There is no doubt in it that debt sucks (yup, it sucks big time) and leaves you pretty much nowhere to go or hide. But luckily to get out of it you don’t have to either. Getting out of this vicious circle is easier said than done but isn’t mission impossible.
So if you’ve been wondering how to get out of debt, you’re in the right place. We cover not just the steps to help you get out but also the reasons most people fall into debt, tips on how to manage it and also mistakes you should avoid when dealing with debt (so you don’t just come out of it, you stay out of it as well).
- Why People Fall Into Debt
- How to Get out of Debt
- How to Manage your Debt
- Debt Related Mistakes To Avoid
Why People Fall into Debt
Many times your expenses overreach your income. It becomes really important that you should handle your life with a lower income from the beginning. Or otherwise, you might start to take on debt. The simplest way to manage this thing is to first understand your changed income and make a budget and a plan accordingly.
It has been seen that maximum marriages in America end up in divorce and then comes to the issues related to personal finances. American laws focus on and see what should be done with their salary while divorce settlement.
There might be possibilities when one party asks for a large amount. That way the other one forcibly has to go into debts to pay for attorneys and also what their partner demands while divorce settlement.
Poor Money Management
Many of the cases happen due to poor budgeting. To avoid this situation, you should make a monthly budget otherwise you won’t be able to check your expenses. If you have a written form of where are you spending all your money, you would have a proper record of everything. This is undoubtedly the ideal way to see where you can cut your unnecessary expenses and help yourself from falling in such scenarios.
Let us first clear out this misconception that underemployment is temporary. It is not true as underemployment can have a lasting effect on your life, mainly debt is the solution to make ends meet. If by any chance, you are underemployed, first you need to calculate your expenses and should start searching for a new job. That way you might save yourself from falling into debt.
Ah! The most favorite source of entertainment for Americans. Well, if you see the reality it is not the same. Since nowadays loans are so easy to get that people become addicted to this idea of winning big and becoming rich. If you don’t know, gambling can easily lead you to a point where you can simply fall into the world of debt in order to win back what you have lost.
Nowadays, these medical treatments are so expensive that it forces a person to fall into the pit of debt. And most importantly, doctors and hospitals nowadays are so grumpy with patients those who are not able to pay their bills on time. One way you can avoid collections is to make sure to put the bills on credit card or to take a loan, in case, you don’t have money for the doctor’s visit.
If you really want to get rid of any kind of unwanted debt, for that you should always have some money to pay for any unforeseen expenditures. Believe it or not, but if you are ready with decent savings, you can easily use that money in urgencies such as a job-loss, severe illness or in a divorce case. In fact, you’ll be happy when you don’t have to ask for help from anyone because you have already saved some.
Another cause of falling into debt is identity theft. It happens when any person opens up another account with some other name and then runs up a serious amount of debt. This is where the victim is simply left with a big debt that he/she needs to repay.
Here comes another overlooked cause of why people get into debt. Many people live with an illusion that they have an enormous amount of money but once they have kids, everything gets changed.
In many cases, parents have to spend their complete one income, which might create a problem in managing other expenses. You can’t even imagine how much a daycare could cost and you’ll be simply left with a question “where did all my money go”?
How to Get Out of Debt Fast
Just remember these simple and easy-to-follow steps and you can easily get rid of your debts.
Find out how much debt you have
So the foremost step for you is to have a full information regarding how much you owe and whom you can ask for help to tackle your debt and to make it manageable. Create a list of all your debts that should have the following:
- Name of each creditor
- How much you owe
- Minimum monthly payment
- The interest rate on the debt
The credit card statements will show you, how much you have to pay every month to get rid of all your debts in three years. Also, write down this number on your list.
Lower your interest rates, if possible
More the interest rates the faster your debt piles on, which further makes it difficult to pay off. The solution? Lower it, but how?. If you want to lower your interest rate, you need to make a balance transfer to a credit card with another bank
With many credit cards you’ll get 0% APR for 18 months and in that specific period of time you can easily pay off the balances without any rise in your debts every month. But remember that sometimes there is 3-5% fee for balance transfers.
The second method to lower your interest rate is to contact your lender or Credit Card Company and ask them for a reduction in interest rate. At last, you can use your debt consolidation loan to pay off all your credit card payments into one single payment and too that with a lower interest rate. Always remember, longer the loan term and you’ll have to pay interest over a longer period of time.
Calculate your monthly payments
Go to your list you have made in the very first point. Add up the payoff-amount of 3 years of every credit card. Also, add up the monthly payments of all the other debts. This helps you to focus on the monthly payment you have to make every month.
Come up with an action plan
After you see how much you need to make monthly, see if it is actually possible for you to make it. If you’ll not be able to make this monthly payment, contact a bankruptcy attorney or credit counseling agency to ask for further steps.
