By: Grace Lee
Taking your time in paying debts is not a good idea because credit card debt can grow at an alarming rate when left unpaid. If you do not take immediate action to change your spending habits, you will find your debt swelling each month.
You may have a very good reason for accumulating debt on your credit cards, such as an unexpected job loss or a big-ticket purchase. But no matter the reason, it should be your top priority to pay off your debt. For this, you will need an action plan that involves making lifestyle changes and cutting your expenses.
It may feel like a daunting task at first, but once you develop an understanding of your current financial situation, you can get rid of debt with dignity. To pay off your debts, use the following strategies:
Avoid paying the minimum
It is tempting to pay the minimum amount toward your credit card bill and get yourself off the hook – at least for a while. With the minimum amount settled, you do not have to pay for late payment and you will have extra cash to buy other things. What could possibly be wrong with this move?
Meeting the minimum payment allows you to avoid penalties, but it has its drawbacks. For instance, paying the minimum prolongs the payment timeline, making you incur new charges monthly.
Get a cheaper credit card
While there is no such thing as a perfect credit card, you can still choose a credit card that will best suit your needs. If you already have an existing credit card but find that the interest rate is too high for your budget, then you should consider transferring your remaining balance. This can help lower your outgoing and consolidate all your debts. Compare credit cards and when you find a bank that offers a lower interest rate compared with the rate your existing bank charges you, it may be a good idea to transfer your balance to that bank.
Depending on your credit score, you can be eligible for 0% introductory rates on balance transfers. Keep in mind though that most banks limit the amount you can transfer, and the transfer commonly takes approximately two weeks. This means that you will still need to make payments to your current card company while waiting for the transfer to be completed.
If you are considering doing a balance transfer but have a low credit score, then you need to be prepared to discuss information about your negative credit history. This way, the bank representative can give you offers that are tailored to your situation.
Make lifestyle changes
Sometimes, paying off debts will require a major lifestyle shift. This is not to say that you will not be able to live your life as before, but it entails getting out of your comfort zone temporarily until such time you are able to settle into a debt-free life. The end goal is to free up cash that you can use to clear your debts.
If you are currently staying in a big house, think about whether you need as much space or you can live in a smaller home for now. In addition, if you own more than one vehicle, you may need to reduce it to one or two so you can lower your transportation costs and car loan. Having one vehicle can be manageable especially if you are working from home.
Adopt a frugal lifestyle
You can pay off your debts even without making additional money if you start to adopt a frugal lifestyle. The road to being debt-free starts with analysing your existing budget and knowing where your money is going.
Check your previous credit card statements and list down the items you spend most of your money on. Determine whether the items are all necessary for daily living and whether there are things that you can refrain from buying. For example, you can spend less on food if you bring a packed lunch to work instead of buying takeaways or eating out every day.
With knowledge about your monthly expenses and your end goal, you can begin to make a budget that does not consist of unnecessary items. It may take time to get used to living a frugal lifestyle, but once you are able to change your spending behavior, you will find that you can save more money over the course of a few months.
Pay off debts in stages
People with high credit card bills are often tempted to dig out all their savings to clear out their debts in one go. But many financial experts advise against doing this as it leaves you with no funds for emergencies. Instead, you can set up a debt repayment plan so you can see your progress in paying your debts with your extra money.
The first step you need to do is to make a list of all your debts, their interest rates, the minimum payment amount for each credit card and personal loan, and the total amount owed. After this, you can proceed to rank your debts in the order that you intend to settle them. The order is up to you, but some experts recommend putting debts with the highest interest rates at the top of the list and those with the lowest rates at the bottom to save you more money.
Once you have determined which debts you will pay off first, compute how much extra money you will use to pay the debts.
Consider debt consolidation
Debt consolidation plans have many benefits. For one, they allow you take out a loan, which you can use to settle all your other accounts. If you have multiple accounts with different due dates for payments, it becomes difficult to keep track of the various deadlines and you may end up forgetting to make payments for other accounts. With debt consolidation loans, you have the option to put your funds in a single debt account and make payments at once.
By consolidating your debts into a single account, you can save a significant amount of money because of lower interest rates. Having several credit cards that are maxed out will easily increase your debt without you realising it. This is because credit cards normally have high-interest rates compared with interest rates of debt consolidation loans.
Another advantage of debt consolidation is that it can help improve your credit score. By staying on top of your payment schedule, you will avoid hurting your credit score because of late payments.
Get professional help
Take advantage of the information talk offered by credit counseling companies to get advice regarding debts and finance management.
During an informational talk on debt management, a credit counsellor will work with you to determine the amount of debts you owe, and will provide information on collection actions commonly taken by creditors.
You also have the option to take part in debt repayment programs, which are designed to help people make reduced monthly payments to creditors.
All the tips mentioned above can help you settle your debts over a reasonable period of time, but the motivation to live a debt-free life must come from you. Decide which method works best for your current financial situation and what actions you can take to save more money in the future.