Managing debt can be one of the most stressful aspects of handling your finances. It seems like debt just keeps getting higher and those monthly payments and interest charges never stop. In order to handle it effectively it takes a lot of planning, patience, and discipline. Once you have organized your budget, you can start to analyze your debt for opportunities in making it better. The more you understand about your debt, the better equipped you will be to improve upon it. So dig up all those old loan terms and rate quotes, here are 10 ways you can help yourself get out of that debt trap.
- Raise your credit score
- Consolidate your debt
- Transfer credit card balances to a card with a lower rate
- Pay off higher interest rates first
- Focus on paying down the right bills
- Take advantage of special offers you qualify for
- Make saving one of your monthly bills
- Cut your costs
- Be disciplined
- Make more money
Raise your credit score
One of the sad truths of debt management is that a lot of times you have to learn to manage your debt before you can be approved for loans that can help you manage your debt. It’s a cyclic dependency, and it’s unfortunate. However, having good credit is essential to good money management, otherwise you will be paying a ridiculous amount of money in interest charges on your big purchases. In short, it means that you will pay more for the same item than other people…just because your credit score shows you as a high risk. Do what you need to improve your score, and it starts with paying your bills on time. Late payments and past due accounts will annihilate your credit. For more credit score tips, take a look at our whole article on how to raise your credit score.
Consolidate your debt
There are many advantages to consolidating your debt. First of all, it’s almost always easier to keep up with one bill than with many bills. That means you are more likely to pay the bill and pay it on time, which is the single most important factor in getting out of debt. Second, if you are able to consolidate a lot of your debts to one payment, you have a good chance of securing a lower overall interest rate, and make lower payments per month than if you paid all of your debts separately. Be wary of debt consolidation scams however. Never use the monthly payment as your only factor…some companies will give you a lower monthly payment with a longer term and a higher interest rate than you are already paying. Basically, debt consolidation is just a personal loan with an interest rate just like any other loan. As with any financial decision, you need to be smart and do your due diligence to ensure the loan you take is a good one. Take advantage of a good debt consolidation opportunity if it presents itself, but make sure you are doing it to help you pay the debt off…not to make room for more.
Transfer credit card balances to a card with a lower rate
If you have a lot of credit card debt, make sure you examine the interest rates on your cards. It’s easy to forget about your interest rates over time, and some people are able to make great strides in this area. If your credit is good (see the first point) you should have multiple offers for introductory APRs, even as low as 0% for a period of time. Take a look at those closely and see if you can use them to your advantage. For instance, if you are approved for a 0% interest rate for 12 months, and you think you could pay off your credit card debt in that time, then it would be a great chance for you to save a lot of money with a no interest offer.
You don’t want to overuse the balance transfer method. Some people like to transfer balances over and over again when their introductory rates run out. You might get some short term interest gains, but you are setting yourself up to be labeled as a higher risk for lenders in the future. Use it if it makes sense, and stay on course to get your interest benefit. If used wisely, balance transfers are a great tool in your debt management strategy.
Pay off higher interest rates first
When working to pay off your debts, always pay off your highest interest rate debt first. Your highest interest rate debt is the place where your money is working for you the least. The amount of money you pay out a month on that debt is being taken up by the most amount of interest and thus the least amount of principal. Organize your debts by their interest rates and work to pay off the highest first. Then move to the next highest and pay it off, and so on and so forth. By reducing your highest interest rate debts, you allow more of your money to work towards paying off your debt.
Focus on paying down the right bills
Related to the point above, you want to focus your attention on paying down the right type of debt. If you have a mortgage or student loans, a lot of times those are considered “good” debt. The reason those debts are better than others is that they are often tax deductible. Also, mortgages and student loans are viewed as positive items on your credit report when paid regularly and on time. Credit card debts are usually the first debts you want to pay off as they usually carry the highest interest rates and can reflect negatively against you on your credit report. In general, you should always pay down your recurring debt before your installment debt.
Take advantage of special offers you qualify for
Most of the time we get a bunch of junk mail or spam about “special” offers that are really not in our best interests. I don’t know about you, but I usually discard them as soon as I see them. However, there are times when special offers are beneficial, especially if you are trying to reduce your debt. For example, we already discussed the introductory rate credit card offers, and how a balance transfer at a really low rate can help you pay down your debt. You could also get offers for refinancing prior loans, home equity line of credits, or personal loans…all of which would need to be examined carefully to see if they benefit you or not. Have a headache yet?
Make saving one of your monthly bills
Being able to make debt management routine is a key component to successfully getting your finances in order. In order to pay your debt down, it is helpful to pay extra if you can. A lot of people fall into the trap of spending their “extra” money per month on random things (eating out anyone?) since that extra money isn’t allocated to any specific bill. One trick that I have been able to use successfully is to allocate a savings amount into my monthly budget. So, effectively it makes you save by treating the savings as a monthly expense you have to keep up with. Over time, you get used to putting that money away and working with what is left each month. That extra money can then be applied to the debts you are attempting to pay down.
Cut your costs
Most people can’t remember where they spend their extra money each month. Whether it is eating out or impulse buys, we spend a lot of money each month without even realizing it. If you can learn to cut back on unnecessary spending, you may be surprised at how much more money you have each month to help pay down your debt. Instead of eating at your office cafeteria, start making your lunches at home and bringing them to work. Instead of eating out every other night, make some things at home that your family can still enjoy. Being able to pay down your debt is a team effort, and it trickles down to your every day actions and choices. Every little bit helps.
Be disciplined
The old management catch phrase is “plan your work and work your plan.” That is a great description of how you should handle your debts. As important it is to organize and plan your debt reduction strategy, it’s really all in the execution of that plan. Once you get started and you see some progress, it will seem easier. Watching your debts go down like you planned will motivate you to pay them off even more. Results breed more confidence, which breed more results. It is usually a long road to pay off your debts, so make sure you stay on track and keep your mind on the ultimate goal.
Make more money
Obviously, making more money can help you pay down your debt. If you are able to increase your income in some capacity, you can use that extra money to pay off your debts quicker. You will also have more flexibility in your monthly budget to accomplish other financial goals. Sounds great, right? But how do you make more money? First off, you can try to find a job with better pay. Alternatively, you can speak with your manager and inquire about getting a raise at your current company. Some other options include getting a second job or possibly starting a side business, either of which would provide a secondary income stream. One of the caveats of trying to get a second income stream is that it will almost undoubtedly take up your time. It’s those type of decisions that make handling your finances tough sometimes. Make sure that any additional efforts you take on will not completely take away from your ability to do your main job, and more importantly, take away from all of your family time.
Handling debt is a part of life, so it’s beneficial to get good at it. Unmanageable debt can be stressful for anyone, and can really put a big dent in your financial health. A huge part of improving your ability to handle your debt is determined by how much you can change your spending and money management habits. You won’t be able to change your financial behavior if you continue to do the same things over and over again. Take the steps necessary to change yourself and your spending habits, and you can change your financial outlook. Keep up with your plan and take pride in the results that you see. Use those results as even more motivation to pay your debts, and you will soon reach your debt management goals. Having a handle on your debt is an important step to your overall financial health, and once you have it under control you can really start to make your money work for you.
