How to Manage Debt to Become Debt-Free
Working to eliminate debt on your own? Use these tips to manage the debt you have and avoid adding new debt that only sets you back.
The following tips can help you learn how to manage debt effectively if you have multiple balances that you need to pay off. If you run into trouble or can’t develop an effective, plan for managing debt yourself, then it may be time to get professional help. A debt management program is a professionally assisted repayment plan that can help you get out of debt when you can’t do it on your own. So, try these tips to manage debt, but if you still can’t make any headway, call us at 1-888-269-2040 for a free debt and budget evaluation to see if we can help.
Tip No. 1: Always pay on time – never juggle bills
In order to maintain your credit score, you must meet the minimum payment requirements on all your debts every month. Missing any payment will result in penalties that only add to what you owe. If you miss a payment by more than 60 days, it will create a negative item on your credit report. Credit history is the single biggest factor used to calculate your credit score. So, one late payment can have a significant impact, in some cases decreasing your score by 100 points or more.
This means that the foundation of any plan to manage debt must be to meet your payment requirements every month. If you can’t find a way to do that on your own, you must seek help immediately. Don’t procrastinate and let your debt ruin your credit.
Tip No. 2: Talk to your creditors to negotiate lower rates
The first step you should take to make it easier to manage your debt is to reduce the interest rates applied to it as much as possible. This minimizes the cost of getting out of debt and makes it easier to get to zero faster; you can focus on the principal (that’s the actual debt you owe). That means calling your creditors to negotiate a lower interest rate on each of your accounts.
Tip No. 3: Focus on one debt at a time
If you don’t want to use special repayment options, you need to implement a strategic debt reduction plan. This means focusing as much cash as possible to paying off one credit card debt at a time. You generally want to focus on the debt with the highest APR first.
Watch this video to learn more about debt reduction strategies:
Take Down Credit Card Debt
This video explains two proven methods to take down credit card debt. Consolidated’s Credit Ninja shows you how to take down debt using the tiger style of debt elimination, where you attack your highest APR debts first to strike quickly and save money. If you don’t have the monetary power to use that method, consider crane style where you peck away at your lowest balances, gaining the strength to take out your biggest, baddest debts.
[On-screen text] Take Down Credit Card Debt: The Right Way to Fight High Balance Credit Card Debt
Narrator: Credit card debt can be one of the toughest enemies you face as you fight to protect your financial realm. Armored heavily with high interest rates, regular minimum payments often barely make a dent in these debts.
[On-screen text] There are 2 basic strategies to reduce debt effectively. The style you choose depends on your situation.
Narrator: Luckily there are two strategies you can use to fight back effectively. Which method you choose really depends on your situation.
[On-screen text] But first… you must know your enemy
Narrator: But first, you must know your enemy to craft an effective strategy to win the war.
[On-screen text] Average credit card debt per U.S. adult = $5,596; cards that have a balance month-to-month = $7,743; average no. of card per cardholder = 3.7
Narrator: Average credit card debt in the United States is over $5,500, and is even more when you focus only on those who carry balances over every month. And while the average number of cards is less than four, that number often grows to five to ten for those fighting against debt problems.
[On-screen text Fighting style no. 1: Tiger Style. For those with the power to take big bites out of debt every month. Debts to target: Highest interest rate first
Narrator: Now fight: Tiger Style!
[On-screen text] How it works
Narrator: Here’s how you make this strategy work.
[On-screen text] Maximize your fighting power: Streamline your budget, cutting unnecessary expenses and boosting cash flow
Narrator: First streamline your budget by cutting out expenses that you don’t absolutely need and this will maximize your power.
[On-screen text] Hold off smaller enemies: Maintain the minimum payments on all of your debts except one
Narrator: Hold off on smaller enemies by making standard minimum payments, then focus all of that power to deliver powerful blows to the next debt with the highest APR.
