According to recent findings from studies completed across the U.S., the majority of Americans are in some form of debt – roughly 80 percent of the adult population. For many of these millions of people, getting a handle on this debt is a top priority. While some people may be able to ask for a raise at their job or even take on a second side job, these options are not realistic for much of the population who already works more than 40 hours a week.
Instead, most people turn to smart ways of paying of their debt to minimize how long they must make debt payments and the total cost of the loan in the end. Figuring out how to start making real headway in paying off your debt will depend on your financial situation and the exact type of debt you must pay back, though some basic rules of repayment apply to all cases.
Four Steps to Becoming Debt-Free
With a little dedication and hard work, you can become debt-free. If you are looking to cut down on your debt, consider following these steps to meet your financial goals as quickly as possible:
- Get a clear picture of your debt. If you have not already done so, you will need to get a handle on all of your debts before you can start to effectively cut them down. Are you aware of the total amount of debt you carry for your mortgage, credit cards, education loans and similar debts? Do you know which of these forms of debt is costing you the most? You need to be able to answer all of these questions and more so that you can correctly prioritize your debt. Take notes on the interest rates of each debt account you have, how long you have to make payments, when you would like to be done making payments and any other information you find to be applicable.
- Set your financial goals. Setting goals is as important as having a clear picture of your debt. If you do not know what you are working towards, it is exceedingly difficult to strategize a way of getting there. While your end goal of lessening your overall debt may be fairly obvious, the intermediate goals that will serve as stepping stones to being debt-free are what you need to think about. If you would like to lessen your debt, it is crucial to examine your money habits to see if you can do anything to reduce current issues and prevent debt in the future.
- Assess which payoff strategy can help you budget for payments. In the same way that your financial goals are unique to you and your economic situation, the debt payoff strategy you choose should match your possibilities and means. While it may be tempting to try to eradicate all of your debt immediately, it is probably unrealistic to think you can live decently while dedicating 70 percent of your income to debt reduction. Instead, figure out a payoff strategy that both meets your needs and allows you to pay for your other financial priorities.
- Track your progress and stay consistent. While making your new budget and debt repayment plan may have seemed difficult, reality sticking to the new budget long enough to achieve your goals usually tends to be the true challenge. Similarly, tracking the progress of your debt reduction to see if your budget and repayment strategy are working often falls to the wayside when things get busy. To successfully eradicate your debt, it is paramount that your consistently make your predetermined payments and track your progress so that you can adapt your strategy as needed along the way.
Tips for an Effective Debt Payoff Strategy
Your success in reducing your debt will largely depend on how well you are able to budget for repayment. Check out the following ten tips on repayment strategies to see which may be able to help you pay off your debt as efficiently as possible:
- Reel in your credit card usage. If you are paying off high sums of debt to credit card companies, you need to consider not using these cards any more until you have paid off at the least majority of debt on each account. It can seem like standing in quick sand when you are trying to pay off debt for an account that you continuously put more debt on. While you are focusing on debt reduction, you may want to think about going on a credit card diet to avoid making any unnecessary purchases until you are squared away financially.
- Take advantage of low-interest offers to pay off high-interest debt, but with caution. A clever method of debt reduction is to pay off a high-interest credit card or other such debt with a new credit card that has a low introductory debt transfer rate. In many cases, these offers can give you between one and two years of interest free time to tackle your debt. Be careful, though. It is easy to open up a second credit card account to take advantage of a low-interest offer only to eventually max out the new card in much the same way as the first one.
- Pay most expensive debt first. While most Americans have a combination of different types of debt, the most important aspect of any type of debt is its interest rate. The higher the amount you pay to have the loan, the higher its priority should be on your repayment list. Loans can have compounded interest, subsidized and unsubsidized interest and many other ways to treat the interest of your loan. Loans that have compounded interest that is unsubsidized will usually cost you the most in the long run and should therefore be paid back as soon as possible.
- Do not pay just the minimum amount or make irregular payments. If you pay only the minimum required amount for most credit cards and many type of loans, you will often be paying almost completely for the accumulated interest on the loan instead of the principal balance itself. In this way, your primary loan amount stays relatively consistent over time even though you have been making payments. If you do not make regular payments for any reason, you should try to remedy this immediately. Irregular payments can result in fees or interest hikes that may completely erase any headway you have been making against the loan’s principle balance.
- Do not worry too much about your credit score. While there is no doubt that your credit score is important for taking out a mortgage or a car loan, it is used for little else. When you are paying back a great deal of debt, your credit score may be in the red while you budget for your limitations and what needs your attention most. Try not to focus on this number while you are concentrating on paying off your debt because it might distract you from your end goals. Once you have squared away your debt, you will be happy to see how fast your credit score will rise on its own.
- Put extra cash towards your debt. It may be tempting to use this year’s unexpected work bonus towards a surprise vacation to Tahiti, it would be much more beneficial to you in the long run to immediately put it towards your debt. While it is naturally tempting to enjoy “extra” money like this, the amount of money you will save over time by automatically putting this money towards the debt is much greater than the value of the money if spent right now. Remember your financial goals.
- Start changing your spending habits. All of the abovementioned tips can take you a step closer to being debt-free, but you may have to permanently alter your spending habits to see real success. By incorporating these money-saving tips into the way you approach money as in general, you can both pay off your current debt and avoid getting into debt again in the future.