women stressing about debt

Eliminating debt at one point is simply about taking a few steps:

1. Stop paying more mortgage

2. Spend less than you make

3. Pay off your debt with the difference.

When you take these steps, you will finally become debt-free. The problem is that it’s not always that easy to follow those moves. And there’s a lot of “support” out there to make matters worse, which isn’t very helpful. Tackling your debt may potentially be one of the hardest things you’ll ever do. You need to control your emotions that can play a major role in how we make financial decisions. You have to know everything, from home loans to credit cards to credit scores. And you’ve got to control yourself how you handle and spend your money. The truth is that it’s not easy to control your expenses and pay off your debt. But the good news is you can. If you want to be bad enough debt-free you can do it.

Get to Know Your Debt: The first step in solving every problem is to grasp it entirely. You should learn all about the terms and conditions of the money you owe when it comes to debt. Here are some tips and tools for knowing your debt.

Put Your Debt On Paper: The very first step is to make a list of your debts. The list will include the following information: the creditor’s name, address, and telephone number; the outstanding balance; the interest rate; minimum payment; and any other information that you feel is important. Even in the age of computers, at least at first, I like writing out my debt on paper.

Take Advantage of Personal Finance Software: Most people already have and are using personal finance applications like Quicken by now. If so, you can use the software tools to record all the debt you owe and build a plan to pay off that debt.

Use Free Online Tools: Most budget tools are available free online. Both resources are easy to use and can track your debt. And it’s tough beating home!

Use Free Excel Templates: Microsoft offers free templates for Excel which can help you track your debt and budget. Microsoft is actually providing free templates for just about everything, including resumes.

Involve Others: It is critical that the process involves your spouse or a significant other. If you don’t see finance eye-to-eye, it can make it even harder to get out of debt than it is already. Taking the lead in the management of finances is not unusual for one partner, and that’s ok. But you should both be on board, particularly as you build a debt juggling strategy.

Create a Plan to Pay Off Your Debt: After all of your debts have been written down, now is the time to determine how you are going to pay off these bills. There should be no need to complicate a solid plan. Tackling your debt is basically your strategy. There is no one approach; you have to do what works best for your family and for you. Nonetheless, there are some important considerations and instruments that can enable you to build a successful debt repayment plan.

Debt Repayment Calculator: As a starting point, seeing how long it will take you to pay off your debt if you make only the minimum payments is helpful (and sometimes painful). And there’s a calculator for free debt repayment which is very easy to use. While the plan will involve making additional payments, the starting point will be to understand what you are up against making only the minimum payments on your debt, and this calculator will help you do just that.

Prepare a Budget: The term “budget” is, for many, the dreaded word “B.” But the fact is you need a budget to track your expenses and manage your money better. Note, it’s the money you don’t spend every month that is going to pay off your debt.

Be Aggressive About Paying Off Debt: It’s about paying off your debt, being violent. Recognize that every dollar counts, as you maneuver through your budget, and that the more you throw at your mortgage, the less interest you pay and the sooner you get out of debt.

Be Realistic About Paying Off Debt: While we all want to get out of debt fast, we need to be careful not to become overly aggressive. Paying off debt is much like taking a diet. You can commit to never eating bad foods, but is that realistic? The thought of never having an ice cream is too much to bear. The same holds true with debt. Sure, you’ll have to make sacrifices to achieve your financial goals, but you need balance in life, including your financial life.

a pink pig on a calculator

Order Your Debt: With your budget in place and an idea of how much additional money you will spend on interest, now is the time to map a specific plan. The problem is, whose debt are you going to put your extra money first? The first thing about that problem is not to get too hung up. One solution may be better than another, depending on your situation, but if you regularly pay down your debt without incurring more debt, you will make great progress regardless of which debt you pay first. That said, here are the top three steps to tackling your debt:

1. Highest Interest Rate First: With this approach, you’re putting all the extra cash on the debt with the highest interest rate. This approach will lead to the lowest possible interest charges and the fastest possible debt repayment.

2. Smallest Balance First: Many experts recommend first attacking the debt with the smallest balance. While that debt may not have the highest interest rate, the idea is to pay off one debt as quickly as possible. The rationale is dual. Second, paying off a debt gives you a sense of success, which could be just the incentive you need to keep track of. Second, you free up the cash that was needed to make monthly payments to that bill by taking out a debt in full. While you are likely to put the cash into the next mortgage, you could use it for other purposes in an emergency. In other words, you free up cash flow by paying the smallest debt first.

3. Non-Revolving Debt First: While many talk of the two methods above, few consider the debt form when choosing which one to pay first. Remember that revolving debt, such as credit cards, helps you to borrow again after paying down the debt. Non-revolving debt, such as a car or school loan, will not allow you to borrow again as you pay the debt down. With a car loan, the loan is gone once the debt is paid off. With a credit card, once the debt is paid, if you so choose, the card will still be available to use again. For this reason, I will often first concentrate on debt that is not rotating. Why? For what? Because once it’s settled, I can’t go out and rack up the debt again. This is primarily a psychological issue, but a significant one, particularly if you feel that some discipline may be lost once some of your debt is paid off.