[On-screen text] Take down biggest threat first: Make the largest payment possible on the debt with the highest interest rate
Narrator: This style uses your credit power to take out your biggest enemies in debt first so you target your debts in order of the highest interest rate.
[On-screen text] Move on to the next biggest threat: Once the first debt is done, roll your cash over to the next highest APR debt
Narrator: Once that first big boss is down, move on to the second and focus the bulk of your power to defeating it next.
[On-screen text] Start clearing the field: As you work your way down, you’ll have more cash power to eliminate debt even faster – you gain more power as you go!
Narrator: As you work your way down, taking out each opponent with the highest APR, you’ll begin to clear the field and gain power as you go.
[On-screen text] Eliminate multiple enemies at once, when possible: Once the first debt is done, roll your cash over to the next highest APR debt
Narrator: By the time you get to your smallest enemies, you should have enough power to cut down several enemies at once until all debts are eliminated!
[On-screen text] Are you a tiger? You need power to be a tiger – if you don’t have a large volume of cash available in your budget, you won’t have the power necessary to take bites out of your biggest debt threats.
Narrator: Tiger style is best used by fighters with the financial power already available. So, if you don’t have much cash on hand, you may not have the power needed to take out those big enemies quickly. In which case…
[On-screen text] Fighting Style No. 2: Crane Style. Peck away at your smallest debts first to gain the momentum you need to win. Debts to target: lowest balance first
Narrator: Crane Style may be your best method.
[On-screen text] Find any available seed money to feed your fight
Narrator: Scour your budget for any little bit of cash you can use to eliminate debt and make minimum payments to keep your biggest enemies at bay.
[On-screen text] Keep combatants on the field: Keep up with minimum payments on all of your debts
Narrator: Target debts with low balances first because they’re easy to wipe out. Here’s how this strategy really works.
[On-screen text] Start by pecking away at your smallest debt: Devote all of your extra cash to make the biggest payment possible on your lowest balance
Narrator: This method pecks away at smaller enemies first so you can gain power as you start to clear the field.
[On-screen text] Each debt eliminated boosts your energy: Every time you pay off a debt, you eliminate that bill so there’s more cash to face bigger enemies
Narrator: Next devote your focus to taking down the debt with the lowest balance. You’ll gain monetary power each time you cut down a debt because there will be one less debt to eliminate.
[On-screen text] Work your way up to the biggest baddies: Once you’ve cleared out all of the small debts, roll those savings into the cash you’re using so you can take out the biggest threats.
Narrator: By the time you get to your biggest balances, you’ll have the power you’ll need to take them down!
[On-screen text] Are you a crane? If the debts that have the highest interest rates are also the ones with the biggest balances and you don’t have a lot of cash, then it makes sense to start at the bottom and work your way up.
Narrator: Crane style is best suited for debt fighters with limited cash flow who need to gain momentum as they battle.
[On-screen text] Consolidated Credit. When debt is the problem, we are the soluti8on. Call 800-210-3481, www.consolidatedcredit.org
Narrator: And remember, if you’re having trouble winning your battle, Consolidated Credit is here with reinforcements that can help you win!
Run some numbers to see how long it will take to get out of debt. You can use a debt calculator to compare minimum payments to making larger fixed payments.
If you see it will take longer than 36 payments to become debt-free, you may want to consider some special repayment options. These relief options can make it easier and more cost-effective to repay what you owe.
Tip No. 4: Consider, but don’t abuse balance transfers
If negotiation doesn’t get the rate results you want with your accounts, you may want to consider a debt transfer. This is where you open a new credit card specialized for balance transfers. It allows you to transfer existing balances for a nominal fee. The benefit is that these cards offer introductory periods of 0% APR, where you can pay off debt interest-free.
The length of the introductory period varies based on your credit score, usually from 6-18 months. The goal is to eliminate all the debt you transfer, plus the fees, before the end of the introductory period. Calculate carefully to transfer an amount of debt you can reasonably expect to pay off before the introductory period ends.
