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Debt Management : How to Get Out of Debt

Finance
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Uploaded on
Feb 6, 2023
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Last updated on
Oct 17, 2023
Uploaded on
Feb 6, 2023
|
Last updated on
Oct 17, 2023
Debt Management : How to Get Out of Debt
Empowering your financial freedom, one step at a time.

If you owe a lot of money, it can be hard to know what to do. But don't worry, you can pay it back. Sometimes you might need to borrow money to buy important things, but it's important to take care of debt that's causing problems. The best way to do this is to make a plan. First, write down how much you owe. Then try to find extra money to pay back what you owe. Finally, try not to borrow more money that you don't need. Here are 5 steps to help you get out of debt and stay debt-free.

Debt Management : Stepwise Guide on How to get out of Debt

Debt management is a crucial aspect of personal finance as it helps individuals take control of their finances and get out of debt. It involves creating a budget, prioritising debts, finding ways to increase income, and reducing expenses. The goal of debt management is to pay off debts in a structured and systematic manner, while also ensuring that the individual remains financially stable. By employing effective debt management strategies, individuals can regain control of their finances, reduce stress, and work towards a debt-free future. Here is our step wise guide to getting out of debt:

1. List down everything that you owe

Take a detailed inventory of your debt to get a clear picture of where you're at now. Start by listing all of your debt accounts and what you owe. To get out of debt, you need to make a plan. First, write down all the money you owe, like credit card bills, loans, and your mortgage. Check your credit report to make sure you have the right information. Then, write down the interest rate, monthly payment, and due date for each debt. Finally, add up all your monthly payments to find out how much you need to pay every month to stay on top of your debt. This is called your debt repayment strategy or debt management plan.

2. Check how much you can pay every month

To manage your debts, it's important to make all your monthly payments on time. But just paying the minimum won't help you get out of debt fast. You will end up paying more interest and stay in debt longer. The faster way to pay off your debts is by paying more than the minimum each month.

But it's not always easy to do that when you don't have much money. Here's a plan to help you figure out how much you can afford to pay each month and find extra money to pay off your debts:

  • To get out of debt, you need to figure out how much money you spend each month. You can do this by using a computer program or a phone app to keep track of your expenses. Write down how much you spend on things like food, your phone bill, electricity, gas for your car, and where you live. If some expenses change a lot, like your electricity bill, write down the average amount you spend over a few months.
  • To get out of debt, you need to understand how much money you make and how much you spend. Write down your monthly salary after taxes. Then, write down all the things you spend money on, including important things like bills and also things you don't need like going out for fun. If there's not enough money left to pay off your debt, you have to do something to have more money. You can either spend less money or make more money.
  • Try to find ways to save money. Take a look at all the money you spend and think of ways to reduce it, such as eating out less or shopping less or talking to the companies you pay for things like electricity and water to try to lower the bill. Debt management is crucial. A debt repayment strategy can help you pay off your debts. Making a debt management plan is a good idea to help you manage your finances.
  • Boost your income or supplement it. You might be able to find a side business, work more hours at your current job, or ask for a raise to earn more money that you can use to pay off your debts.

3. Reduce Your Interest Rates

Getting out of debt can be hard when you have high interest rates. To make it easier and cheaper, you need to lower these rates. Here are some ideas:

  • Get a reduced interest rate from your lender. If you have a solid payment history with them and strong credit, you might be able to work out a deal with your lender for a temporary, or even long-term, cheaper interest rate. You incur no charges and suffer no consequences by calling your lender to request a lower interest rate. It also has no impact on your credit record or score.
  • Think about getting a balance transfer credit card.One way to save money on interest while paying off debt is to move your debt to a balance transfer credit card that has a 0% interest rate for a certain amount of time.You need to have good credit to be eligible for this type of card.You may also have to pay a fee, usually 3% or 5% of the total amount you're transferring, to use this service.
  • Think about debt consolidation. A debt consolidation loan can help you save money on interest and make it easier to pay off debt by putting all your high-interest credit card or loan balances together into one loan with a lower interest rate. By lowering the interest you pay, you can put more money towards paying off the original amount you owe. If you want to use a debt consolidation loan to make paying off your debt easier and lower your interest rates, look for lenders that offer these loans with good annual percentage rates.

