Paying off debt in 8 Steps

Consumer debt continues to grow. It has gone from a useful tool to a dangerous anchor. You need to change your debt habits today and start eliminating this burden.

1. Stop burying your head in the sand.

It is time to own up to your mistakes. List every loan, bill and debt which you pay monthly.

Find out the total amount of your minimum payment for each loan, bill and credit card statement. If this number exceeds your monthly income then you will have to make tough choices such as selling assets, taking on additional paid work or declaring bankruptcy.

2. Debt Payment Priorities

After paying the minimums you will want to make additional payments to your highest interest debt (most likely that pesky credit card that is so fun to spend money on). If you can’t manage to pay off credit card balances each month then you have no choice but to stop using them altogether. For many credit cards are just too easy to fulfill current desires and worrying about paying later which leads to increase debt burden and pain later.

3. Check Credit Score

Contact Experian, Equifax, and TransUnion to request an annual credit report. You want to look for inaccuracies so that you can maximize your credit score which could lead to low interest loans to help consolidate high interest debt.

4. Building Credit Score
Banks like to see consumers with various debt like mortgage, auto loan, and credit cards which can show consumers are being responsible with debt. Those most responsible receive the highest credit scores and also the lowest interest rates.

However you need to watch the credit card utilization rate if you are carrying a credit card balance greater than 20% on your available credit this will hurt your score and banks will be shy about giving you other loans.

You may also want to sign up for balance transfer credit cards so that you can reduce this years interest cost to a 3-5% upfront fee instead of paying 20%+ for standard rates.

5. Double Payments

You have done all you can to reduce interest expense and consolidate payments. Now is the time to use excess discretionary income to make additional payments on the highest interest debt you have remaining.

Once that is paid off continue with the same dollar amount on the next highest interest loan. This creates a snowball effect punching down your debt faster and faster.

6. Cuts Hurt

Just like dieting making financial cut backs is no fun at all. The unfortunate part is that there are just limited ways to rid yourself of this burden.

With health you can eat all you want if you exercise more and the same with finances, if you do not want to make cuts you will have to sacrifice more time by working longer hours or second jobs.

Bankruptcy is your last option as it leads to its own pain points.

7. Personalize Advice

Sometimes we are not able to do it on our own. A credit counselor can help you emotionally through the process (a personal trainer for finances). They can also be a tool to help negotiate with your creditors to come up with terms that can work for your situation.

8. Negotiate

Before committing to bankruptcy try speaking with each creditor or using a credit counselor to do so. If you explain your situation banks will likely work with you so both can come out ahead. Banks do not want you declaring bankruptcy and it hurts their balance sheet and is a costly process.

The Bottom Line

Set your mind to being debt free or at least have a reasonable amount of debt within your means. You can do this.

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.