If you do a balance transfer for only a portion of your debt, make this card the first one that you focus on eliminating. It will save you money since the payments are completely interest-free.
Tip No. 5: Cut back on discretionary expenses
Debt reduction and balance transfer payoffs are more effective with more cash. So, the more you can cut back on other expenses, the more cash flow you have to get out of debt. Here are a few tips for cutting back:
- Minimize streaming entertainment accounts (movies, TV, music, gaming)
- Cancel or suspend services that you can do yourself (landscaping, pool care, house cleaning)
- Reduce the number of times you dine out and take your lunch to work
- Cancel your gym membership and work out at home
Always keep in mind that cutting back as much as possible accelerates your debt management plan. However, don’t do the financial equivalent of a crash diet; it can lead to spending splurges. Always aim to make a plan that you can maintain.
Tip No. 6: Don’t neglect your savings
One thing that you shouldn’t cut out to eliminate debt is savings. You should always make an effort to save; think of it like a bill that you owe yourself. Ideally, you want to save about 5-10% of your take-home income per month. However, you should at least be saving something each month. Otherwise, living paycheck-to-paycheck puts you one emergency or unexpected expense away from more debt.
You need to have savings and contribute to savings in order to cover unplanned expenses in emergencies. This means that you should not cut savings out to pay off debt. You shouldn’t have to spend every penny to get out of debt effectively; if you have to, it means you need another solution.
Tip No. 7: Increase payments as you free up cash flow
Each time you eliminate a credit card debt, you eliminate that bill. That gives you more cash to pay off the next debt. Although you can use the freed-up cash to reinstate discretionary expenses or relax your need to budget, it’s better to roll it into paying off your debts.
Stay committed to repaying your debts and knocking out your balances.
Tip No. 8: Compare debt consolidation loan repayment
Besides balance transfers, you can use a debt consolidation loan to consolidate debt. This is a low interest rate personal loan that you use to pay off your credit cards. You zero out all your credit card balances, leaving only the loan to repay.
With good credit, you can qualify for a low interest rate around 5% – you at least want a rate under 10%. Go online to check current loan rates, then compare the estimated cost to other options. Even with the loan, go for the highest payments you can afford to pay off your debt as quickly as possible.
When you compare options as you construct a debt management plan, focus on two factors:
- Time to payoff
- Total cost (including interest charges and fees)
This takes some calculation, but it’s essential to get the most cost-efficient and timely repayment plan possible.
Tip No. 9: Stop charging until you pay back what you owe
The last thing you need is more debt to repay while you’re in the process of paying it off. That means that you must commit to stop charging while you focus on managing debt. You don’t have to swear off credit cards forever, but you at least need to get back to zero first. It’s the only way to get back to the point where you can use credit interest-free.
Even if you use balance transfers or consolidation loans, resist the urge to charge until you pay the debt off. Otherwise, you run the risk of running up new balances and making your debt problem worse instead of better. Your goal was to reach zero so you can regain stability, not to fall back even further into debt.
Tip No. 10: Deal with the service provider for medical bills
Besides credit card debt, you may have unpaid medical bills to repay, too. Medical collections are big business and a big cause of credit damage for millions of Americans. So, you need to incorporate medical debt repayment into any plan to manage debt.
Here are some tips for dealing with medical debt:
- Review the original bill carefully to ensure there aren’t any mistakes or charges for services you didn’t receive
- Always try to deal directly with the original service provider to see if you can work out a repayment or settlement plan
Tip No. 11: Never turn to alternative financing solutions (AFS)
Alternative finance solutions refer to any nontraditional lending source; it’s basically any no-credit-check loans, like payday loans. These financing options offer instant approval with no underwriting, so you can get approved even if you already have more debt than you can handle. The problem is that the finance charges are high – usually $30 for every $100 financed. In addition, the interest rates can get extremely high, as in above 300%.
