1. Stop taking on new debt
First and foremost, if you wish to pay off your debts, you must refrain from incurring further debt. It’s easy for me to say, right?
However, if you stop taking on new debt and continue to pay your present bills, you will eventually be debt-free; even if you do not pay anything extra to your debts, each minimum payment reduces your balance. If you keep going without adding new debt, your balances will eventually reach zero.
However, if you continue to take on fresh debt, you will just dig yourself further into a hole.
To accomplish this, you will need an emergency fund and a budget. That way, you’ll have cash for emergencies, and your budget will save you from incurring new debt to cover your living expenditures.
Knowing where you’re spending creates the groundwork for determining how much income you can devote to debt repayment.
With this information in hand, start thinking about where you can minimise expenditures to free up more income for debt payback.
2. Pay More than the Minimum
If you’ve committed to not take on additional debt and want to boost your debt repayment approach, invest as much money as you can towards that debt. Every small amount can make a significant difference.
Furthermore, paying more than the minimum payment lowers your total debt utilisation ratio, which can boost your credit score.
3. Reduce your interest rates
Paying less interest implies that more of your payment goes towards reducing the debt.
Even if you are not eligible for a zero percent balance transfer, you may still be able to lower your interest rate. It might be as simple as phoning your credit card company and asking!
4. Earn More
Reducing spending can help you save money, but it only goes so far. Unfortunately, life has a cost that appears to be increasing with each passing day.
Fortunately, this is only one side of the equation. One of the most efficient ways to pay off debt quickly is to increase your income.
If possible, consider selling items you don’t need or creating a side job centred on something you enjoy. The more you earn, the more you’ll have to put towards debt, and the sooner you’ll be debt-free.
5. Focus on one debt at a time
A very frequent and effective technique for debt repayment is to pay the minimum payments on all except one of your bills. Then send as much money as possible to the single focus debt. Once that obligation is paid off, shift your attention to the next bill.
As you make progress, you can transfer the funds you originally budgeted for the recently paid-off debt to the debt you wish to pay down.
The order in which you pay off your debts is referred to by different names. The debt snowball strategy involves focusing on the debt with the lowest balance first. The debt avalanche strategy involves focusing on the debt with the highest interest rate first.
Which method you pick doesn’t really matter. Just pick a debt and start paying it off.
To do this effectively, you’ll need to get clear on your current situation. Create a spreadsheet of all your outstanding debt and document:
- How much debt is outstanding, by lender
- What the interest rates are
- The type of interest rate (fixed or variable)
- Payment frequency
- Payment due dates
- Minimum payment amounts
- Any prepayment fees/limits
Don’t leave out any kind of debt, including buy now, pay later responsibilities. That list will serve as the framework for driving where you need to focus, keeping you engaged, and allowing you to celebrate quick triumphs while refreshing your balances.
Make a note of anything surprising on the list, since it may reveal spending tendencies that should be reduced.
6. Get Professional Help
Sometimes the debt feels overwhelming, and you need assistance. That’s when it’s time to seek the help of a professional debt counsellor. Debt counsellors educate money management and debt reduction skills so that people may make informed financial decisions about budgeting, credit, and debt management.
Debt counselling agencies are typically non-profit organisations that provide free or low-cost guidance. Introductory counselling is usually free, however depending on the assistance needed, there may be an enrolment fee or a monthly fee after that. Most agencies provide free debt education information; however, additional services such as debt management and repayment programs require fees.
Working with a counsellor individually will not affect your credit score, but what you do afterward may.
While debt counselling can have a negative connotation, you don’t have to be in horrible financial situation to use it. They can be a valuable resource for proactively managing your finances.
7. Explore Debt Consolidation
Debt consolidation entails taking out a new loan to pay down existing loans. It’s usually done with an unsecured personal loan. Exploring this option may allow you to lower your monthly payments and extend the time it takes to pay off your debt.
This technique may work for some, but personal loans sometimes have higher interest rates than loans backed by an asset, and certain types of personal loans, such as payday loans or other short-term, high-cost loans, are best avoided.
Only do this if you are unable to make even the minimal payments on your present debts. Also, if you continue to incur new debt on a regular basis, you may want to reconsider your living choices. You cannot get out of debt if you are still accumulating debt.
8. Negotiate Debt Settlement with Creditors
Debt settlement is a sort of debt relief in which you engage with your creditors to decrease the overall amount owing. The purpose is to reach an agreement on how much will be paid. After all, paying something is preferable to not paying anything.
While debt settlement can help you lower your overall debt, avoid bankruptcy, and pay off your debt faster, it can also have a negative influence on your credit score, make it more difficult to obtain future credit, and cost thousands of dollars. Furthermore, any discharged debt may be taxed in the subsequent tax season.
Debt settlement should be chosen based on your individual financial situation, although it is frequently viewed as a last choice. A debt counsellor can frequently help settle negotiations with creditors.
Again, if you continue to incur debt, this issue must be addressed. You will not become debt-free if you continue to incur additional debt.
Putting It All Together
Paying off debt isn’t a one-size-fits-all endeavour, but with the correct mindset, goals, dedication, and consistency, it is doable.
Knowing why you got into debt and what type of debt you have will help you start developing a repayment strategy that works for you.
Just remember why you started your debt reduction quest and what the end goal is. In the future, you will be grateful.