Here are my own concrete debt elimination tips and thoughts on how to reduce debt. I’ve learned from my mistakes, so I hope these ideas help you avoid the debt trap.
In the mid- to late-’90′s, I made accumulating credit card debt something of a hobby. It wasn’t exactly a conscious decision, but every time I handed over that piece of plastic with my name smartly engraved upon it, I was further destroying my financial future.
To make a very long story short, by the end of 1998 I had nearly $25,000 in debt and not a darn thing to show for it. After getting tired of my situation, I eventually buckled down and, in 2000, got a second job in a last ditch effort to get my life back in order.
Now that I’ve got a few years distance between me and those old mistakes, I can offer a few tips on how to, and how not to go about eliminating debt.
My Debt Elimination Tips: Do’s and Don’ts On How To Reduce Debt
DO: Review your credit score on a regular basis.
One of the first things you can do to get a handle on your debt is to find out how your credit situation looks to your creditors. While you can get this information from various sources, most lenders and creditors are interested in your FICO credit score (which is considered the “standard” in the credit industry). You may find what you need with Equifax credit score and report products.
DON’T: Damage your credit.
Avoid doing things to ruin your credit such as forgetting to pay your bills on time or at all! If you close your credit card accounts or apply to too many loans, you may be in danger of negatively affecting your credit, so be aware of how you’re managing your existing loans.
DO: Find ways to lower the interest rate on your debt.
One of the best strategies to cut down on existing debt is to find ways to lower your rates, where possible. If you’re going to own a credit card, go for low interest rate credit cards or if you feel that you are disciplined enough, then balance transfer credit cards and 0% APR credit cards may be worth applying for.
DON’T: Add to your debt load recklessly.
If you’re in financially hot water, don’t add to your troubles by applying for additional loans. The only time you should seek new loans is if these can be used for debt consolidation or as part of a strategy to lower the payments you are already making.
DO: Build a lean budget and stick to it.
Don’t let the “b” word scare you. Budgets are actually pretty easy to put together and to maintain. All it takes is a little upfront organization and a few minutes every week for updates. Don’t know where to start? Perhaps this list of budgeting tools can help.
Or you can check out YNAB (or You Need A Budget), which is a highly rated money management and budgeting software product that runs on most computer platforms. You can read our review on YNAB (You Need A Budget) personal budget software for more details. A standalone product like this or Quicken should provide you with iron-clad security since they don’t run on the internet, an advantage they have over free online money management sites.
DON’T: Keep spending the way you have in the past.
Clearly, the same old same old is not going to work here. Your spending habits are likely what got you into debt in the first place. Changes must occur if you are serious about getting your finances back on track. Sure, those weekday morning lattes from Dunkin’ Donuts may feel like a necessity, but what’s worse? A few days of caffeine detox, or drinking away $700 or more that could be put toward your debt each year? Look at all of the little luxuries in this light and you may quickly find your priorities shifting. I’m not saying that you need to deprive yourself of everything that makes you happy but, rather, that you should try to find things that make you happy that are less expensive or, even better, free.
DO: Have an emergency fund.
Even if it’s just $500, an emergency fund is crucial to the process of debt elimination. Many perfectly good budgets have fallen apart due to unexpected vehicle repairs, veterinary expenses, bail, etc. Make sure that you park the equivalent of at least six months’ worth of expenses into a high interest savings account.
And remember that an emergency is an EMERGENCY. A great sweater on sale at J. Crew is not an emergency, no matter how you try to justify it.
DON’T: Look for an easy way out.
Bankruptcy is an extreme option and shouldn’t be a consideration unless you are under extreme circumstances. I also don’t recommend trying to grow your money through the lottery or gambling. There’s a good chance that you will need to put some effort into getting out of debt, but that’s really ok. It’ll put hair on your chest.
I screwed up and paid things in the order of the collection phone calls that came, which meant that I ultimately paid more and for longer than was really necessary. The better strategy is to pay the minimum on every account, then funnel any extra money toward the account with the highest interest rate until it is paid off. See if you can take discretionary income and extra savings you’ve got each month to add to the minimum payments of your highest interest rate debt accounts. This strategy will ensure that you pay the least amount possible in interest.
I hope you can learn from my mistake: putting off debt elimination will do nothing but make life stressful and ruin your credit. Credit already ruined? Ouch. But the longer you wait to rectify the situation, the longer your credit will remain bad. The sooner you pay off those accounts, the sooner they will age off of your report, and the sooner you can move on with your life.
DO: Find ways to increase your income while cutting down costs at the same time.
If you’ve cut as much of your budget as you can, then see if increasing your income is a feasible exercise. You can explore getting a second job or running a part time business. Keep your eyes open to possible opportunities that arise and don’t be afraid to take a risk! Remember that without risk, there’s no reward.
What are you waiting for?
Contributing Writer: Emiley Thacker
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