If you have outstanding debt, you may feel like you’re drowning some days. Getting out of debt is an excellent plan for the new year. Here are a few ways that you can take back control of your financial life.
1. Prioritize your debt by interest rate.
The higher your interest rate, the more you’re going to pay overall. Prioritize your debt by interest rate, not by the amount you have to repay. A lower bill now could end up higher than your highest bill if it has an outrageous interest rate. This is also a good time to take complete stock of all of your debt and to get a realistic of view of exactly how much you owe.
2. Ladder your debt.
Now that you have all of your debt listed and prioritized by interest rate, you can put as much money as possible toward the debt with the highest interest rate. When that lender is completely paid off, apply that payment you’re used to making to the next lender on the list. As you pay off more and more debt, you’ll gain momentum and start paying off your debt at a quicker pace.
3. Pay at least your minimum payments every single month.
The best strategy is to pay your bills in full each month, but if all you can afford is the minimum payment, then at least pay that. If you miss a payment, it’s possible that your interest rate will increase or you’ll have to pay a late payment fee. If you have any extra money to devote to your bills, put it toward the debt with the highest interest rate.
4. Make your payments by the card’s closing date.
Check your statement for the card’s closing date, which is the date when the lender will report your latest information to the credit bureaus. Always pay by this date instead of going by the payment due date. You want the credit bureaus to see that you’ve made your payments on time every single month, which will help your credit score.
5. Create a savings account.
You may think that any extra money you get should go straight to repaying your debt, but it’s always a good idea to have an emergency savings account, no matter how much or how little income you’re bringing in. Emergencies don’t wait for you to be out of debt, and if something unexpected pops up, you’re going to have no choice but to fund it. If you have some money set aside, you won’t have to go further into debt in order to get out of your jam.
6. Consider downsizing.
While you’re paying off your debt, it’s a good idea to cut down your expenses wherever possible. This can mean doing something drastic, like moving to a more affordable home, or something super simple, like finding a less expensive coffee shop to stop at on the way to work each morning. Remember, downsizing is only temporary ¬– you can resume your normal habits once your debt is paid off. It’s helpful to make a plan so that you know you can get back to regular life eventually. For example, maybe after you pay off your highest debt you’ll allow yourself a Netflix subscription again.
Debt costs money, period. Even debt with a low or fixed interest rate will end up costing you money over time, not to mention stress. Get out of debt now so that you can start spending and saving more wisely.
Photo: CC 2.0 / Chris Potter