Today’s post is a guest post from Tess Thompson of Money Done Right.
I am excited to share her “Top 4 Ways to Get Rid of Debt.” Enjoy!
Struggling with debt can feel overwhelming, but anyone can become debt-free if they stick to a payment plan that works for their budget.
While living without debt may sound like an impossibility today, you’ll start to feel more and more confident as you continue making progress.
If you’re having trouble managing your debts, start with these tips to improve your strategies and get closer to paying off your balances.
No matter how you choose to approach debt, the most important thing is to stay consistent over a long period of time.
Debt consolidation is one of the easiest ways to simplify the process of paying off outstanding balances while minimizing interest payments.
It involves taking out a loan to cover one or more balances with higher interest rates, and you can get debt consolidation loans from a number of lenders.
Of course, your loan offers will heavily depend on your credit history, and you may not have a great credit score if you’ve struggled with debt in the past.
If your credit score is below roughly 700, you should consider postponing a debt consolidation loan until you’re able to qualify for more competitive offers.
Balance transfers are essentially another form of debt consolidation. In some cases, they even allow you to pay off your entire balance without being responsible for any interest at all. They’re often the best choice if you’re dealing with a large amount of credit card debt.
Instead of getting a term loan, you’ll have to apply for and receive a card that enables you to transfer an existing balance. From there, you can move your balances and pay them off on that card rather than under the terms of your original debts.
Many balance transfer credit cards offer a promotional period during which you won’t be charged interest, although you will have to pay a balance transfer fee (typically around 3% of the balance).
Keep in mind that you’ll still be responsible for interest if you carry a balance after this period ends.
You can also approach balance transfers proactively by using them to spread out the impact of a large purchase like a car or appliance.
If you know you want something that’s $7,500, for example, you could put it on a new card and pay it off with $500 per month over 15 months for no interest at all. The same purchase could cost substantially more if you use a card that charges the 15-20% rate that typically comes with credit cards.
The Debt Avalanche
If debt consolidation or balance transfer cards aren’t an option for you, you’ll need to consider how to approach paying off multiple debts at the same time.
Different financial experts recommend using a wide range of debt repayment strategies when managing more than one balance.
The debt avalanche is the right choice if your goal is to minimize your overall interest payment. After making the minimum payment on every balance, put any extra cash toward the debt with the highest interest rate.
That said, any method that helps you stick to a payment plan is worth doing, and it’s more important to be consistent than to completely optimize your approach.
There’s nothing wrong with starting from the smallest balances and moving to the largest ones.
Beyond interest rates and the size of each balance, you may also want to consider creating a strategy based on overall cash flow. Paying off debts that require a high minimum payment will give you access to more money each month and avoid having your cash held up in debt payments.
Avoid Further Debt
This might sound like an obvious tip, but the reality is that the best way to get out of debt is simply to cut debt out of your life. Taking on debt is often treated as normal, and this attitude leads us to buy things we can’t afford and make a variety of bad financial decisions.
If you’re currently paying off debts, you can avoid relying on even more credit by setting up an emergency fund to cover any unexpected costs. This takes money away from your balances in the short-term, but it ensures that you won’t lose the progress you’ve already made.
Once you’ve become debt-free, you shouldn’t use credit cards or other forms of credit for anything you couldn’t buy in cash.
Furthermore, you should keep your credit utilization under 30% in order to maximize your credit score.
Paying off debts takes time, but you’ll make progress surprisingly quickly if you’re honest about your current financial situation.
These tips will help you overcome your debts as quickly as possible and get back to focusing on other financial priorities.