How Do I Get Out of Debt?

Personal Finance
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Repaying your debt is important. Unlike that ‘IOU’ you gave your sister when you were little, debt is very real and not paying it off can have long-term effects.

1. How big is the problem? Know who you owe and how much

Take inventory of all your debts. Write out the details for each debt – including who you owe, reason for the loan, contact info, principal owed, interest rate, monthly minimum payments and payoff date. Do your homework and make sure you know who you owe and how much. Below is an example of a debt repayment schedule.

2. How am I going to get out of this mess? Create a repayment plan

There are two ways you can go about repaying your debts:

  • Pay off the debts with the highest interest rates first
  • Pay off the biggest balances first

Prioritize which debts you want to pay off first. Some debt-elimination experts recommend the debt-snowball method – pay off debts with the lowest balance first. This way, you’ll see the benefits of seeing results sooner and gain “momentum” to attack your larger loans later– but where is the “momentum” in that?

Why would you pay off a $100 consumer loan with zero interest that’s due at the end of the year when you have a $1,000 credit card balance with 18% interest that’s due at the end of the month?

Paying off the debts with the highest interest rates or biggest balances first guarantees that you’re getting more bang for your buck and not racking up more interest for your creditors.

3. How do I avoid worsening the situation? Pay more than your minimum monthly balance

Many creditors tell you the minimum balance that is due at the end of the month. If you can, pay more than the minimum balance. Don’t go spending the extra $50 on a round of drinks for your friends. Use that cash to pay off your credit card balances or other loans. Refer to this nifty calculator to see exactly how much you’ll save in interest you owe and how much faster you’ll be able to pay off your debts when you choose to make payments in excess of your minimum monthly balances.

Making accelerated payments will help you keep your credit card balances below 30% of the credit limit, which is the recommended percentage of amount of credit you’re using to your total available credit limit to maintain a healthy credit score.

4. Who can help me conquer my debt? Ask for help

Never ignore your debts – ignorance is not bliss when it comes to debt. If you’re financially unable to make your loan payments, communicate with your creditors and explain to them your situation. Ask them to reduce your interest rates or put you on a more flexible repayment plan. Creditors would rather have you work with them so you can work towards repaying your outstanding loans than have you default and pay nothing at all.

Additionally, if you’re burdened by high-interest debt, there are refinancing options available to you. Credit counseling agencies and other debt relief agencies can, not only provide you with financial and credit counseling, but also help you create a Debt Management Plan.