Paying Down Debt – A Top Financial Goal

Paying Down Debt – A Top Financial Goal

February 16, 2020         Written By Justin Hefner

Every year Americans make New Year’s resolutions and every year many Americans give up on their resolutions by the end of January. One of the main resolutions people make, outside of losing weight, is getting in better financial shape. This means saving more and paying down debt. The first step in setting a new year’s resolution or a goal is to first conduct a self-assessment to see what you need and want your life to look like at the same time next year. Sometimes, letting a friend or a parent examine your financial situation is the best way to understand if you need to make any adjustments. A lot of times we can think that we are doing just fine when in reality if something major was to happen, like a sudden job loss, we would have a hard time making ends meet. There are a few quick self-checks that you can make to see if you have a debt problem.

Here are five signs that you have a debt problem:

  • You pay only the minimum amount on your bills.
  • You have at least one credit card that is at its limit.
  • You can’t afford to purchase an item with cash, so you use a credit card.
  • In the past year, you have paid a late fee or over the limit fee because you didn’t have the money to pay your bills.
  • You do not know how much debt you owe.

If you read through those five signs and you have experienced more than two of them in the past year, you may have a debt problem. Not to worry though, just because you have a problem now does not mean that you have to be in the same situation a year from now. The good thing about a new year’s resolution is that you have a whole year to plan and put yourself in a better place before next year. It may not be easy but there are some steps that you can take to get out of personal debt.

Here are ten suggestions for helping climb out of your personal debt:

1. Get a clear picture of your debt. Simply paying the minimum balance on each bill without knowing exactly how much you owe is easy. To get a clear picture of your debt, collect all of your bills with outstanding debts, including all credit cards, mortgages, student loans, auto loans, personal loans, and bank loans. Create a summary sheet that lists the creditor, monthly payment, balance, interest rate, and credit limit for each. List the status of each account, whether any bills are past due, and verify the payment due dates.

2. Prioritize the bills to pay first. If money is tight and you have to make choices about what to pay, first pay the bills that are a necessity for health, shelter, basic groceries, and basic transportation. Then pay the secured loans, such as your car loan.

3. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. Start with your lenders and ask for a lower rate. If that doesn’t work, shop around for a mortgage or credit card with a lower rate.

4. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be able to help you work out a payment plan, lower your rate, or lower your monthly payment. It is better business for them if you keep making your interest payments and avoid bankruptcy and foreclosure.

5. If you have a high interest rate, transfer your balance to a card with a lower interest rate. If your rate is above 12%, transfer the balance for that card to one that offers 0% for 12 months for balance transfers. Getting 0% for 12 months is a great opportunity to pay down your balance. To take full advantage of this 0% interest, pay as much as you can over the monthly minimum. Most cards charge a balance transfer fee of 3%; pick one that has a cap on the balance transfer fee. The amount you save on interest payments should more than offset the fee. If you have a card with a lower rate that is almost at its credit limit, you may want to start with this card. Reducing your debt/credit limit ratio helps your credit score. Get your balance down to 30% of your credit limit, and then focus on other cards that have balances close to their limits.

6. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothing, entertainment, and things that are long gone. If you use cash, you will not only save money on interest, but you will also reduce the amount you spend.

7. Pay more than the minimum amount for your loans, especially credit cards. Credit card issuers set the minimum payment at approximately 2% of your balance. This reduces the payment but makes paying off the balance almost impossible, so try to add at least $10 to your minimum payment. Look for areas where you can cut back on spending like entertainment, eating out or clothing. Use this money to accelerate your debt payments. Doubling or tripling your payment will help you pay off your debt much faster. The following example illustrates the benefits of paying more than your minimum balance. Assume that you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum amount of 2% each month, it will take 346 months to pay off the balance and will cost $7,696 in interest. If you pay 5% of your balance each month, it will take 109 months to pay off and will cost you $1,579 in interest.

8. If you are surprised by your current rates, check your credit report. Your report may contain an error that is creating a higher credit score and higher interest rates for you. If you find an error on your credit report, contact the credit bureau to report it. The bureau must respond to your claim within 30 days or remove the incorrect or unverifiable information. You can make your dispute by mail, telephone, or online. If the corrected error results in a higher credit score, contact your creditors to make sure they know about your improved score, and ask for a lower interest rate.

9. If you need more than three years to pay down most of your debt and if cutting expenses won’t realistically help you pay off your debt, contact a reputable debt counselor. The National Foundation of Credit Counseling (nfcc.org) is a good place to start.

10. Realize that it took time to get into debt and it will take you longer to pay off your debt. Do not get discouraged, no matter how little you pay off each month or how long it will take you to become debt-free. Being debt-free is worth the effort.

Debt can accumulate extremely quickly, especially if we are not aware that we have a problem. We have normalized debt and a lot of people have the mindset that they will “always be in debt, so why bother?” and that simply is not true. There are things that we can do today that can and will significantly impact our financial future. It really does not matter your age, if you are in debt now and can make a plan to be out of debt, you should do it. Whether it takes six months or six years, the financial freedom of paying off debt is a far greater experience than being in debt your entire life.

If you can imagine for a moment how much money you would be able to save if you did not have your car note, student loans, credit card debt, personal loans, etc. it could be astronomical. It is crazy to think about how much more money people would have to save, invest and pay for things if they stopped borrowing money, got out of debt, and then only paid for things they could afford. On paper it sounds so much easier than it actually is. Getting out of debt is hard work and it will take a lot of personal responsibility in order to become debt-free.

It may be better for you to chop your debt into bite sized pieces. Looking at the overall number can be daunting and make you not want to pay it off, but if you take the smallest debt you have, say a $1,000 personal loan and pay it off first you will feel good about the fact that you paid off a debt. Then you can move on to the next highest debt, so on and so forth. When you pay off a debt, apply the minimum payment for it to the next debt. You will be able to pay it off faster if you throw as much money at it as you can.

Write down your goals, tell others about them so they can keep you accountable, put your head down, and push toward them.

The information contained within this article was accurate as of February 16, 2020. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

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About Justin Hefner

Justin Hefner is in the education field and has written about a number of financial issues. He holds a Bachelor of Arts degree from Texas Tech University and a Masters in Education from Texas State University.