Getting out of debt and living free without debt is not an easy endeavor. Most likely, you are reading this article because you are currently in a large amount of debt and think that it is impossible for you to get out of debt completely. To solve the problem, don't add new debt and change your life forever.
Step
Part 1 of 3: Dealing with Credit Card Debt
Step 1. Lower your interest rate
If you have a good credit report, contact your credit card issuing bank and ask for a reduction in interest rates. This is a way to reduce interest expenses and save money each month.
Step 2. Pay off the credit card debt with the highest interest first
If the interest rate on a high-interest credit card cannot be lowered, pay off the debt first. That way, interest expenses will be reduced because the debt on the card is also reduced.
Step 3. Consider a debt consolidation loan
If your credit report is good, you can combine all of your credit card debt into one debt consolidation loan. Arranging one payment is certainly easier than multiple payments at once. In addition, debt consolidation loans usually have lower interest rates than credit cards.
Step 4. Stop using credit cards
To ensure that you can get out of debt, you must stop adding to debt. Replace credit cards with debit cards, so the money you spend is directly charged to your savings.
Step 5. Pay more than the minimum amount if possible
Credit card payments are structured to keep cash flowing to the credit card issuing bank for as long as possible. Avoid pitfalls that will hurt your financial position and benefit creditors by paying more than the minimum payment whenever you can.
Part 2 of 3: Managing Money
Step 1. Create a budget
If you really want to get out of debt, you'll need to keep track of your income and expenses, so you can discipline yourself to only buy what you need for the month.
- Make a list of all your sources of income. List all the ways you've earned money, whether it's from work, investments, interest income, etc. Calculate all your income streams per month.
- Make another list for your monthly expenses. Make sure you include everything you need to pay per month, including electricity bills, household purchases, fuel, meals at restaurants, school fees, etc. Also calculate all expenses per month.
- Subtract monthly income by monthly expenses. If the income is more than the expenses (and it should be), the remaining money is free income and can be used to pay off debt or save.
- Make sure you stick to your budget each month. If spending exceeds budget, there will be less money left to pay off debt or save.
Step 2. Look for additional income
To settle debt effectively, you need more income. The solution can be a side job (if you are a permanent employee) or earn more commission (if you work in sales). This method does sacrifice time for yourself, but it is necessary to get out of debt.
Step 3. Cut your expenses
Find ways to reduce expenses each month so that there will be more money to pay off debt.
- Do you often eat out? Save money by cooking your own.
- Can you reduce your electricity bill by saving energy? For example, does the downstairs really need air conditioning when everyone in the family sleeps upstairs? Are your electronic devices on all the time when they should be turned off?
- Consider getting and using coupons and vouchers when shopping to save money.
Part 3 of 3: Considering Professional Debt Relief Options
Step 1. Talk to a nonprofit credit counselor
The counselor will work with you to develop a plan to pay off all debts and will contact creditors to lower your loan interest rate.
Step 2. Consider debt settlement
If your debt is getting out of hand, creditors may realize that a little money is better than nothing. In such a case, they may be willing to accept payment of less than the amount you owe rather than receive nothing. Thus, your debt to the creditor will be fully settled. If you choose this method, you will need the help of a debt counselor.
Be aware that this choice will negatively affect your credit score. The assessment will appear as serious as default or credit card debt hanging even though the account has been closed
Step 3. File a bankruptcy petition
One of the least attractive options for getting out of debt is to file for bankruptcy as it will adversely affect your reputation. However, you will receive protection from creditors and a judge can make your debt disappear completely.
- Consult these options with a bankruptcy advocate.
- Note that you will get black notes on your credit report if you choose this method.
Tips
- If you want something, save it before buying it. You should only buy things you really need (such as a house and a car). Don't buy furniture, unnecessary electronics or vacations. If you can't pay for something with cash, you can't afford it.
- Use cash as much as possible. Paying with cash has a significantly more psychological impact than paying with a card. It feels like you're spending more money, so you're spending less.
- Don't think of a debt consolidation or credit counseling agency as your first choice. Both options should be a last resort. As tempting as it may seem, if you want to tackle debt, working on your own will help you learn the skills needed to solve problems on your own and avoid similar situations in the future.
- Realize that the credit card issuer is not your friend. They want you to stay in debt and pay the minimum amount every month for the rest of your life (your credit card debt is considered their asset). So you have to pay off all your credit card debt and after a few months (without using them again), seriously consider closing the account. It would be better if you use a debit card issued by your savings bank. That way, you can still use your card for shopping, but the money will be taken directly from your savings account and you'll avoid debt. By closing a credit card account a few months after paying it off, your credit report will still be good.
Warning
- Avoid the temptation to disburse a loan whose payments are deducted from your paycheck, no matter what. A loan like this is a quick "settlement" that will lead to bigger debt problems. Before thinking about doing so, consider other favors, such as friends and family, or home equity.
- Try not to give the collector too much personal information because everything you say will be included in the file. Speak briefly and politely. Don't be tempted to answer personal questions and know your rights.
- Chronic shopping and debt are harmful habits, just like alcoholism or any other addiction. Shopping is sometimes entertainment, or used to cover deeper problems. Consult a professional if you think you have problems with spending and debt.
- Don't be rash. Closing current credit card accounts can lower credit ratings. Closing will shorten the life of your credit history and make you appear untrustworthy for credit. Choose which cards to cover carefully. You can avoid this problem by keeping the older card and closing the new card. However, you should consider the interest rate when choosing which card to cover.
- Be careful with low-interest credit card balance transfers. The base interest rate will almost always make your debt pile up.
