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5 Things to Do When You Are Buried in Debt

5 Things to Do When You Are Buried in Debt

A year ago, I was in heavy debt. Day after day, I found myself in a credit crunch. Things took a turn for the worse when I started taking out loans to pay off other loans. I’d use one credit card to pay off debt on another credit card, not realizing I was taking on more debt.

I also made late payments on my utility and credit card bills and therefore had to pay penalties on them. My debt started ballooning – growing faster and larger – because I was being charged higher interest rates. I had debt collectors breathing down my neck, but I had no money left to pay off my creditors. It took me time and discipline to turn my money situation around. Here are five essential points I learned to not do in order to get out of debt:

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1. Stop neglecting money issues: take control

Make a list of your income and your expenses. You need to be able to make more than you spend. You should also focus on your necessities and let go of luxury items. Also, make a payment plan for paying off your creditors. This will help you in forming a budget. Lastly, take a pair of scissors and cut up all your credit cards. They will tempt you if you keep them, so this is necessary for being debt free. If you must, keep a single credit card for emergencies, but only one with a low credit limit.

2. Stop spending aimlessly: make a realistic budget

Keeping track of your income and expenses is just a small step, the bigger step is to make a budget and stick to it. Allot realistic ratios to different kind of expenses, for instance 20% of your income should be able to cover your food bill, 40% of your income should cover your utilities, and so forth. Let go of unnecessary items such as gym memberships and expensive beverages. Make sure you have enough left over to pay some part of your loans.

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3. Stop spending your emergency fund: it’s only for emergencies

An emergency fund works like this: when you keep money in the emergency fund you are supposed to forget that the emergency fund exists. This is because these funds are for emergencies only and paying off your debt is not an emergency. This money shouldn’t be touched, but you should find other sources of income, like a second job or project-based income, and you may have to sell some personal items to have cash inflow. How well you can generate income will be directly proportional to how fast you get out of debt.

4. Stop deferring bill payments: your debt will balloon up faster

Make it a principle to pay in cash only. Don’t use credit cards as they are a form of deferred payment that charge you interest. Deferring large payments on your cards will increase the burden of your debt faster because of the high interest rates and penalty fees. Negotiate with your creditors on an agreed payment plan.

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5. Stop paying high interest rates on your debt: negotiate!

It is not that hard to negotiate better interest rates. Gather all your financial statements and speak to a representative of your credit card company or financial institution. Be courteous to them as they are doing you a favor! Remember to make monthly payments in full and on time, this will make you eligible for lower interest rates. If you have a history of late payments, then make sure you pay on time in the future and keep trying to negotiate a lower interest rate. If they still don’t lower your interest rate after your persistence, then consider taking your business elsewhere to another company that will give you a better deal.

Featured photo credit: credit.about.com via 0.tqn.com

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Tayyab Babar

Tayyab is a PR/Marketing consultant. He writes about work, productivity and tech tips at Lifehack.

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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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