If you can easily make the monthly payment, then you just need to plan a budget and cut down some unnecessary expenses, otherwise follow these given steps:
- Prioritize, what debt you should pay first. Well, it is recommended to first complete the credit card debt because as compared to the student loan, auto loan, and mortgages, its interest rate is usually higher. Or you can see if other loans have a higher interest rate, go for that one first.
- You should set up an automatic payment for minimum balances on all other debts.
- If possible, every month, pay off as many top debts as you can.
- Once you are done with your top priority debt, focus on the other and follow the same procedure.
Track your progress
If you have a number of debts to pay off, it is necessary to keep a track on the repayment progress monthly to ensure that you are on the right path towards your aim. Once your prioritized debt is paid off, focus on the next and as you move towards the repayment process you should:
- Keep a regular check on your credit score to see if it is getting better. A good credit score means you have a good financial status.
- Make sure you should do a balance transfer or credit consolidation if you have not done it yet.
Believe it, if you follow this plan, you are on the correct path of being debt-free. If you still need some additional funds to pay off your debts, you have to look for one or the other way to make more money.
How to Manage Your Debt
Okay, so you know how to get out of debt but how tedious the entire process is will vary on the size of your debt and that is why it’s important to know to manage it right. So here are few tips to help keep things within your grip.
Tip 1: Build a Budget
This is the very first step you should start with, study your monthly expenses, assets, and income properly. Write it down in a secured place or you can use an online budget worksheet. Check the things like what is coming and what is going out. There must be some areas where you are spending unnecessarily, thus, you need to make a well-proved spending plan.
Tip 2: Now Negotiate
You want to contact your credit card companies or lenders for a lower interest rate. A maximum number of people do not call their companies until they fall badly.
Tip 3: Consolidate your Obligations
This other way to manage your debt allows you to combine multiple credit card and loan bills together into one loan where you can pay it as a monthly payment and helps to manage what you owe. Two main types of debt consolidations which are worth considering are student loans and credit card debt consolidation.
Tip 4: Prioritize Payments
After you are done every above point then you need to prioritize and focus on which debts are the most important to be paid off. First, focus on those with higher interest rates. Once you are done with the first one, focus on the other remaining debts.
Tip 5: Use a Credit Counselor
Sometimes, situations make people so frustrated or desperate they simply cannot help themselves even if they want to. In this case, a top credit repair company is your ideal mate. These companies offer free counseling and work with most creditors to help reduce late fees and other penalties. Their agents work as consolidators meaning they collect monthly payment from the debtor and give funds to the creditors.
6 Common Mistakes People make while paying off Debt
Mistake 1: Same old spending habits
Once people get addicted to any habit, found it quite difficult to get rid of it. They generally visit the same stores, their all-time favorite restaurants, ride the same car, because of COMFORT. Well, it costs you way more than you can manage financially. Thus, you need to change your spending habits in order to get out of debt.
First, start with bringing changes in your daily spending habits. You can begin your day with the morning coffee and breakfast at home. Take your lunch while leaving except for extra money. Spend your evenings at home with movies or games and home cooked meal. You just need to go with some new and better options with what you do.
Mistake 2: Trying to get out of debt alone
Whatever the problem, people often run towards relatives or close friends to seek any help. Instead of this, try to contact a non-profit credit counseling agency and get help from experts too that for free.
These certified and trained credit counselors can recommend you with better debt-relief solutions such as credit card consolidation, debt settlement, debt management programs and many more. They’ll advise you how to make a budget and it’s all upon you whether to take their advice or not.
Mistake 3: Not creating a practical budget
Well, it is not impossible to keep a control on your finances when you can well-made budget. Usually, people believe that it is difficult to manage but actually it’s not. Create a budget that includes your crucial financial needs like health care, insurance, education, housing, food and then also you should be left with enough to pay your debts.
Keep your credit cards aside and use only cash. But this cash system doesn’t include dining out, shopping for clothes or electronics, or entertainment. But if you really want to reduce debts, follow the budget seriously and go for cash payments.
Mistake 4: Closing accounts when they are paid off
This problem has the easiest solution. When you pay off the account, don’t close it. The credit scoring system not only focuses on how much you owe but also how much credit you are available with. If credit is available but you are not using it, this shows restraint and can help you boost your score.
Mistake 5: You stop contributing to a retirement account
Though it makes sense that you add a few dollars to the reducing debt today but afterward it will cost you more. You should definitely contribute a small part of your income say 5-10% to retirement savings as soon as you start working.
Time has always been proven as the best tool in the retirement savings. The earlier to start thinking about your retirement savings, the better you can enjoy your retirement days. Look for some other places in your budget to pay the credit card accounts.
Mistake 6: Not verifying your credit report is correct
Never miss this step to check the credit report for inaccuracies if you want to reduce your debts. You can get a free credit report from any of the main credit reporting companies like Experian, Equifax, and TransUnion.
Go through your credit report closely and check the incorrect delinquencies or the balance that which are affecting your credit score badly and could be stopping you from buying a new car or house, to get more credit.