In the third quarter of last year, consumer debt in the United States stood at a whopping $4 trillion.
Coming down to an individual level, the average American has about $38,000 in personal debt, excluding mortgages. If you are one of the millions of Americans who owe this amount, it is easy to feel you are drowning in debt.
But what about the good news for those dealing with debts?
Debt isn’t a life sentence. Difficult debt a tall mountain to climb, sure, but with the right mindset and strategies, you can do it. You could consider working alongside debt settlement programs as they will be able to guide and help you through this struggle, it is a good start to diminish your debts strategically.
In this article, we are all about debt diminishing strategy. Here is how to pay off debt fast and boost your credit.
1. Get a Clear Picture of Your Debt
When you are spiraling into debt, you can lose track of just how much money you owe. "We have folks that we assist that have 15-25 different accounts they owe on, so you can see that it's easy to lose track", stated Ben from Ascend Finance. Perhaps you have student loans, multiple credit cards, an auto loan, and a payday loan affecting your debt and credit score.
If you can list all the loans you have off the top of your head, that is a good start. But do you know how much interest each loan charges? How about the remaining balances?
If you don’t, you are making a big financial mistake. When you don’t have a clear picture of your debt, you won’t even know which loan is charging the highest interest so you can prioritize accordingly.
As such, the first step to getting out of debt fast is to get a good handle on your debt. Write down all the details about your loans. If you have some that have gone into collection, include them too.
2. Get a Clear Picture of Your Income
Paying up what you owe is the most effective way to get out of debt, right? You might be lucky enough to secure debt forgiveness from a lender, but don’t bet on your luck!
To pay up, you need an income. This is why having a clear picture of your income is crucial to getting out of debt.
How much do you earn in a month? If you have multiple income sources, add them up.
Next, establish your household or domestic expenses. This is the money that goes to rent, energy bills, internet, television, and other utility services.
Now subtract these expenses from your income. The amount you have left is what goes into debt repayment. If you still have money left after paying your loans, thumbs up! This means you can commit more of your income to debt payments, and the more you commit, the sooner you will be debt free.
But what if you have nothing left after paying loans? Or you are in a deficit?
You need to reduce your overhead!
3. Cut Your Expenses
Now that you have already broken down your expenses, look for opportunities to cut back.
While there are basic expenses you can’t touch, don’t think twice about cutting those that you really don’t need to survive. If you have cable and streaming subscriptions, for example, you don’t need both. Cancel one, preferably the costlier one.
If you’re the kind of person who loves partying hard during the weekends, eats out often, and goes to the movies, it’s time to go easy on that lifestyle; otherwise, you’ll stay stuck in debt for the longest time.
In short, embrace a frugal lifestyle. When your goal is to pay off debt first, you should be willing to do whatever it takes – within reason, of course. You’ll lower your expenses and, consequently, you’ll have more money to pay your debts and save.
4. Boost Your Income
Sometimes reducing your expenses alone might not have a significant impact on your income. The cost of living keeps going up, so that’s understandable.
If you’re in this situation, look for ways to supplement your primary income. You could take up an additional job, such as walking dogs during your free time.
If physical jobs aren’t your thing, don’t fret. The Digital Age has come along with thousands of online job opportunities, including writing, editing, transcribing, and web design. If you’ve got any of these skills, go online and find a gig.
What if you’re the entrepreneurial type? Can you start a small business as a means to boost your income?
Well, starting a small business is always welcome, especially if you’ve got a good idea. But when you’re deep in debt, the move might not be advisable, and here is why.
You see, entrepreneurship is risky. You’ve probably heard that almost half of all new business close shop within five years. If your business fails, you will lose your capital investment and end up with more debt.
That being said, if your efforts to supplement your income are successful, ensure it goes to debt payments.
5. Don’t Take Up More Debt
This is a no brainer. When you’re in a hole, stop digging.
Unfortunately, this is easier said than done. In fact, you’re more likely to go in for another loan when you’re crumbling under debt. Maybe a collection agency is hot on your trail and the only way to lose them is to secure another loan so you can settle their debt.
The temptation to take up more debt will always be there but don’t fall it. A new loan not only increases the total amount of money you owe but also extends the length of time you’ll be in debt.
6. Consider a Debt Consolidation Loan
Debt consolidation offers you an opportunity to roll all your debt into one loan, usually at a lower interest rate. Once your debt consolidation loan is approved, you’ll use the money to pay off all the other loans you hold.
In addition to the potential of securing a lower interest rate, consolidation takes multiple lenders off your back, and some lenders allow borrowers to set their payback terms.
However, not everyone qualifies for a consolidation loan. If your credit is bad or poor, most lenders will turn down your application or slap you with higher interest rates. Other lenders will require collateral, such a house, before giving you the loan.
7. Prioritize High-Interest Loans
In the event that you’re unable to secure a consolidation loan, turn your focus to paying off loans charging the highest rates first. A good example of a high-interest loan is a payday loan.
Perhaps you’re wondering, “Does prioritizing high-interest loans mean defaulting on the low-interest ones?”
Well, it depends on your specific financial circumstances. For instance, if you’ve money left after paying up your loans and taking care of living your expenses, you should commit the surplus amount to the high-interest loans instead of spreading out evenly across all your loans.
Ideally, you shouldn’t let any loan go into default. This hurts your credit score. If prioritizing high-interest loans raises the prospect of defaulting on low-interest loans, don’t use this strategy.
8. Negotiate With Your Lenders
As a borrower, you’re bound by a loan’s terms and conditions.
However, these conditions aren’t cast in stone. Yes, lenders can make good their threat to repossess the collateral if you default on a secured loan, for example, but, in most cases, they want to pursue the path of least resistance. This means they’re often willing to tweak these conditions to make it easier for you to pay up.
There’s a catch, though. You must make the first move.
If you’re struggling to keep up with a loan, approach the lender, explain your situation and try to strike a debt agreement. To ensure the agreement really works for your finances, it’s advisable to work with a debt agreement administrator. This professional will craft a proposal that suits your situation and lodge it on your behalf.
9. Sell Off Items You Don’t Need
Did you know the average American household has over 300,000 items?
You probably have valuables that you no longer use. Or maybe you’ve even forgotten you own them!
Comb through your home, find such items, and put them on sale on Craigslist or any other marketplace. You’ll be surprised at how much money you can raise from selling off the items you don’t need. Use the money to pay off your debt.
10. Know When to Seek Debt Relief
No matter how hard you try, sometimes debt can be too much to clear within a short time. You should be able to recognize when to stop trying and seek debt relief or protection.
If more than 50 percent of your annual income is going into debt payments, for instance, there’s only so much you can do to get out debt. Consider seeking help from a nonprofit credit counseling agency or filing for bankruptcy protection. The latter can discharge some of your debts and give you enough time to reorganize your finances.
It’s Possible to Pay Off Debt Fast
Debt isn’t a bad thing. It helps us build our credit and get out of financial emergencies.
However, sometimes things get out of hand and we end up with too much debt. If you’re in such a situation, don’t lose hope. With the strategies fleshed out above, it’s possible to pay off debt fast.
Stay frugal with your finances! Good luck and keep reading our blog for more insights on personal finance and loans.
