Putting at least 15 percent of your paycheck — or income from Social Security or pensions — toward credit card debt and loans will help you pay down those obligations much more quickly because most credit card companies only ask you to pay about 2 percent of the outstanding balance each month. Making small, minimum payments means that your debt balances are collecting interest as each month or each year goes by. Paying off large chunks of your debt within a few months could save you a significant amount of money on interest payments alone.
2. Use savings to pay down larger debts
Don't be afraid to use a portion of your savings to pay down high-interest rate debts. Using cash reserves for debt repayment is a smart decision because you will stop accruing interest on those large balances. Although it may feel comforting to have some extra cash sitting in your bank account, the truth is that those funds aren't really working for you — not with today's record low interest rates. Don't deplete your savings entirely. If you're sitting on a pile of cash, do use some of those funds to eliminate your bills.
Call your creditors to negotiate a lower interest rate. You'll be surprised how many creditors will be willing to reduce your interest rate based on your payment history and account standing.
If you have maintained a good relationship for a few years, you may be in a much better position to qualify for a lower interest rate. This can help you save some money on interest payments as you pay down that debt over the course of the year.
4. Use your tax refund check to pay down debt
While it's tempting to splurge on a high-ticket item or go on vacation with that tax refund check, a smarter money move would be to pay down some, or all, of your debt. Consider the value of reducing your monthly payments with a single lump sum debt payoff strategy. You'll enjoy the benefits of a lighter debt load over the entire year and for years to come, instead of enjoying the short-term satisfaction of a purchase.
5. Sell items for cash
Put together a list of items that you could sell on eBay, Craigslist, or at a garage sale. Drumming up some extra cash by selling items you no longer need or are ready to part with — and using the proceeds to pay down debt — can help you rapidly lighten your debt load.
6. Consider cashing in your life insurance
Cashing in your life insurance may be a viable debt payoff strategy because it will give you a chance to pay down larger amounts of debt quickly. If you feel like you are drowning in debt and don't have beneficiaries that need to benefit from your life insurance policy — for example a spouse or children — then it might make sense to use those funds to pay off debt.
This strategy doesn't apply if you own a term life insurance policy. It only works for those with whole life policies that have built up cash value. It's also important to note that even if you do have beneficiaries, you may be able to tap into part of the cash value of your whole life policy, getting cash for debt reduction and still leaving some life insurance proceeds to your loved ones.
7. Make more money
If you're very determined to pay off that debt within the year, you should look for ways to increase your income and use that extra money to pay off debt as quickly as possible. Whether it's taking on a part-time job or negotiating a raise with your boss, think of some ways to start earning more money for at least a few months and make debt elimination a high priority.
8. Do a credit card balance transfer
Most of us typically tear up all those credit card balance transfers that arrive in our mailboxes. But if you want to go on a tear with your debt reduction efforts, a balance transfer can help. By transferring high rate debt to a zero percent deal — one that lasts for 12 months or so — you eliminate all credit-card interest. That frees up cash flow, giving you additional money to knock out those credit card bills. Just read the fine print before signing up to make sure you are really getting that low rate.
9. Use a statute of limitations law to eliminate old debt
Some people pay off old credit card debts — really old ones — even when they're no longer legally obligated to do so. We all want to repay our bills. But if times are especially tight and you just don't have the money, you should focus on current debts and consider forgoing repayment of old bills that are 7 to 10 years old, or even older.
Each state has its own set of rules regarding outstanding debts. Some states don't allow a debt collector to collect a certain type of debt after a certain period of time; others limit the amount of time when a creditor can sue you over an old debt. Either way, you should find out whether the statute of limitations has passed regarding an old debt you may owe. If it has passed, you can likely forgo repayment without worrying about financial, legal or credit consequences plaguing you.
For more information about dealing with old debts, contact your state Attorney General or the consumer protection agency for help and advice regarding your state's statute of limitations on credit card debt.
10. File bankruptcy to discharge your credit card debts
Bankruptcy should only be used as a last-ditch option to rid yourself of debt. But under extreme circumstances — as when you have no income or you have completely unmanageable credit card payments or medical bills — a Chapter 7 bankruptcy filing is appropriate to discharge credit card bills in their entirety.
If you feel morally obligated to repay your debts, you can also look into Chapter 13, which reduces some of your credit card bills. Then you repay the remaining debt over a three- to-five year period.