Although you may be tempted to use AFS if you can’t get other financing, don’t do it! Payday loans and other AFS options only make a bad situation with debt worse. They can seem like a good idea to fill a cash need quickly. However, when you’re already struggling to make ends meet, there’s little chance you’ll pay the loan back before those notoriously high finance charges and interest rates kick in.
Tip No. 12: Avoid actions that leave you worse off
What you don’t want to do while working to manage debt is to take steps that put you in a weaker financial position than when you started. There are several ways you can pay off credit card debt that hurt your overall financial outlook.
- Don’t dip into your 401(k) or another retirement account. If you have a 401(k) through your employer or an IRA privately, don’t tap it to pay off your credit card debt. That money needs to stay put to grow so you have financial stability later in life. Using your funds now leads to early withdrawal penalties. And even if you put the money back after you recover, you lost that time for growth. It’s usually not worth the debt elimination benefit for the savings you lose.
- Don’t covert unsecured debt to secured debt with a home equity loan. A home equity loan allows you to borrow against the equity built up in your home; that’s the property value minus the remaining balance on your mortgage. Some people use this option because it’s easier to get a low interest rate with a weaker credit score. However, that’s because it uses your home as collateral. If you start to miss the payments on this loan, the bank can foreclose and take your house. It’s just not worth the added risk.
Tip No. 13: Be prompt in admitting a solution isn’t working
If you try something and you see that it’s not working, don’t wait to try something else. Remember, the longer you procrastinate and delay paying what you owe, the more money you waste on interest charges and the deeper you go into debt. Time is not on your side when you have debt to pay.
If you try and debt solution and it doesn’t provide the benefits you need, don’t wait try something else. If a balance transfer introductory period is about to end and you still have a balance, look at consolidation loans. By the same token, if you can’t keep up with loan payments, don’t wait for default to seek help.
Tip No. 14: Don’t let emotion keep you from asking for help
For the most part, people usually prefer to solve debt problems on their own. However, that’s not always easily done. In many cases, reaching out for professional assistance is faster, easier and more cost effective than solving debt problems on your own. So, if you exhaust all the tips above and you still can’t find an effective way to pay back what you owe, ask for help.
Don’t let pride, feelings of embarrassment at your situation, or mistrust of outsider prevent you from getting the help you need. Just make sure that the company you work with is reputable, well-rate, with a proven record of help.
One of the most effective solutions people use if they can’t solve debt problems on their own is consumer credit counseling.
What is Credit Counseling?
Nonprofit consumer credit counseling helps people find better ways of eliminating debt. Learn how the process works so you can see if it’s worth it to reach out for help
Credit counseling doesn’t have to be so confusing. Here’s a super-easy 60-second explanation of how credit counseling works.
If you’re facing financial distress because of debt, you have a few options when it comes to finding relief. Credit counseling helps you zero in on the right option to use in your situation. That way, you can rest easy knowing your debt solution is actually going to work.
You start the process with a free debt evaluation to see where you stand. A certified credit counselor looks at your debts, budget and credit score to help you decide which solution will work for you.
If a debt management program ends up being your best option, then your credit counselor can also help you enroll in the program. They can tell you how much you’ll pay on the program and how long it should take versus what it would typically take on your own.
So if you’re struggling to get ahead of your debt, we can help! Call Consolidated Credit today for a free debt evaluation with a certified credit counselor. Together, we can find the best solution so you can finally beat your problems with debt.
Tip No. 15: Make sure to check your credit once you’re done
No matter what your plan to manage debt looks like once you have it crafted, always check your credit once it’s done. Financial distress is usually not easy on your credit score, but getting out of debt is. That means that you need to check your credit report once you finish to make sure it reflects your new debt-free status.
- Check to make sure all account statuses are paid and current
- Make sure any missed payments were actually missed
- Review collection accounts to see that they were either removed or listed as paid; also check to make sure you didn’t miss anything that slipped into collections.
Basically, you’re looking for mistakes and errors that could still hurt your credit score. If you find any, dispute them to have them removed. Then, start rebuilding your credit if the period of hardship led to any damage.