5 Tips to Manage and Reduce Your Debt
For most of us, debt is an essential part of life. Borrowing money can help us get an education, own a home, or follow our passion and start a small business. This is considered “good debt” and when it’s managed well, it can enhance our lives and help us accomplish great things.
As with anything in life, too much debt or the wrong kinds of debt can leave us stressed, struggling, and can hinder our financial progress and our ability to pursue our long-term financial goals. Some examples of “bad debt” are high-interest credit card debt and payday loans.
Week 2 of Financial Literacy Month aims to educate consumers on managing their debt to feel in control of their overall debt situation, so here are our top 5 tips to effectively manage your debt.
1. Add up ALL of your debt
This can be scary, but it’s a necessary first step. Go through your accounts and make a list of your outstanding debts. Make sure you include the interest rate on each debt so that you can identify which high-interest accounts are causing you the most financial strain.
2. Get your credit report
You can request a free copy of your credit report from Equifax and Transunion. It’s best to get a copy from each bureau since they could have different information about your credit history on file. Reviewing your report will help you ensure that you haven’t left off any outstanding debts on the list you just created.
It’s also important to check your credit report for accounts that you don’t recognize and inaccuracies in the reporting. If you discover any errors, bring the dispute to the creditor so that they can fix the problem and revise your report.
3. Pay more than the minimum
If you want to make a dent in your debt, you need to make sure you’re always paying more than the minimum payment on your credit card or personal line of credit. If you’re only making the minimum payments, you’re likely just covering the interest fees. Even paying an extra $50 each month can help you pay down your debt faster, save on interest, and can even help improve your credit score.
4. Check to see if you qualify for lower rates
Reach out to your bank to see with you qualify for lower interest rates on your current debts. If your income has increased or your credit score has improved since you originally applied, chances are you’ll qualify—or maybe the interest rates have dropped on their own since you first applied. Either way, it doesn’t hurt to ask!
5. Pay off your most expensive debts first
This is commonly known as the “Avalanche Method” and the idea is that you make the minimum payments on your debts except for the account that is charging you the most interest. Take the money each month that you’ve saved set aside for extra payments and put it all towards paying off your highest-interest debt first. Once this debt is paid off, move on, and focus on the next most expensive debt and keep doing this until all of your debts are paid off.
The Avalanche Method will save you a lot of money in interest payments and reduce the time it takes to pay off your debt. It also helps to encourage you and keep you motivated as you see your progress with each debt you pay off.
Sometimes, despite your best efforts, debt can grab a hold of you and might take more than do-it-yourself tips and tricks to see the light at the end of the tunnel. If you’re struggling to make your minimum payments, receiving collection calls from your creditors, or losing sleep worrying about your debt, it’s probably time to meet with a licensed debt professional. A Licensed Insolvency Trustee (formerly known as a Bankruptcy Trustee) can walk you through the options you have to eliminate your debt and will help you determine the best path for you to get out of debt and take back control of your finances. Book your free, no obligation consultation with a Licensed Trustee now.