Lynnette Khalfani-Cox, The Money Coach(R), is a personal finance expert, television and radio personality, and regular contributor to AARP. You can follow her on Twitter and on Facebook.
10 Biggest Mistakes People Make When Paying Off Debt
The decision to get yourself out of debt is a life changer, if you are willing to make the necessary commitment that goes with that.
You can learn how to get out of debt and how to avoid the mistakes that could torpedo the whole thing.
Getting out of debt involves more than just paying off a few credit cards. It means changing spending habits; learning to how to budget; knowing who and how much you owe; prioritizing debts; creating emergency and retirement funds; and knowing where to find help when you get off track.
In other words, there are a lot of decisions that need to be made and it’s possible – if not probable – you’ll make some mistakes along the way. Here are some you can avoid that will make it easier to get out of debt.
1. Mistake: Same old spending habits.
People are creatures of habits and spending money is no exception. We shop at the same stores, eat in the same restaurants and drive the same car, because it’s comfortable. It’s also costing you more than you can handle financially. Remedy: If you won’t change your spending habits, you won’t ever get out of debt. Start with your morning habits (have your coffee and breakfast at home). Go to lunch with a brown bag, not a wallet. In the evening, watch games or movies on TV, while eating a home cooked meal. You will see an immediate impact on your daily spending habits. You don’t have to do without. You just have to make better choices with what you do.
2. Mistake: Trying to dig out of debt alone.
People are reluctant to ask relatives or friends for help dealing with debt. Remedy: Call a nonprofit credit counseling agency and get free help from experts. Credit counselors are trained and certified by national organizations like the National Foundation for Credit Counseling. They can suggest debt-relief solutions like debt management programs, credit consolidation, debt settlement or, if things are way over the edge, bankruptcy. The credit counselors advise you on creating budgets and recommend a solution that you can take or leave. And, it’s free! Take advantage of that.
3. Mistake: Signing up for a debt-relief program, but not understanding what is expected.
It is rare to get a quick-fix solution to debt problems. If that is one of the promises you hear, start looking elsewhere. Remedy: The first thing to understand is that debt-relief programs typically take 3-5 years, so be patient. Second, check up on the whatever company you choose for debt relief. The Better Business Bureau or local state attorney’s office are good places to start. Credit unions, universities and military bases should be reliable sources for recommendations. Be sure whatever organization you choose is licensed and doesn’t have a record of consumer complaints.
4. Mistake: Not creating a practical budget.
It is difficult, if not impossible to gain control of your finances unless you have a budget. People think it’s too much work … until they get $20,000 in credit card debt and wonder how in the world that happened! Remedy: Develop a realistic budget that addresses financial needs like housing, food, health care, insurance and education, but still creates room to make payments on debt. Put away the credit cards and only pay with cash. That might mean reducing (or eliminating) things like dining out, entertainment, shopping for new clothes, cars or electronics, but if you’re serious about eliminating debt, operating with a budget and paying cash is a great start.
5. Mistake: Trying to pay off multiple debts at once.
Consumers with multiple sources of debt – credit cards, mortgage, student loans, etc. – often try and address each one every month. Bad move! Remedy: Go back to your budget, trim spending to bare bones on everything but essentials, and create a $100 (or preferably $1,000) surplus that goes directly at the credit card with the highest interest rate. When that’s paid off, go after the card with the next highest interest rate and keep going until all credit card debt is eliminated.
6. Mistake: Closing accounts when they are paid off.
Remedy: The solution to this problem is simple: Pay off the account, but don’t close it. The credit scoring systems rely not only on how much money you owe, but how much credit you have available. Having credit available, but not using it, shows restraint and can improve your score.
7. Mistake: You decide to stop contributing to a retirement account.
While it seems to make sense to devote every dollar possible to eliminating debt today, in the long run, it’s a costly mistake. Remedy: Contribute at least 5%-10% of your income to retirement savings as soon as you begin working and don’t let eliminating debt cut into that. Time is the most powerful tool in retirement savings. The earlier you start contributing to a 401(k) or other retirement fund, the better off you’ll be at retirement. Find other places in your budget to pay down credit card accounts.
8. Mistake: Not setting aside emergency savings.
According to research, more than half of American consumers (57%) don’t have enough cash to cover an unexpected expense of $500 or more. Remedy: It’s impossible to predict unemployment, car accidents or busted plumbing, which is why every home needs an emergency fund. Experts say put 3-6 months of expenses aside for emergencies. It might take a while to get there if you’re focused on paying off debt, but again, it has to be part of your monthly budget. Set aside at least 5% of your income in an emergency fund, at least until you have three months of expenses covered.
