If you are in a tricky situation with debt, you should really focus on improving your financial health by reassessing your personal finance choices and actively working to alleviate issues. Debt traps are very common and can take a significant toll on your mental health. In this article, we will elaborate on a few steps you can take to get rid of debt and put yourself in a position of financial security.
Reduce expenses and create a budget
The primary way to free up cash and start aggressively paying off debt is to reduce unnecessary expenses. Cutting down on groceries and modifying your lifestyle temporarily to pay off debt can be extremely beneficial in the long run. To help with this, you can create a budget that sets aside a fixed amount each month to go towards monthly debt payments and interest. Really try to evaluate your needs and cut down expenses so that your disposable income that goes toward debt increases.
Find more sources of income
While creating a budget, it will be in your best interest to find supplementary income. You can use this income to increase your debt payments and pay them off earlier. Remember, the longer a loan sticks around, the more you will have to pay in interest. In the case of credit cards, the high APRs can keep you trapped in debt for decades. So if you have an extra property that you can lease out or a car you can sell, try to get that cash in hand as soon as possible.
Create a plan
Structuring your debt repayment schedule isn't easy. There are two common ways to go about making a plan. Firstly, you can try the snowball method, in which you make minimum monthly payments for all your debt and pay off the smallest debt balance with the leftover cash. This method is useful with credit cards, as it can help you reduce your credit utilization ratio and improve your credit score quickly. This method can be encouraging if you have mostly small balances that get paid off frequently. However, since this method does not take the interest for each different debt vehicle into account, there is a chance you might end up paying more in interest for loans with larger balances.
The second method is called the avalanche method. The avalanche method advises that you make the minimum required payments for all your different accounts, and then use the leftover money to pay off the debt with the highest interest rate. Once you pay off that debt, you can move on to other accounts with interest rates in descending order. With this method, it might take a while before you see observable benefits to your credit score and financial health, but once your outsanding balances starts falling, it will be much easier to manage outstanding balances. This debt will also help you pay interest more efficiently, since you will be paying off high-interest debt first.
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Maximize monthly debt payments
If you are able to increase your aggregate monthly debt payments, you can pay off your outstanding balances faster. While it is recommended that you always pay the minimum required monthly payments, paying more than the minimum is a good way to shorten the duration of your indebtedness.
Try debt consolidation
If your debt is all over the place and it is getting hard for you to balance payments across different accounts, you can consider getting a debt consolidation loan. Debt consolidation loans can be used to pay off balances on multiple accounts so you can direct your payments towards a singular source of debt. This type of loan can be especially beneficial if the interest rate on the loan is lower than the rates you pay on other debt accounts.
Look into refinancing
In simple terms, refinancing involves you taking out a loan to pay off an old loan. Refinancing can be extremely attractive when interest rates drop and your existing loan is based on a fixed rate. It is most common to see refinancing in mortgage loans and other types of asset-financing loans. If you think the interest rates on your different debt accounts are too high, refinancing can be a viable option to reduce your financial burden. As for credit cards, you can look at balance transfer cards that can allow you to transfer your outstanding balances from high APR cards in order to help you pay them off easily. However, you need to keep in mind that taking on additional credit cards can negatively affect your credit score.
Try a debt settlement
Finally, you can attempt a debt settlement. If you are going through or have gone through hardship such as job loss, medical problems, or divorce, you can speak with your lender to reduce your debt obligations. Negotiation alongside a debt settlement company can help you persuade your lender to reduce your owed amount to 50% or less of the original balance. However, despite any debt forgiveness, you will have to pay taxes on the full amount.
Overall, there are several strategies you can employ to reduce debt and strengthen your financial health. It doesn't take a lot of time for debt to grow to a point where it can haunt you for the rest of your life, so quick and timely payments are necessary to ensure that you do not fall into a perpetual debt cycle.