Debt can be useful when used properly as it gives your financial life a boost. There are times when unforeseen circumstances would prevent you from fulfilling your debt obligations or find it hard to pay back. In this guide, we will be discussing some of the tips you can use to get out of debt this year. Debt can be a heavy burden to bear as it can weigh on your finances and prevent you from achieving financial fulfillment. Without further ado, here are some of the helpful tips that would help you get out of debt today:
Draft a Budget
Drafting a budget is a good first step to getting out of debt. It helps you to plan your finances and properly allocate capital as needed. Your budget gives you a clear view of where your money is coming from, how much it is, and where your money is going. To create a compact budget, the first thing you should do is outline all your sources of income and your corresponding fixed recurring expenditure on a monthly basis. The difference between your total income and your expenses is your disposable income which you can use to repay your debt. Determine how much of your disposable income you would set aside to use in repaying your debt.
Haggle Lower Interest Rates
Where possible, you should always call your creditors and negotiate a lower interest rate. Most debtors are unaware that creditors are willing to review your interest rates based on your payment history and your account information. If you have a good relationship with your creditor, leverage that relationship to get better rates especially if it is one you have been building for years. Renegotiating your interest rates would save you money and help you to get free of debt faster. You never know if you qualify for lower interest rates so make that call today.
Increase Your Debt Repayment Percentage
Setting aside a reasonable percentage of your disposable income towards paying off your debts would help you clear your debts faster. For example, credit card companies require debtors to pay at least 2% of their debt monthly. If you set aside 15% of your income for debt settlements every month, you will be on track to clear your debts faster. When you pay smaller amounts (minimum payments), your debt balance keeps accruing interest and it takes a longer time for you to pay off. On the other hand, large chunks of paid debts would drastically reduce the amount and time you would spend paying off the debt.
Pay Off Small Debts
Create a list of all the debts you owe from the littlest to the largest to get a clearer picture of your total debt profile. Paying off your smaller debts first has a number of advantages which put you on track to clearing your total debt. Firstly, you get to be free of those smaller debts which may then accrue to become larger debt obligations. Secondly, it helps you build momentum as the small payment milestones will create a snowball effect and put you in a positive frame of mind.
The debt snowball method is a very common method used to help debtors get out of debt and it can help you too. Using this snowball method would ensure you have the momentum to weather your larger debts. Classifying your debts in order of size will help you to delegate your money to your smaller debts and improve your capital allocation.
Tackle Large Debts
Large debts can be scary because they may weigh on you both mentally and financially. Once you have paid off your smaller debts (see tip above), you can employ different methods to tackle your larger debts. One popular method used is called the debt avalanche method. This method requires you to pay the minimum payments for all your outstanding debts and then use the remainder of the money earmarked for paying debts to pay off the debt with the highest interest rate.
Interest rates accrue and can make your debt larger with time, this method ensures that you truncate the interest rate on your worst debt and keep more money and make larger payments. This method has been proven to be effective when used to tackle large debts as it ensures that you have fewer amounts to pay each passing month and you get one step closer to freedom with each payment.
Use Debt Consolidation And Debt Relief
Debt consolidation and relief are viable methods of getting out of debt. Your credit score also affects your interest rates during repayment as individuals with higher scores pay lower interest rates than debtors with lower scores. When you pay higher interest rates, most of your repayments go towards servicing the interest rather than paying the principal and it is important that you avoid such a scenario. Having higher interest rates on your repayments will put a strain on your finances and keep you in debt longer than necessary.
Debt consolidation can help you if you have debt with high percentage interests by allowing you to combine your multiple debts into one single debt with better and more flexible repayments terms. This way, you are only obligated to pay one monthly payment with low interest rates as opposed to multiple monthly payments with high interest rates.
Debt relief also makes it easier for you to make your payments as it helps you by giving you a lower principal, reduced interest rates, or partially forgiven debt. This reduces the burden on your finances and ensures that you are able to pay off your debt in an easier manner. Both these options are available to you and the one you choose is up to your preference. If you want more help with this line of action you should consult a debt expert for a more detailed breakdown.
Use Tax Refunds
Tax refunds can be a good source of extra income and it can be quite tempting to want to use this money for fun activities but if you have any outstanding debt it is not advisable to do so. Tax refunds give you a much needed cash injection which can allow you to pay off some of your debt thereby reducing your monthly payments. The resulting lighter debt load will take off the strain from your finances and give you a better long term outlook over spending the tax refund on other activities.
Credit Card Balance Transfer
Credit card balance transfers allow you to transfer a high interest rate debt to a zero percent deal that lasts for around 9 months. We know most people ignore or tear up credit card balance transfers as soon as they appear in their mailbox but you may want to rethink this action. Eliminating your credit card interest can free up cash which you can use to pay off other debts.
Debt repayments can be daunting especially if they are not planned properly. If you currently have some debt you are working through then we hope this article has been able to provide enough insight on how you can solve your debt problem. As always, contact a debt professional if you need hands-on help to solve your debt repayment.