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Advice on paying off your debts
Life can be stressful with mortgages, car loans, student loans, credit cards, and medical bills, which means debt can get out of control and you can be left struggling to pay your debts.
Whether your debt stems from a job loss, unexpected expenses, or overspending, it’s possible to reduce your debt and eventually pay off your debts. Tackling your debt takes time, but using the right strategies and getting the right debt advice can help you get out of debt.
Here are some tips to help you pay off your debts:
Get on top of your debt with a budget
It is beneficial to create a detailed budget to track income and expenditures. You can use this approach for planning and monitoring to provide very important information for debt management. With a budget, you will:
- Know how much net income you have available to spend.
- Know what your fixed costs are (e.g. mortgage, rent, car).
- Know what your variable spending is by category (e.g. childcare, food, transportation, savings).
- Know what your credit card bills include (i.e. broken down by new purchases and interest)
- Create your budget with your own spreadsheet.
Increase your income
If you’re paid hourly, sometimes working more than 40 hours per week can increase your hourly rate to a time and a half of your normal rate.
Get a second job. You might even be able to work from home with freelancing opportunities or take on a very flexible part-time job.
Rent out a bedroom
Sites such as Gumtree and Airbnb can help you find a roommate or part-time renter for when you’re away from home.
Sell things you don’t need
A garage sale can bring in some cash. Use eBay or craigslist to efficiently reach even more eager buyers, especially for bigger-ticket items.
Reduce your fixed costs
It’s easy to think of your home and car as expenses that you can’t change, but often you can. Refinance your mortgage for a lower monthly payment with either a first mortgage or home equity loan.
Move to a less expensive home
If you are renting consider renting a less expensive place to reduce costs. Consider selling your car and get rid of car loans, insurance, parking and maintenance expenses. Use public transportation or a bike to get to work or change to a less expensive car. Implementing some of these money-saving strategies can help you pay off debt and give you some breathing space.
Reduce your variable expenses
Stop shopping. Although this won’t get you out of debt, it is the first step to ensuring that the situation doesn’t deteriorate any further. It’s almost impossible to make a dent in your debt if you continue spending. Whether you cut up your credit cards, freeze them or lock them in the safe, put mechanisms in place to ensure that you aren’t tempted into further spending.
This is where you may have a lot of flexibility, by cutting out non-necessary items you can save extra money.
- Cook at home instead of dining out and shop smartly for the best deals.
- Stop making impulse purchases. Determine your necessities and stick to a plan.
- Cut out luxury items, from coffee-shop drinks to weekend splurges.
- Find free or low-cost activities for family fun.
- Get the family engaged in money-saving efforts, for example, working to reduce electricity usage and economizing purchases.
- Have your kids get after-school jobs to pay for their own discretionary expenses.
- Exercise and stay fit to avoid unexpected healthcare costs.
Stop accumulating debt
This strategy alone won’t get you out of debt, but it will keep you from making it harder to pay off. Reduce your temptation to create more debt by taking a break from your credit cards or even freezing your credit card account.
Freezing your credit locks your credit reports to new inquiries, making it harder to apply for new credit on impulse. This step is typically intended to minimize identity theft, but can also help you avoid opening new lines of credit.
If you don’t have one already, now is a great time to create a budget. A budget helps you bring your spending in line with your income, making the most of each dollar that comes in and ensuring you don’t need to use credit cards or loans to make ends meet.
Create an emergency fund
Use the Debt Snowball Method
The less you pay toward your debt balances every month, the longer it’ll take to pay them off. Interest can exponentially expand the timeline for your debt repayment, and most debit balances rack up interest charges every month.
Many people find the debt snowball method to be a good way to pay down their debt. This method allows you to make noticeable progress by paying as much as possible each month toward your smallest balance. In the meantime, make the minimum payment on all your other debts so your accounts remain in good standing. Once you’ve paid off that smallest debt, move on to the new smallest balance, and continue this process until you’ve paid off all your accounts.
The debt avalanche method is an alternative to the debt snowball method. Using this strategy, you’d start by paying as much as possible toward the debt with the highest interest rate. Once you paid it off, you’d move to the balance with the next-highest interest rate, and so on.
Ask your creditor for a lower interest rate
Higher interest rates keep you in debt longer because so much of your payment goes toward the monthly interest charge and not toward your actual balance. However, interest rates can be negotiable, and you can ask your credit card issuers to lower your interest rate. Creditors do this at their discretion, so customers with good payment histories are more likely to successfully negotiate lower rates.
You may be able to find a lower interest rate by seeking out promotions. If you use a balance transfer to get a lower rate, try to pay off the balance before the promotional rate expires. After that promotional period, your balance will be subject to higher interest rates.
You typically need to have good to excellent credit to qualify for a low-interest or balance transfer credit card.
Cash out a life insurance policy
You may have accumulated some cash in your whole or universal life insurance policy that you can put toward your debt. Like tapping retirement funds, this is a risky strategy that can come with tax consequences.
Cashing out means surrendering your life insurance policy, and it will no longer be in effect. Borrowing from your insurance policy may also be an option, but it may affect the death benefit your beneficiaries will receive. This is a risky approach, but if you are in bad debt it can help you pay your debts or not miss a payment.
Debt settlement may be a solution if your accounts are past due or you owe more money than you could repay over a few years. When you settle your debts, you ask the creditor to accept a one-time, lump-sum payment that’s lower than the full balance to satisfy the debt in full. Creditors typically only accept settlement offers on accounts that are in default or at risk of defaulting. However, debt settlement can negatively affect your credit score, so it should only be used as a last resort.
You can settle debts on your own by negotiating directly with your creditors, or you can get help from a reputable debt relief company. Beware of any company that advises you to purposely fall behind on payments in hopes that you can settle your debt once your accounts are in default.
Credit counselling agencies are organizations, usually nonprofit, that can help manage your finances and debt. When it comes to paying off debt, certified credit counsellors negotiate with creditors on your behalf to create an affordable debt management plan. Each month, you’ll send a lump-sum payment to the credit counselling agency, which divides the payment and sends it to your creditors on your behalf.
A debt management plan created with a credit counsellor is very different from debt settlement—you don’t have to be in default for credit counselling, and the goal is to pay your accounts in full.
You can find a credit counsellor through the National Foundation for Credit Counseling or the Financial Counseling Association of America. Both organizations deliver credit counselling services through local member agencies.
Benefits of managing your money while in debt
- Accelerate your rate of improvement and pull forward your timing for being debt-free.
- Your credit score may start to increase, which may help reduce your current and future interest rates, further reducing your interest expenses. A higher credit score may help you get a better rate when you apply for future loans.
- Improve your mental state and physical health by reducing the stress of overwhelming debt and lack of control. Stress reduction might even reduce your medical costs.
- Start creating good savings habits that will last a lifetime. Learn to “pay yourself” as part of your monthly budget.
- Use some of your freed-up discretionary funds to set up emergency savings, which can provide good financial protection if you lose your job, experience a medical situation or have unexpected expenses.
- Add to your retirement savings. You may qualify for some matching funds from your employer or tax breaks from the government.
Talk to a professional
If you can’t figure out a way to reduce your debt, consider talking to a debt adviser or credit counsellor. They can help people work through their debt problems. They can help you develop a plan, reduce your interest costs and get out of debt over time.