4. Start using a debt repayment strategy

To pay your debts, you should make a plan. It's important to think about which debts to pay first. Your home loan is a big debt and it may take a long time to pay off. It's better to focus on smaller debts like credit cards and loans that you can pay off faster. Consider these strategies for paying down debt:

  • Manage any debts that are being collected. Prioritise paying off any debts that are in collections because you are late on payments. You should prioritise paying off collection accounts as soon as possible since doing so can assist lessen the harm they inflict to your credit. Additionally, ceasing calls from debt collectors might lessen some of the stress associated with having debt.
  • Spend additional funds on paying off the loan with the highest interest rate. This debt management strategy, also known as the debt avalanche strategy, will ultimately result in the greatest interest cost savings. Pay the minimum on all of your bills, and then put whatever additional funds you have toward paying down the loan with the highest interest rate. Focus on the debt with the next-highest interest rate after that, and so forth.
  • Spend additional funds on the credit card or debt with the lowest balance. With the debt snowball technique, you may eliminate your smallest sums more quickly, resulting in fast victories and a smaller number of accounts to manage. With this approach, you pay the minimum amount due on each account while making additional payments until your smallest balance is paid off. The account with the next-smallest balance will then be your main focus, and so on.
  • Put the money you save each time you successfully pay off a debt toward paying off your other debts. You may also use any extra money you get, such a bonus at work or a tax refund, to make additional debt payments.
  • As you pay off debt, keep your credit in mind as well. Paying your payments on time each month is one of the best things you can do to improve your credit score. Consider setting up automated payments or payment reminders through your bank to make sure you never miss a payment on debts or any other services.

5. Be careful going ahead

Getting out of debt is challenging. As you make progress toward paying off your debts, be sure to reward your progress and take pride in how far you've come.

Make a commitment to avoid taking on any new debt that isn't absolutely necessary. Be especially careful if you plan to use a personal loan or balance transfer card to consolidate credit card debt. If you aren't confident that you can resist the temptation to charge up the cards you just paid off, then it's best to avoid consolidating your debt.

Debt management : Strategies to get out of Debt

Debt management is the process of effectively organizing and paying off debts. It involves creating a budget, prioritizing debts, and finding ways to increase income and reduce expenses. There are various strategies that can be employed to get out of debt, including debt consolidation, negotiation with creditors, using balance transfer cards, and developing a debt repayment plan. Learn to budget better and become financially more sound with our visual webstory on the 5 Ways You Can be Financially Stable to learn more. Here are six of the best strategies to get out of debt and regain financial stability.

Top 6 strategies to get out of debt : 

1. Pay more than the minimum amount due

To manage your debt, first take a look at your budget. See how much extra money you can use to pay off your debt. By paying more than just the minimum payment each month, you can save money on interest and become debt-free sooner.

For example, if you have a credit card balance of $15,000 with an interest rate of 17% and a minimum payment of $450, it would take almost 4 years to pay it off just by making minimum payments. You would also end up paying around $5,500 in total interest.

But, if you were to pay $550 a month, which is $100 more than the minimum, you could repay the debt in less than 3 years and only pay $4,100 in total interest. To help you better understand this, try using a credit card payoff calculator.

How does this Debt Repayment Strategy work: Paying more than the required minimum helps your credit cards' main debt get paid off faster.

How to start using this debt repayment strategy: Plan to make the additional payment before the current billing cycle's deadline. It may also be incorporated into the minimal monthly payment.

2. Try the debt snowball

If you want to get out of debt, one option is to use the debt snowball method. This debt repayment strategy involves paying the minimum payment on all your debts except for the smallest one. Instead, you focus on paying as much as you can towards the smallest debt until it is paid off. Then, you move on to the next smallest debt while still making minimum payments on the rest.

For example, if you have a $8,000 credit card balance, an $3,000 auto loan, and $100,000 in student loans, you would start by paying off the auto loan first because it has the smallest balance.

The debt snowball method is a good way to manage your debt because it helps you stay focused on one debt at a time, and as you pay off each debt, you will build momentum and be motivated to continue. However, this method should not be used for payday loans or title loans because these loans have much higher interest rates, so it is important to pay them off as soon as possible.

How does this Debt Repayment Strategy work: When you use the debt snowball strategy, results come immediately, inspiring you to keep going.

How to start using this debt repayment strategy: List your outstanding debt balances in ascending order, starting with the lowest. Continue to make the minimum payments on each of your debts, and until the one with the lowest balance is completely paid off, apply any excess cash to that loan. Use the next smallest debt on the list to repeat this process.

