot be transferred, you can spread it across multiple cards with lower interest rates and aggressively pay them down one at a time. Snowballing can save a lot of money in interest over the months. Even better, once one card is paid off, even more money is available to tackle the next one. However, you should always be careful and read the fine print regarding balance transfers, since you may be required to make minimum payments or repay within a specific timeframe.
Take out a home equity loan.
People who are making mortgage payments or who have paid off their homes hopefully have significant equity in their homes. In this situation, you may want to borrow against this equity to pay down or eliminate your debts. While this method does indeed result in a new monthly bill, you may be able to get a home equity loan at an interest rate that is significantly lower than those of other debts. If you have the opportunity to trade thousands of dollars of debt on a credit card for a home equity loan that carries an interest rate that’s just a third of that number, you would be foolish not to do so. In this situation, however, you need to be careful not to immediately rack up debt on the credit card again, which would saddle you with two monthly bills.