One of the most important things you can do when it comes to getting rid of your debt is knowing exactly how much you owe. “About half of the people I meet find great relief in knowing the large number, but the other half tell me it’s too overwhelming and best to start with small steps,” says Manisha Thakor, co -author of On my own two feet and Director of Wealth Strategies for Women at Buckingham Wealth Management Company. Whatever your approach, here’s how to get started.
Total your minimum monthly payments. That’s how much you are obligatory payable monthly. Skipping a single payment can make your situation worse. “You could trigger late payment and penalty interest rates and that will hurt your credit score. There is a series of negative consequences if required payments are not paid,” Thakor said. You could also face higher rates on everything from future debt to insurance premiums.
Indicate the total amount of unpaid debts. Get a complete picture of everything you owe by noting the current balances you have on credit cards, car loans, student loans, mortgages, and other debt. Make three columns, noting: (1) the total amount of each debt; (2) the minimum monthly payment on each; and (3) the interest rate for each. “That way nothing is hidden. Even this small step in listing is going to make you feel like you are in control of the situation,” Thakor says.
Sort the interest rates from highest to lowest. Continue to pay the minimum monthly payments on all outstanding debts. At the same time, funnel any extra money (that won’t go towards rent or living expenses) into the debt with the highest interest rate.
You might not want to hear this, but in terms of balancing loan repayment and saving for the future, the best course of action is a combination of the two. It can be manageable if you follow this four step plan from Michelle Perry Higgins, author of Poor College No More and financial planner and director at California Financial Advisors.
Step 1: First, the transition to a life based on money. “When people get used to living with credit cards, there’s this endless supply of cash,” Higgins says, “but when your money is gone, your money is gone.”
2nd step: While you are doing this, make sure you are paying the minimum on everything, plus extra on your high interest debt (usually credit cards or payday loans). Thakor recommends $ 50 more for every $ 5,000 in debt, but more is always better.
Step 3: Once you’ve limited your spending, start contributing to your retirement fund if your employer offers a company match. “We’re finding that a lot of companies will match around 3 percent. If you don’t contribute up to that limit, you’re essentially giving away a 3 percent bonus each year,” Higgins said.
Step 4: Then focus on an emergency fund. Cash will keep you from getting into debt in the future. Three common scenarios that lead to debt are inevitable disasters (such as a house fire), frivolous spending, and lack of emergency funds, for unexpected circumstances, such as a flat tire, a hospital visit or a crash. dishwasher repair, says Thakor. Strive to set aside $ 2,000 in emergency funds, says Thakor, according to a Consumer Federation of America study, that’s the average amount of unforeseen expenses in any given year.
“Generally speaking, 700 to 750 and up is good and 500 and under is awful. Between 500 and 700 you really want to work hard to take it up a notch,” Thakor said. At the end of the day, the debt advice is the same for the person with a credit score of 500 as it is for the person with a score of 750. “If someone who is 5’4” and 160 pounds and someone who is 5’4 ” and 220 lbs wants some fitness advice, I would need him to go through the same steps to get in shape. If your credit score isn’t in shape, the job may be harder at a worse figure, but it’s still the same job. ”
Typically, you’ll start to see improvement after a full year of one-time payments and a declining principal balance, Higgins says.
If an invoice has gone to collection, make sure you pay the full amount and make sure it’s noted on your credit report as paid, Thakor says. To do this, call one of the three credit bureaus to make sure the debt is no longer overdue on your credit report. This will trigger an automatic modification of the other two reports. If you almost always pay the bill on time, don’t be afraid to call the credit card company and ask them to waive the free delay and request that your APR stay the same, Higgins says. In most cases, the company will accept that you made a mistake, waive the charges, and reset your interest rate.