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Manage Debt
10 Ways to Pay Off Debt |
Sooner or later you must come to terms
with your outstanding debt problems. The consequences of not repaying your debts are
dismal -- it's possible you could lose assets such as your home or car. Your ability to
borrow again might be limited due to a bad credit rating. Your earnings could be garnished
or you could even wind up in court. Not a happy situation.
The good news is that there are a number of debt reduction strategies that can help you
reduce financial distress, manage your money better, and improve relationships with
creditors. Here are ten of them:
1. Contact Your Creditors At Once.
This is one of the most overlooked ways to resolve your debt problems. Don't wait for your
accounts to be turned over to a debt collector. Communicate with your creditors and assure
them you will continue making payments. They are most likely willing to work with you. Be
honest and explain your financial situation. Tell them you plan to pay off your debts as
soon as possible. Ask for a reduced payment schedule or a lower interest rate. Some
creditors might even be willing to accept interest-only payments for a few months. It
never hurts to ask.
2. Empty Your Savings Account.
Do What? If this advice comes as a surprise to you, please try and understand that it
makes absolutely no sense to have money in the bank earning only 4% while you're carrying
credit card debts that charge in excess of 18%. Paying off high-interest cards like these
is like finding an investment that yields an 18% return, all tax-free and without risk.
Even if you're a stock market guru, your investment returns would actually have to beat
18% because of the tax consequences. If the interest rate on your debts are even higher,
the decision to repay versus invest becomes more obvious.
Your asking me to deplete my emergency fund? There are two schools of thought to this
question. You may want to leave a small cushion in your account to absorb any unforeseen
expenses or temporary loss of income. On the other hand, if you truly need them, you may
decide to use your credit cards for an emergency situation. Otherwise use some of the
other strategies that follow (borrow from your family,etc).
3. Increase Your Minimum Payments.
Consider this. If you only made the minimum payment on a $2,000 credit bill with an 18%
interest rate, it would take you roughly 18 years to pay it off. The interest alone would
amount to $3,690. Have you ever wondered why the minimum payment on your credit bill is so
affordable? Take a hard look at that last number and you'll see why lenders set your
minimum payment so low (often 2-3% of the outstanding balance). Doubling or even tripling
your minimum payments will have a significant impact on your ability to reduce debt. Those
increased dollars will save you thousands in interest payments and shave months, if not
years, off your debt. Don't play by their rules.
4. Pay Off The Highest Rates First.
Paying off the highest interest rate rather than the highest balance will result in
quicker debt reduction. Your debts may take many years to pay off, so don't allow the
additional interest charges that are still accruing to be at the highest rate. Pay the
minimum to each creditor and apply all your remaining money to the debt that has the
highest rate. Once the debt is paid off, move to the next highest rate and apply the
rollover amount from your first debt. Continue down the list to the next-highest creditor
and repeat this process until your debts are gone. Stick with your plan.
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