In the modern day, debt has become a common thing. You either have a student loan, mortgage, car loan, or credit card debt. Becoming debt-free is no longer a goal that people strive for.
That is until your debt become bad debt. When the payments are so high it threatens your living standard. When the debt is way overdue it affects your credit score negatively. This is when it becomes urgent for you to get rid of your debt. The truth is, however, that getting into debt is always easier than getting out of it.
The most shocking fact is that out of 10 Americans, at least 1 person would have 10 or more credit cards under his or her name. This calls for a change in attitude. Debt can be a valuable financing tools, but it can pretty much turn around and ruin your life. If you find yourself in debt woes, here are the 3 necessary steps to get rid of your financial burden:
1. Know that you have Debt Issue:
It may sound simple, but you cannot solve a problem without realizing the magnitude of it. It is time to face the reality and be truthful to yourself of how much you owe.
Surprisingly, most people can only give a vague number when asked about their total debt. If you want to get rid of it fast, however, take a hard look. Memorize the number. Know your enemy. Only then can you put all your minds into paying off the debt. It is also an important step to build your payment plan and figure out how long it will take you to become debt-free.
2. Understand your Interest and Fees
Most people don’t think of the fact that their interest rate is compounding. If your debt is $1,000 and your interest rate is 20%, it doesn’t mean that you will pay $200 in interest every year. The rate is compounding. This means if you pay nothing in the first year, the interest on the second year will be $240. The next year it will be $288, and so on. On top of the growing interest payments, you may also be charged with other fees and penalty, such as late payments. This can add up very quickly.
To minimize your debt, the first step you need to take is to review all the interest and fees that you are being charged. Make sure to make minimum payments when you can to avoid penalty and fees. While you cannot reverse the compounding effect of the interest rate, you may be able to get a lower interest rate. Many credit card holders successfully negotiate a better interest rate just by calling their credit card provider.
3. Set a Smart Payment Plan, and Stick to it
If you want to get rid of your debt, you need to make payments, as much as you can. However, you can pay back in different ways, and choosing a smart payment strategy can very well save you thousands of dollars and even a couple of years.
To save on interest, for example, you will focus on paying off the debt with the highest interest rate first. This means you will make minimum payment on all the loan. Then put all the extra cash towards the loan with the highest rate. For example, if you have student loans and credit card debts, you may want to focus on the credit card debt first.
Another method is called the snowball method. In this method, you focus on the smaller loan first. For example, let’s say you have $3,000 in student loan, and another $10,000 in a car loan. With the snowball method, you would pay off the smaller student loan first. Once you get rid of this loan, you can use the extra cash you save and put towards the bigger loan.