Getting in to debt is far from a pleasant experience, but unfortunately for many debt can become a bottomless pit of despair. Whether you have taken out a loan or accumulated an unsustainable amount of credit card debt you need to take action for getting out of debt. The key to taking care of the problem are discipline, patience and understanding your income versus outgo ratio. Below are 6 steps for getting out of debt.
1) Check your credit
A few tips for getting out of debt is making sure that you start looking at your credit. When you need to know what you owe and how much, try and do a credit check in order to find out the information. Once you have all of the information, you can start getting a plan together to resolve your debt level.
2) Save money
Start saving money and getting things in order while you are working. If you are not working then you may want to find a job that will help pay you more or provide you with extra shifts. You can find something part time or full time and go from there, but be sure to try and save a certain amount of money each month or every time you get paid.
If you have the discipline, this method can work the best for you. You won’t be paying extra (save,for the interest that continues to accrue, but this will happen anyway). You’ll be helping your credit score. And, eventually you will knock out the debt. This is how the method works. Let’s say you have three bills you have to pay on each month. Bill A runs you $75 per month. Bill B accounts for $100 of outgo and Bill C costs $150. If you pay the minimums on all three bills, you have an extra $200 (after rent/mortgage, utilities, food and other ordinary expenses). If you can maintain the discipline, you throw an extra $100 towards one of the bills. Most people start with the bill which is owed the least. This will pay the debt off quicker. So, for Bill A, you are now sending in $175 per month instead of $75. This curtails the amount of interest accruing and the bill will be taken care of much more quickly. Once paid off, you take that $175 you were spending and throw it at Bill B. Now, instead of $100 per month towards Bill B, you are sending $275 per month, with the freed up disposable income. When B is paid off, you throw everything at Bill C. Once the first of the bills is paid off, you will see that the others’ debts will be reduced much more quickly thasn you’d expect. As stated before, this requires great discipline and, of course, as other emrgencies arise, you have to make adjustments. Still, if you can stay within this budget, you can eliminate debt fairly quickly and actually help your credit score. Again, all these things are easier said than done.
3) Reduce interest rates
You can contact the creditors and see if you can reduce the interest as you pay off the bill. You can negotiate with the creditors by telling them your situation. Remember that you may need to talk to a supervisor in order to get your interest rate reduced.
4) Cut your credit cards
You have to start cutting your cards to start saving. You will need to do this in order to get out of debt a little faster. You should not keep using your credit card especially if you are overdue on your payment. Credit cards are good if they have a certain limit to them, but having an unlimited credit card will get you in trouble and deeper in debt.
Check our post on managing credit card debt.
5) Do not splurge
Yes, getting yourself nice things is fun and you should, but not when you are in so much debt that you cannot get out. You should not buy things every week when you can save that money for your debt. Buying things here and there is good, but make sure that you do not over-splurge, because the money that you used could have gone towards paying off a loan.
6) Do not take out a loan to pay off debt
Do not take out a loan to pay off debt, because this can result in creating a vicious circle. The vicious circle here is that you have to keep borrowing to pay of debts. This can result unsustainable rates of interest that has to be paid off. Remember, you have to be smart when it comes to debt.
Alternative ways to get out of debt
Choosing bankruptcy is one method to try to eliminate debt. It would be easy to say that this is the least-preferred method, as bankruptcy can stay on your credit report for up to ten years. It is not a method I would necessarily choose, but I understand those who do. Some people feel they have no choice. The positive aspect of bankruptcy is, you are often left with no, or at least substantially reduced, debt. A repayment schedule for the debt not forgiven will be drawn up by the courts and you will be expected to adhere to the schedule. While this will substantially reduce your monthly outgo, it does come with a price. You will have to pay your attorney at least something and, you do have that black mark on your credit report. It’s a matter of what’s most important to you.
Another method one can use is a credit counseling service. This will not eliminate what you owe. When you come to one of these services, they will take a look at your bills and figure out for you a manageable repayment plan. Most will actually take your bills from you and pay on the bills, while sending you one monthly bill to offset what they pay out. This is convenient for you as you only have one bill to worry about. There is no juggling. On the downside, these companies are going to have to charge a fee so they can stay in business. For a lot of people, the thought of one bill is enticing and the fee is a small price to pay. Of course, you have to make sure you pay on time each month for the one bill. This method will take a little longer to pay down the debt, but it should not effect your credit report negatively.
When all is said and done, the best way to be debt-free is to avoid debt to begin with. Once debt accrues, it has a tendency to snowball quickly. When things get out of control, the best steps to take to become debt-free are to maintain discipline, patience and understanding where the money goes. Following these steps, you on getting out of debt quicker than you think.