3. Refinance your debt

To manage your debt and pay it off quicker, you can refinance your debt to a lower interest rate. This means changing the terms of your debt for mortgages, car loans, personal loans, and student loans.

One debt repayment strategy is to get a debt consolidation loan, which is a type of loan that has a lower interest rate. Another option is to transfer your credit card debt to a balance transfer card. These cards have a 0% annual percentage rate for a certain period, usually 6 to 18 months.

How does this Debt Repayment Strategy work: You can refinance to acquire a cheaper interest rate, a fixed loan term, and a predictable monthly payment, which will help you accomplish the job more quickly.

How to start using this debt repayment strategy: To choose the finest debt consolidation solution, do your research. To receive the lowest rate if you decide to take out a debt consolidation loan, be preapproved. If you decide on a balance transfer card, be sure you have the funds available to settle the debt in full prior to the conclusion of the promotional period.

4. Commit windfalls to debt

When you receive a tax refund or stimulus check, instead of saving it or spending it on something fun, you should use the money to pay off your debts. You can either use all of the money for debt repayment or split it between debt repayment and something enjoyable, like a vacation or fancy dinner.

Other surprise money, like inheritances, bonuses from work, or cash gifts, can also help you pay off your debts faster. Keep in mind that every bit counts when working towards your goal of getting out of debt.

How does this Debt Repayment Strategy work: Using financial windfalls wisely creates momentum for debt repayment.

How to start using this debt repayment strategy: To prevent the temptation to splurge, decide how you'll use the money and instantly apply the amount you select to your debt amounts.

5. Settle for less than what you owe

Another way to get out of debt is to talk to your creditors and try to settle your debt for less than what you owe. You can do this yourself or hire a company to help you for a fee.

Although settling for less may seem like a good idea, it does come with some risks. Some debt settlement companies might ask you to stop paying your debts while they negotiate, which can lower your credit score. The Federal Trade Commission warns about these risks.

How does this Debt Repayment Strategy work: You'll just have to pay a percentage of your debt, and you'll be able to move on knowing that you've paid off those creditors.

How to start using this debt repayment strategy: Make settlement offers to your creditors, and if they accept, obtain the terms in writing. Alternately, you might pay a respectable debt settlement business to perform the effort on your behalf.

6. Revisit your budget

To pay off debt faster, you can either make more money or spend less. While getting a second job or extra work may not be possible, you can still make changes to your budget.

Begin by reviewing your spending plan and categorizing each item as necessary or unnecessary. Identify expenses that can be cut back or removed, and make those changes to your budget. Use the extra money to pay extra on your debt every month. This is a key aspect of a successful debt repayment strategy and debt management plan.

How to start using this debt repayment strategy: To free up money that may be utilised to reduce your amounts more quickly, you might make short-term financial sacrifices.

How to start using this debt repayment strategy: Analyze your budget to identify areas where you may minimise costs. In your spending plan, transfer these monies to your "debt-payoff fund" and use them to make extra payments on your bills each month.

What to do if you are still unable to pay your Debt

Being in a lot of debt can be very stressful, especially when you don't know what to do. If you need help or are looking for a solution, here are some options to consider:

  • Credit counseling: If you want to get a better handle on your debt, talking to a nonprofit credit counselor can be helpful. They can give you advice on how to manage your money and reduce your debt. This may include creating a budget and sticking to it.
  • Debt management plan: If you're having trouble paying off your debt, especially with credit cards, a credit counseling organization can help. They can recommend a debt management plan. This is a plan to help you manage paying back your debt.A credit counselor will talk to your creditors to see if they will agree to lower interest rates, lower monthly payments, or not charge fees. Then, you will pay the credit counseling organization once a month and they will give the money to your creditors according to the agreement.
  • Bankruptcy: Declaring bankruptcy is very bad for your credit score and should only be considered as a last option. If you do declare bankruptcy, it will show on your credit report for 7 to 10 years. This means that you will either have all your debts cancelled or you will have to come up with a plan to pay some of your debt back.

Start your journey to financial freedom today by taking control of your debt. Remember, every small step counts and with determination and a solid plan, you can get out of debt and reach your financial goals. You can also go through these tips on how to get out of bad debts in our webstory. Let's make it happen!

Frequently Asked Questions

Should I consider declaring bankruptcy as a way to get out of debt?

How does debt consolidation work?

Is it possible to negotiate lower interest rates with my creditors?

How can I create a debt repayment strategy?

What is debt management?

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Debt Management : How to Get Out of Debt
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