Before you can tackle your debt, you have to get real with it — and that means facing it head-on and adding up every last cent. As terrifying as that stack of overdue bills may be, you can't create a plan of attack without understanding how much you actually owe.
First, identify all of your outstanding debts — car notes, student loans, credit card debts, and personal IOUs. Next, write down the interest rate for each debt, plus the payback terms. Scary stuff, we know, but we'll show you how to tame that monster.
Armed with these details, make a payback priority list. Then, pay as much as you can toward your debt. One option is to pay back your debt by tackling the highest interest rates first. The higher the rate, the greater priority it should be to pay this back. This is the financially smarter strategy, since you pay less in interest to your creditors.
As an alternative, you can tackle your debt in order of balance (in other words, how much you owe). Knock out small balances first, and tackle the bigger debts later. This is the emotionally happier strategy, since you feel better when you close out debts completely.
Don't stress about choosing the "right" one. Either strategy is better than no strategy, since ignoring your debt problem makes it worse.
If there were ever a time to go above and beyond, this is it. Make sure your strategy includes paying more than just the minimum on your credit card debt. For instance, let's say you have $10,000 in debt at 20% interest. If you pay only the minimum, you will get out of this debt in 67 years...after paying $46,168 in interest. See what this means for your real-life situation by using theFederal Reserve’s minimum payment calculator.
To help speed up your payoff and pay less in interest, use these two tricks:
1. Make your payments early in the billing cycle — waiting till the due date costs you more in interest. If you can’t afford to make the whole payment early, make multiple smaller payments throughout the month, such as half-payments twice a month.
2. Pay a constant amount, even as your balance and minimum required payments decline. This speeds up your debt payoff considerably — even more than the first trick.
So...what if you're seriously
in debt? If your total outstanding debt (not including mortgages) is multiples of your annual income, or you cannot afford even the minimum payments on all of your debt, try working with a credit counselor. (Check the National Foundation for Credit Counseling
for certified counselors and agencies.) A counselor can help you with a debt management plan, or even filing for bankruptcy. Keep in mind, bankruptcy filings stay on your credit report for 10 years — impacting your ability to get loans, and even jobs or apartments — so, use this only as a last resort.
Oh, and those commercials and newspaper ads that promise "easy" debt relief? Skip them. A lot of scam artists operate in this field. If the process sounds quick and easy, it's probably a scam.
Start by creating a realistic budget that allows for some splurges while still keeping expenses below your income. Just as you tracked every cent that you used to owe, plan out your monthly budget down to the last dollar. (It's fine to leave some "mad money" that can be used just for fun.)
And, once you've paid down your debt, the next challenge is to improve your credit. (More on this in May!) Start by using credit cards for small purchases, then paying off the balance in full each month. If you consider taking out future loans, be aggressive in seeking out those with low interest rates (and don't take out more than you'll be able to pay back comfortably). Little steps like this will go a long way toward building a stellar credit score — and proving that you canbe a money badass, no matter your financial past.