Getting Out of Debt Once and For All!
Isn't that a glorious thought?!
Chances are if you're in debt, you want to get out of it as soon as possible!
There are a number of important steps to take when making the decision to get out of debt once and for all.
For purposes of this article, we are talking about bad debt such as credit card bills, not mortgages or car loans.
Step One - Assess the damages.
It's tough to get a handle on how bad things are, and how long it will take to get out of debt if you have no idea how much debt you actually have. Get all of your current statements together. Find out exactly how much "bad debt" you have. That's the start. I know, it's a rough way to start, but you've got to know what you're working with here. Is it even realistic? Can you even meet the minimum payments for everything? If not, it may be time to talk to someone about filing bankruptcy. If you're close to that point, and fearful you may get there, read on! There is hope!
Additional tip: we found it helpful and very motivating to make a countdown chart at the beginning. That way we could see our balance going down. Seeing the light at the end of the tunnel can be very helpful in being successful here.
Step Two - It doesn't hurt to ask.
We have successfully had our AMEX interest rate lowered twice, and is now 9%, thanks to a couple of quick, painless phone calls. If you have been making payments on time, every time, you have a better chance here. Believe it or not, some companies (the smart ones) will work with you here. They'd rather help you make the payments than get nothing because you file for bankruptcy. We used a line like this: "even though we pay the minimum payment every time, we are having trouble seeing our balance go down". Low and behold, it worked! The moral of the story here is this: it doesn't hurt to ask! The worst that can happen is they tell you they can't do anything and you're no worse off than you were when you picked up the phone. On the other hand, being successful here can save you thousands! On a $10,000 balance, a reduction from 29% to 24% lowers the monthly interest by $41! That's just for one month, and that's only with a 5% reduction!
While you're calling, ask about balance transfers, which can be very beneficial when used correctly. Be aware that many balance transfers only supply the advertised interest rate for a certain amount of time. After that, you could run into a very high rate. So make sure to only transfer an amount that you can realistically pay off during the promotional period. Mind the transfer fees here too. If you're not saving more money in interest than it costs to move the money, don't do it.
Step Three - Pay off highest interest before highest balance.
Once you have that almighty number, you can begin to break down what you owe and where. Write down your balances for each company that you have bad debt with. The tendency here is to try to pay off the highest balance first. That is not the best way to approach things. While continuing to pay your minimum balance on all of the other bills, put everything extra that you have toward the bill with the highest interest rate. Every month, do this until the balance with the highest interest rate is down to that glorious number: zero. Next, move on to the debt with the 2nd highest interest payment. Continue paying down your debt in this manner, it is the most efficient way to do it.
As you can see from the above graphic, paying down the highest interest balance first is the best method. Notice that the balance of the bottom account is more than twice the amount of the other one, however the interest payment is only $30 more. If you were to pay the highest balance off first, when the $12,000 account got below $10,000 owed, the interest payment would actually be less per month than the account with a $5,000 balance and the 29% interest rate!
So remember (have we said it enough?) highest interest rate gets all of the extra payment money!
Additional tip: always try to pay cash while you are paying off debt. Using your credit card is what got you here in the first place! Using cash will make you think harder about what you are buying.
Step Four - Don't let it happen again.
From this point forward, whenever possible, use cash or debit cards when buying things. This way you are only paying for things with money that you have. Obviously there may come a time when you need to use your credit cards, but the days of taking your best pals Visa and Discover to the mall should be long gone. If you're in debt I hate to say it, but you put yourself there, and only you can make sure it does not happen again.
- Throughout the process, keep track of your due dates and payments. It would be a shame to set your progress back because you forgot to pay a bill one month.
- Remember, it's a marathon, not a sprint. You can do this. Stick to it.
Thank you for reading, and good luck getting out of debt once and for all!
Do you have any other tips or motivation for others getting out of debt?