9. Mistake: Not verifying your credit report is correct.
Checking your credit report for inaccuracies is an important step in your journey to reduce your debt. Remedy: You are allowed a free credit report from each of the major credit reporting bureaus, Equifax, Experian and TransUnion. Split them up, one every four months. Check them closely for incorrect delinquencies and/or balances that hurt your credit score and could make a difference in your ability to buy a house or car, or obtain more credit.
10. Mistake: Not prioritizing your debt.
Everyone has bills and most everyone wants to get out of debt, but some people simply can’t get a focused. It’s not a priority for them. Remedy: The best solution could be to consolidate your debts and make just one payment every month. Another way to get focused would be to take a piece of paper the size of a credit card and write down the five debts you want to get rid of. Tape that piece of paper to your credit card. Every time you reach for that card, you’ll be reminded that you’re adding, not subtracting to the problems on that page.
Best Way to Get Out of Debt
Now, you know the steps toward avoiding debt, but there is still a stack of bills on the counter. What should you do?
Here are a few steps that should help getting out of debt. Many of them are first-cousins to the list of mistakes to avoid, but looking at the problem from different angles always helps produce better solutions.
Check your budget. There always are areas where you can shave a few dollars free and create extra cash to apply to the debt? One less night eating out (at least $20 saved). Take your lunch to work every day (at least $20 saved). Watch the movie or sporting event at home (at least $20 saved). Skip Happy Hour ($20 saved).
Bury your credit card. That is what got you in trouble. Keep one in your wallet for bonafide emergencies. Pay for everything else in cash. It’s a LOT more difficult to hand over a $20 bill than it is a credit card. Impulse buying almost disappears when you pay everything with cash.
Go shopping with a list. A grocery store or shopping mall is a dangerous place when all you take is a credit card. Make a list of what you want. Only buy what is on the list. Get in, get out.
Share the cost. Roommates cut the cost of everything in half, maybe more, if they’re really frugal. You spend less on rent, less on food, less on utilities, less on cable and even less on transportation. In most cases, the savings generated by splitting costs will be enough to drastically reduce your debt by itself.
Take one more look around the house. Do you really need a $100 a month worth of cable TV? Does paying $50-$75 for a round of golf make sense? Can you mow the yard and clean the house yourself? How about exercising without a gym membership? All those things are nice to have … if you’re not in debt. Dump them until you’ve paid off the last of your credit cards.
Get some help. If you are still flummoxed by debt, find a nonprofit credit counseling agency online and go through one of their free credit counseling sessions. They help you sort out your problem; help you set up an affordable budget; and advise you on which debt-relief option best suits your situation. The counselors are trained and certified so The greatest thing about it is that it’s FREE!
How to Pay Off Debt Faster
Or, you could take a few steps toward paying off debt faster and maybe still have enough money for an occasional night out or round of golf.
Here are some suggestions that once you’re committed to eliminating debt, will make the process go faster.
Generate more income. That’s a polite way of saying take on a second job. Most people respond: “I don’t have time!” But you do have time to visit restaurants, shopping malls, golf courses and gyms? Those take time and cost money. Use that time to make money. And put it all toward retiring your credit card debt.
Pay all bills on time. You’re just giving away money when you’re late paying monthly bills. Late fees are a gold mine for credit card companies, landlords and banks. They don’t have to do any extra work to collect extra money. Don’t give away your money.
Garage sale anyone? Nearly everyone has old TVs, computers, exercise equipment, furniture and clothes they simply don’t use anymore. Let’s someone pay you to take away your junk.
Unbudgeted income. You may get a tax refund or payment from an estate you never expected. Forget about a weekend vacation. Spend the money on reducing debt.
Ask for a rate reduction. If you haven’t looked at the interest rates you’re paying, especially on credit cards, take a look at your statement and find out. If you have been a consistent, on-time payer, your card company will want to retain your business. Tell them they can, if they drop your interest rate to the lowest levels. This is one area where “Ask and ye shall receive” should actually work.
Ask for a raise. Businesses have been flush with money for a while, but the recent tax cuts should make their bottom lines even bigger. Unemployment is at its lowest levels. The combination means it may never be a better time to get a raise. The worst that can happen is you get another “No!”
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