This article was last updated on April 16, 2022
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We love an occasional shopping spree…maybe a little too much, judging by the size of our last Visa bill. While spending like a high roller can be fun, actually being in debt is anything but. And, if you’re like most people, you owe — big time. According to the Census Bureau, the median American household debt is a whopping $70,000. (Approximately $15,000 of that is from credit cards.)
Okay, that’s a lot of dough, but before we go any further, it’s important to discern “good” debt from “bad.” Typically, good debt includes school loans and mortgages, since both of those can be considered investments that can pay off in the future. Bad debt involves assets that go down in value. In other words, if you owe 25 grand, it’s better to have a Ph.D than a flashy car to show for it.
Whether your debt is good or bad, digging your way out is a smart and noble financial goal. That’s why we’ve tapped former Wall Street guru Kelly P. Hernandez to reveal the debt-busting strategies that actually work, whether you owe $100, $1,000, $10,000, or more. The founder and CEO ofFinancechic.com, an independent personal finance site for women, Hernandez offers a life raft for those of us sinking in debt. Get ready to kick your bills to the curb — you may never stress about debt again.
Face The Facts
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.
Prioritize Your Payback
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.
Go Beyond The Minimum
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 the Federal 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 theNational 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.
Stay Out Of Debt
Once you’ve put in the hard work of eliminating your debt, the harder part for many may be tostay out of debt. There is no magic cure for this, unfortunately; the only way is to live within your means. Easier said than done, but youcan do it.
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 can be a money badass, no matter your financial past.
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