Debt is a part of American life. The cost of living has increased, and wages have not kept pace. More people are relying on credit to get by. The problem with credit cards is the high APRs and compounding interest rates. According to the Federal Reserve Bank of St. Louis, the average APR on credit cards is 21.37%. Carrying a balance with a 21% APR will quickly lead to overwhelming debt. And that’s not considering any loans you may have.
Being in debt can be stressful, but know that it is entirely possible to repay all you owe. The best strategy depends on your income and debt level.
Assess Your Debt Load
The first step to successfully tackling debt is knowing how much you owe. Look at your credit card statements, loan documents, and collection notices. Write down the balance, interest rate, due date, and minimum monthly payment of each debt. A list will give you a clear picture of your your situation and help you determine the right strategy.
If your debt is less than 50% of your gross income, then better budgeting and a DIY method may be the ticket. If your debt is more than that, you may need external help. Doing it yourself is empowering and a good place to start, but it’s okay to explore your options if you need more support. One place to start by researching is National Debt Relief legit. Debt relief companies can help you determine the right strategy for getting rid of insurmountable debt.
Create a Budget
The next step is figuring out a budget that you can stick to. Write down everything you make in a month. Then, subtract all your expenses. Fixed expenses like rent are easy. Varying expenses like groceries and utilities, you’ll have to estimate. The amount you have left is how much you can put towards your debt.
Stop incurring debt
Be honest with yourself. If your spending habits contribute to the problem, now’s the time to make changes. Stop buying on credit. Do not take out any new loans or advances to avoid digging a deeper hole.
Build an emergency fund
It’s hard to save money while paying off debts, but it’s still a good idea. Having a safety net means you don’t have to borrow next time an emergency arises. Start small by setting aside anything you can. Eventually, you should build up three to six months’ worth of savings.
Pay It Off Yourself
If your debt isn’t overwhelming, you can pay it off yourself with the right strategy. The key is consistency.
Snowball method
With the snowball method, throw all your money towards your smallest debt while making minimum payments on the rest. Once you pay off the smallest, you roll that payment into the next smallest, and so on. The idea is to build a snowball that will make paying off your largest debt easy.
The snowball method is effective due to its quick wins. Each “win” fuels the next building momentum to stay on track.
Avalanche method
The avalanche method targets your highest-interest debt first. You’ll still pay the minimum on others but aggressively pay down the costliest one.
With this strategy, you’ll save more money in the long run, but it may take longer to see the first win. Choose the DIY method that helps you stay motivated to finish.
Negotiate with lenders
Sometimes, a conversation can go a long way. Ask your lenders about lower interest rates, waived fees, or a payment plan. Many creditors are open to negotiation, especially if you’ve been a reliable customer. Be polite, honest, and persistent. You may have to call back or ask to speak with a supervisor.
Explore Debt Relief Options
If managing your debt alone is too much, consider debt relief. Debt relief is any strategy that reduces or restructures your debt into something more manageable.
Debt Management Plan (DMP)
A DMP is a structured repayment plan offered by credit counseling agencies. The credit counselor negotiates with your creditors for affordable monthly payments. They may be able to lower the APR or waive fees. You make a single payment to the agency each month, which then pays your creditors.
Debt Consolidation
Consolidation is when you take out a loan and use the money to pay off debts. You are left with one monthly bill, ideally at a lower interest rate. Debt consolidation simplifies your finances and can save you money with a lower APR. The catch is that loans often come with fees and longer terms that can cost more in the long run. You’ll also generally need a good credit score to secure a loan with a lower interest rate.
Debt Settlement
Debt settlement companies negotiate with creditors to accept a reduced payment and forgive the rest. Settlement can significantly lower your debt. It will also hurt your credit score, come with hefty fees, and potentially have tax consequences.
Bankruptcy
As a last resort, bankruptcy offers legal protection from creditors and can discharge many types of unsecured debt. Chapter 7 wipes out eligible debts quickly, while Chapter 13 sets up a repayment plan. While bankruptcy can give you a fresh start, it will cause severe long-term damage to your credit.
Final Thoughts
Getting out of debt is hard but you can do it with the right mindset. Find a budget that works for you and enables you to pay your bills on time each month. Paying on time is the best way to become debt-free, stay that way, and build credit.
Debt relief strategies like the snowball or avalanche methods, negotiating with creditors, and consolidation can all help you build credit as you pay off debt. That’s because these methods require you to pay on time every month. On-time payments are the best thing you can do to improve your score. A higher credit score will help you borrow with better terms in the future.