Don’t Forget Your Emergency Fund: An emergency fund is a truly important part of a debt relief plan. While you may be tempted to spend 100 percent of your extra cash on loans, setting some of it aside for emergencies may help break the dependence on credit that many have. It’s better to turn to the emergency fund when the car needs new tires than it’s the credit card. I’ll also note that while you can use your emergency fund’s high-yield savings account, a short-term, high-yield CD might be the better bet. While most CDs charge a penalty if funds are withdrawn before the end of the term, the penalty will help prevent you from accessing funds for anything but a real emergency. Additionally, short-term CDs with 3 or even 1-month terms are available.

Improve Your Credit Score: When many people think of credit reports and credit scores, if you want to apply for a loan they see them as important. And they are of course important when applying for a loan. But it also makes your credit report and score absolutely critical to get rid of debt. You are qualifying for lower interest rates with a good credit score that can help bring down your total interest charges. You’re stuck with bad credit and paying double digit rates. Let’s look at some tips and tools which can help:

Understand the Importance of Your Credit Score: As noted above, your credit score is a key tool to get out of debt as quickly as possible. Further illustrate this, reviewmyfico.com stats for individuals with a FICO score of 660 (fair credit) versus 760 (excellent credit)

Mortgage: Today’s average interest on a home loan is about 4,766 percent for unpaid credit but 5,379 percent for equal credit.

Car Loan: You should expect a car loan interest rate of about 6.3 percent with a credit score of 760. The rate increases to around 9.8 percent with a ranking of 660.

Home Equity: Great lenders should expect a premium of about 8% or less whereas average credit borrowers can pay as much as 11% or more. For short, what counts is your credit score.

Get your Free Credit Report: It starts with getting your free credit report and testing it for errors.

Get your Free Credit Score: First, you should get your FICO score for free. You can’t get this from annualcreditreport.com but there are several sites offering the actual FICO score in exchange for a free trial of a credit watch system. If you do not want to keep the service you can always cancel before the end of the free trial.

Pay Your Bills on Time: There are a number of factors that go into a credit score, but paying your bills on time is one of the most significant. Do whatever is necessary to avoid making a payment, and make sure that you make the payment far enough before the due date so there is no risk that it will be late.

Don’t Close Accounts: Don’t lock credit card and other revolving accounts as a general rule. One of the factors in determining credit score is the amount of debt that you have when compared to the amount of credit available. The greater the lending available, the better. If you don’t want to risk using them, you can always cut some of your cards off but don’t cancel them. Here are a few other tips to help boost your credit score.

Get the Lowest Interest Rates Possible on Your Debt: When working to improve your credit, it’s important to look for ways to lower your debt interest rate. Whether the debt is a home loan, car loan, credit card or some other debt, having the lowest interest rate possible would help speed up the amount of time it takes to get rid of your debt. Here are some tips and tools to help you raise tariffs:

Refinance Your Mortgage: The general rule is that if you can lower your interest rate by 1 per cent, you can refinance. While this is a good starting point, it is also important to consider how long you plan to stay at home and whether you need to move to a safer fixed rate loan from an adjustable rate mortgage. Interest rates remain at historic lows, and online comparison of mortgage rates is easy.

Negotiate Lower Interest on Home Equity Lines of Credit: If you have a line of credit for home equity, compare the interest rate with current market rates. If you think you can do better, step one is contact the mortgage firm and ask for a lower rate. For our home equity credit line, we did it effectively. Although there are no assurances, trying cannot hurt.

Lower the Interest on Credit Cards: Since credit card interest rates have risen so much in the past year, having a lower credit card debt rate can save a lot on interest payments. If you have a good credit score, you can be considered for a credit card transfer with 0 percent balance.

Be Careful with Debt Consolidation: Although taking advantage of the lowest possible interest rates is vital, the one place you really want to be cautious about is with debt consolidation firms. While they may guarantee you low rates and a single payment, there is an increase in the number of consumer complaints about those businesses. You can then refinance and merge your debts electronically as an option. Here are a number of good options for personal low rate loans.

Spend Less and Make More

One important aspect of getting out of debt, as I said at the beginning of this article, is spending less and making more.

Earn Extra Income: Any additional revenue goes a long way to get out of debt. I’ve learned this firsthand from the money I’ve blogged, all of which goes either to charity or debt repayment. If an extra few hundred dollars a month can help you gain debt more quickly.

Bonus: If refinancing high interest debt is what you want, find SoFi. They offer some of the lowest rates available, and it is very easy to apply for online.