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8 Step Guide To Getting Out of Debt

8 Step Guide To Getting Out of Debt

Debt is like a noose around your neck. It irritates, suffocates and stifles the life out of you. No worries. We have a plan that will help spring you free and turn your frown upside down.

We’ve all read the success stories of people who got rid of their debt in 12-24 months. What they all had in common was a willingness to acknowledge, assess and tackle their problem head on. Using some of the most successful techniques out there, here’s an 8 step guide to help you get back on track.

List Your Debts

Before you can tackle your debts, you need to know your debts. Make a list of each loan or credit card, with the creditor’s name, balance owed, interest rate, minimum monthly payment required, and due date (if any). Loans include mortgages, leases, car payments, lines of credit, sales finance loans, overdraft, payday, etc.

Negotiate Lower Rates

Before you call a debt settlement company, see if you can do what they do. Call up each of your creditors and ask for relief. There are two strategies lenders typically use to reduce your pain.

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First, they can cut your interest rate. Credit card companies are most adept at this. Often you can go from a 19.99% rate to 11% or lower, cutting the cost of your debt by half.

Other times, lenders may be willing to reduce your minimum payment to ease your monthly obligation. This won’t lessen the cost of your debt, because you’ll pay for it over the long term, but it will make it more manageable within your budget.

Do A Balance Transfer

If you have high interest credit card, store card, even a line of credit, sometimes the fastest and most effective way to reduce your interest is by doing a balance transfer. Often times balance transfer credit cards offer 0% promotional rates for 12-24 months. The other advantage of balance transfer cards are that they allow you to consolidate multiple cards into one loan, and one payment.

If you do a balance transfer you’ll still have to make monthly minimum payments. Ideally, you’ll use the 12 months or more to pay down as much of the principle as you can, while it’s interest free. In the end you’ll have to figure out what to do when your promotional rate expires, because once it does, your interest rate will go back up to the 20% range. You can do yet another balance transfer, pay it down with a line of credit, or pay down your balance with cash.

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The High-Low

One strategy suggests you pay your high interest loans first. Mathematically, the faster you get rid of your most expensive debt, the cheaper your total debt obligation will be.

The way to do this is to rank your debts by highest to lowest interest rate. Calculate the minimum payment for each of your debts. Now whatever else you can afford to use to pay down your debts you should allocate towards the highest interest debt.

Snowball It

The other strategy, the snowball plan, says you should pay down your smallest loans first. The idea here, is that as you start knocking smaller debts off, you’ll start to feel more empowered, successful and organized.

The way to do this is, rank your debts by highest to lowest balance. Calculate the minimum payment of each of your debts. Then allocate left over funds towards the debt with the smallest balance. Cleaning up debts with $200, $500, or $1,000 balances will quickly make you feel like you’re on top of your game, and reduce the risk of missing a payment here or there.

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Tax Refund

Ever get a surprise tax refund? How about a planned tax refund. Either way, if you do, this time you’re not going to use it for an unplanned vacation. Use it to pay down your debt, either with the snowball or high-low strategy.

Sell, Sell, Sell

It’s guaranteed you have tons of “stuff”. You’re probably sitting on thousands of dollars of stuff you no longer use, but someone else can. Go on Craigslist, or ebay and start selling stuff you no longer use, pocketing $50 here, or $100 there. We’re talking things like your old treadmill, dumbbells, record player, teddy bear collectibles, baseball cards, bandsaw, etc… whatever you’re no longer using. Kids toys, strollers, cribs, high chairs, and car seats are great places to start.

You might even consider selling and/or downsizing some of your bigger ticket items like your car, ATV, boat, snowmobile, camper etc…

Cash Is King

For some psychological reason, study after study has shown that using plastic prevents us from assessing and feeling the impact of making purchases. As a result, we’re willing to spend more for the same items with plastic than we are with cash. We also have a harder time keeping a budget with plastic.

