The American economy has millions of people working paycheck to paycheck. As if it’s not enough, 80% of Americans are walking around with some type of debt to keep their head over water as a way to afford bills or pay back tuition looking for ways to reduce debt.
Debt also happens to those who have a poor understanding of finances or those who desire to meet a certain lifestyle. It can be exhausting to try to pay back what you owe when it is a lot. If you need tips on how to reduce debt and get back on track, keep reading.
1. Learn Where You Stand
There are two types of debt a person who owes money has: problem debt and managed debt. When you are riddled with debt uncertain of how to pay it back, you are dealing with problem debt. This is because you are in a position where you take out more than what you can afford.
The goal is to turn problem debt into managed debt so you can work to pay it back to be debt-free. This cannot happen if you do not know where you stand. The best way to be clear about your financial situation is to pull out a pen, paper, and your credit report.
Your report will provide you a list of credit cards and loans you have, how much you owe, and whether or not you are current on the payments or not. If there happen to be discrepancies on your report, now is the time to correct it.
2. Budget and Start a Debt Plan
Before you contact lenders, you should create a debt management plan and create a budget to see what you can afford to pay. You may be able to pay more than you think each month if you can cut out certain expenses you do not need such as shopping.
If you are able, you could also increase your budget by working more hours or finding another job. You can do this by yourself or you can work with a financial consultant to help add structure to your plans and guide you.
3. Pay off Debt With the Avalanche or Snowball Method
You are in better control of your personal finances when you can order how, how much, and when you repay money you owe. There are two types of debts you may have. The first, known as revolving debt, comes from credit cards that have a monthly balance each month when you do not pay it back (in full).
There is also installment debt that is a chunk of money you owe at once — although you pay back in installments. This is the case with mortgages, personal loans. Both can affect your credit score. It’s helpful to use the avalanche or snowball method when you are paying your debt back.
With this method, you pay off debt from the highest interest to the lowest. Overall, you want to make at least the minimum payment, but add more money to accounts with higher interest. You continue this process to the end and doing this method helps you decrease the total amount of money you owe by reducing the interest.
With the snowball method, you are doing the opposite. You are paying back from smallest to largest. This method also works to lower the amount of debt you owe, but by eliminating debt which stops interest.
4. Negotiate to Settle
If you do have some money on the side or can get it, you may be able to clear the debt you owe quicker by settling on the balance with a lender. With this method, you are paying less than what you owe on the balance that the lender accepts.
This amount may be as little as 20% or as much as 80% to 90% off your balance. The only way to figure out how much you can get off is through negotiation. Upon receiving your payment, they will show your account as paid.
5. Consolidate Debt
Another option to address debt is to consolidate it. A major benefit is that it can help with your credit scores. When you consolidate debt, you are rolling all your debt, including the interest rates, into one single payment and interest.
The attractive thing about debt consolidation is that you save more by having a reduction in interest so you can pay back the money you owe faster. This method is also ideal for those who find it hard to keep up with multiple payments.
6.Do Not Add On to Debt
The last thing you want to do as you are working to repay debt is to add on to it. You should never attempt to get another loan or card to pay an existing debt. More often than not, this will make matters worse and it will be more difficult.
This also means you need to change old habits that caused you to get in debt in the first place if you have problems spending. A good tip to avoid getting in more debt is to stop using credit cards when shopping and switch to cash when you know you cannot pay the balance back in full. Relearning to use cash rather than depending on credit cards can make a huge difference.
Reduce Debt to Get Back on Track With Your Finances
When you first get a credit card or loan, it can be an exciting feeling. It feels nice to be able to get something you want or pay a bill you previously could not afford to pay back. Every time you use money from a lender, you should always keep in mind the money is not yours, and it comes with interest.
When you do not pay what you owe, you will find it hard to get future approvals and notice a plunge in your credit score. There is a way to reduce debt and get rid of it when you acknowledge you have it and use the tips to get ahead of your finances.
If you want to find more ways to keep your money in check, take a look at more blogs on the finances section on our website.0