Eliminating your debt is one of the best things you can do to experience financial security and build wealth. It’s a lot said than done though. Just because it can be challenging to get out of debt, doesn't mean that you can't do it. Follow the steps listed below to help you get started on the right track.
- Get to know your debt.
When your stress level is already high and the bills just keep coming, it can be tempting to simply ignore your debt. If you have been in denial about exactly how much you owe, the first thing you need to do is face your debt head on and fully understand your financial situation. That means making a list of all the debts you owe and getting a copy of your credit report. CreditKarma.com and AnnualCreditReport.com are two sites that offer credit reports at no-cost.
- Report any errors on your credit report.
Once you receive your credit report, review it and make sure that it is accurate. Agencies can make mistakes and simple clerical errors can end up costing you.
- Find out if you can lower your interest rates.
You might be surprised to learn that lenders can be quite willing to renegotiate interest rates and set up a more favorable payment plan. For example, if you have an auto loan and have been regularly making payments for at least a year, you may be able to refinance your loan and get a lower interest rate. Credit card companies will also lower interest rates for loyal customers with a solid payment record. While you might not get the results you want every time, a simple phone call could save you a lot of money.
4a. Pay off your highest interest debt first.
A lot of people don't know where to start when it comes to choosing which debt to pay off first, but the answer is simple and it all comes down to the numbers. If you have $1,000 debt that comes with an 18% interest rate, you will save the most money by paying off that debt as opposed to a $2,000 debt with a 4% interest rate.
4b. Or pay off smaller debts before tackling large amounts.
Paying off smaller debts will not only begin to repair your credit score, it will also help you build confidence and keep you feeling motivated. A sense of accomplishment can make you feel better positioned to tackle larger debts that may feel intimidating.
- Negotiate debts in collection.
Taking the time to call collection agencies about debt can reduce the amount you owe. It is one way to start the journey to get out of debt, without having to pay the original amount owed. However, there are a couple of facts to keep in mind before you make that phone call:
- Collection debts will be on your record for seven years.
- Once you call about a debt, the clock restarts, essentially adding another seven years to the length of time the debt will appear on your credit report.
With that in mind, only call about debts that you are prepared to pay off immediately, otherwise you will extend the time you owe.
It will be a lot harder to get out of debt than it was to get into debt, but your efforts will be met with big rewards. You can lower your stress levels, begin to save, invest money, and create the financial future you always wanted.