We’ve all read the success stories of people who got rid of their debt in 12-24 months. What they all had in common was a willingness to acknowledge, assess and tackle their problem head on. Using some of the most successful techniques out there, here’s an 8 step guide to help you get back on track.
List Your Debts
Before you can tackle your debts, you need to know your debts. Make a list of each loan or credit card, with the creditor’s name, balance owed, interest rate, minimum monthly payment required, and due date (if any). Loans include mortgages, leases, car payments, lines of credit, sales finance loans, overdraft, payday, etc.
Negotiate Lower Rates
Before you call a debt settlement company, see if you can do what they do. Call up each of your creditors and ask for relief. There are two strategies lenders typically use to reduce your pain. First, they can cut your interest rate. Credit card companies are most adept at this. Often you can go from a 19.99% rate to 11% or lower, cutting the cost of your debt by half. Other times, lenders may be willing to reduce your minimum payment to ease your monthly obligation. This won’t lessen the cost of your debt, because you’ll pay for it over the long term, but it will make it more manageable within your budget.
Do A Balance Transfer
If you have high interest credit card, store card, even a line of credit, sometimes the fastest and most effective way to reduce your interest is by doing a balance transfer. Often times balance transfer credit cards offer 0% promotional rates for 12-24 months. The other advantage of balance transfer cards are that they allow you to consolidate multiple cards into one loan, and one payment. If you do a balance transfer you’ll still have to make monthly minimum payments. Ideally, you’ll use the 12 months or more to pay down as much of the principle as you can, while it’s interest free. In the end you’ll have to figure out what to do when your promotional rate expires, because once it does, your interest rate will go back up to the 20% range. You can do yet another balance transfer, pay it down with a line of credit, or pay down your balance with cash.
The High-Low
One strategy suggests you pay your high interest loans first. Mathematically, the faster you get rid of your most expensive debt, the cheaper your total debt obligation will be. The way to do this is to rank your debts by highest to lowest interest rate. Calculate the minimum payment for each of your debts. Now whatever else you can afford to use to pay down your debts you should allocate towards the highest interest debt.
Snowball It
The other strategy, the snowball plan, says you should pay down your smallest loans first. The idea here, is that as you start knocking smaller debts off, you’ll start to feel more empowered, successful and organized. The way to do this is, rank your debts by highest to lowest balance. Calculate the minimum payment of each of your debts. Then allocate left over funds towards the debt with the smallest balance. Cleaning up debts with $200, $500, or $1,000 balances will quickly make you feel like you’re on top of your game, and reduce the risk of missing a payment here or there.
Tax Refund
Ever get a surprise tax refund? How about a planned tax refund. Either way, if you do, this time you’re not going to use it for an unplanned vacation. Use it to pay down your debt, either with the snowball or high-low strategy.
Sell, Sell, Sell
It’s guaranteed you have tons of “stuff”. You’re probably sitting on thousands of dollars of stuff you no longer use, but someone else can. Go on Craigslist, or ebay and start selling stuff you no longer use, pocketing $50 here, or $100 there. We’re talking things like your old treadmill, dumbbells, record player, teddy bear collectibles, baseball cards, bandsaw, etc… whatever you’re no longer using. Kids toys, strollers, cribs, high chairs, and car seats are great places to start. You might even consider selling and/or downsizing some of your bigger ticket items like your car, ATV, boat, snowmobile, camper etc…
Cash Is King
For some psychological reason, study after study has shown that using plastic prevents us from assessing and feeling the impact of making purchases. As a result, we’re willing to spend more for the same items with plastic than we are with cash. We also have a harder time keeping a budget with plastic. The result? Your credit cards need to be put on ice. Don’t cancel them, because truthfully, sometimes they’re a necessity, like for hotel reservations or car rentals. But take them out of your wallet, and put them in your mother’s underwear drawer (that’ll make you think twice). Also get rid of your debit card. While better than a credit card, it still allows us to overspend, and can impair your ability to keep to a budget properly. The best way to stick to your budget is to take it out cash at the beginning of every month. Put it in an envelope (the envelope budget) and use it as needed. You will be shocked how much this will help you. Featured photo credit: Michael Frank, Bankruptcy – to scissors a credit card, Flickr via flickr.com