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The result? Your credit cards need to be put on ice. Don’t cancel them, because truthfully, sometimes they’re a necessity, like for hotel reservations or car rentals. But take them out of your wallet, and put them in your mother’s underwear drawer (that’ll make you think twice).

Also get rid of your debit card. While better than a credit card, it still allows us to overspend, and can impair your ability to keep to a budget properly.

The best way to stick to your budget is to take it out cash at the beginning of every month. Put it in an envelope (the envelope budget) and use it as needed. You will be shocked how much this will help you.

Featured photo credit: Michael Frank, Bankruptcy – to scissors a credit card, Flickr via flickr.com

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Marc Felgar

Marc Felgar is an aging, health & senior care expert focused on improving the lives of mature adults.

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Last Updated on March 4, 2019

How to Use Credit Cards While Staying Out of Debt

How to Use Credit Cards While Staying Out of Debt

Many people will suggest that the best thing to do with your credit cards during these tough economic times is to cut them up with a pair of scissors. Indeed, if you are already in huge debt, you probably should stop using them and begin a payback strategy immediately. However, if you are not currently in trouble with your credit cards, there are wise ways to use them.

I happen to really love my credit cards so I will share with you my approach to how I use mine without getting into deep financial trouble.

Ever since about 1983 when I got my first Visa card, I continue to charge as many of my purchases as possible on credit. Everything from gas, groceries and monthly payments for services like my cable and home security monitoring are charged on credit. Despite my heavy usage, I have maintained the joy of never paying any interest fees at all on any of my credit cards.

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Here are some tips on how best to use your credit cards without falling into the trap of paying those nasty double-digit interest fees.

Do Not Treat Credit Cards as Your Funding Sources

Too many people treat their credit cards as funding sources for major purchases. Do not do this if you want to stay out of trouble. I use my credit cards as convenient financial instruments so I do not have to carry around much cash. In fact, I hate carrying cash, especially coins. When you buy things on credit, the purchases are clean and you will not get annoying coins back as change.

I do not rely on my Visa, MasterCard or American Express to fund any of my purchases, large or small. This brings me to my golden rule when it comes to whether I will pull out any of my credit cards either at a retail or online store.

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I never purchase anything with my credit cards if I do not have the actual cash on hand in my bank account.

If I really cannot pay for the item or service with cash that I already have at the bank, then I simply will not make the purchase. Remember, my credit cards are not used as funding sources. They are just convenient alternatives to actual cash in my pocket.

Make Sure to Always Pay Off Balances in Full Each Month

The next very important part of my overall strategy is to make absolutely sure that I pay the balances in full each and every month no matter how large they are. This should never be a problem if the cash has been budgeted for my purchases and secured in the bank. I have always paid my full balances each month ever since my very first credit card and this is why I never pay interest charges.

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Using Credit Cards with Rewards

Most of my credit cards are of the “no annual fees” type, including one MasterCard on a separate account I keep at home as a spare in case I lose my wallet or incur any fraudulent charges. However, I do use a main Visa card which does have an annual fee because all purchases on that card reward me with airline frequent flyer points. For me, the annual fee is worth it since I do travel and I get enough points to redeem many free flights.

You have to decide for yourself if you will charge enough purchases on credit each year without paying interest charges to warrant a credit card that rewards you with airline points (or other rewards). In my case, the answer is “yes” but that might not be the case for you.

I occasionally use a MasterCard or American Express card on small purchases just to keep those accounts active. Also, I have been to the odd retailer that accepted only a certain type of credit card, so I find that having one from each major company is quite handy. Aside from my main Visa card which earns the airline points, the rest of my cards are of the “no annual fees” variety.

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So this is how I use my credit cards without getting into any financial trouble with them. This strategy is recommended only if you are not in debt, of course. In fact, it is worth keeping in mind once you’re out of debt so that you can keep your credit cards active and treat them responsibly.

What are your credit card usage strategies? Let me know in the comments — I’d love to hear what methods you use.

Featured photo credit: Artem Bali via unsplash.com

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