Financial Fiddler

When you checked your mailbox today, did you see all of the enticing offers from credit card companies promising you low interest rates and awesome rewards?  Getting multiple credit cards and accumulating debt is easier than ever, but getting out of debt is a different story. It takes commitment, sacrifice and discipline.  Credit card debt is just one type of debt people are struggling to manage. We are going to look at the most common types of debt and ways to effectively reduce and eliminate it forever.

1. Credit Card Debt

According to the Federal Reserve, Americans owe around $5,700 in credit card debt.  ValuePenguin took it a step further and analyzed the Federal Reserve’s findings.  They determined that over 40% of American households carry debt and the average balance they carry each month is over $9,000.  Unfortunately, the bottom line is that with credit cards so easily accessible, many families and individuals are digging deeper and deeper into debt.

2. Student Loans

Student loan debt continues to rise year after year.  According to a recent report by the Federal Reserve, there are around 44 million borrowers who owe more than $1.5 trillion in student loans.  That is a lot of debt. With the rising costs of tuition, student loans can be expected to continue to rise.  Many classify student loan debt as “good” debt, but it can take an extremely long time to pay off.  

3. Medical Debt

Have you ever looked at a bill from the doctor or hospital?  The cost of medical treatments and care continue to rise. Even with health insurance, many procedures and tests are not covered 100%, meaning the patient or the patient’s legal guardian are required to pay for it.  Depending on the situation, these costs can add up fast and before you know it, you can owe thousands of dollars.

4. Auto Loans

The average person walking into a car dealership does not have the money to pay for the entire vehicle with cash.  They have to finance some or all of the vehicle depending on the size of their down payment. Typically, the average loan lasts between 24-84 months.  One tactic dealerships will use is to stretch a loan out as long as possible in order for their client to afford the monthly payment initially.  

5. Mortgages

According to Experian, Americans now owe more than $9.4 trillion in mortgage debt.  With housing prices continuing to rise, mortgage amounts will continue to rise as well.  For most, a mortgage will be the most amount of money you will ever borrow. The most common mortgages last 15 to 30 years and have a fixed or variable rate.  If you take out a $250,000 mortgage at 5% fixed interest for 30 years, you will pay more than $233,000 in just interest alone. Wow, even with the interest rate so low, you still end up paying in interest what you originally paid for the house!  

Ways to Reduce and Eliminate Debt

We’ve listed some of the most common types of debt and you may even have other kinds not listed.  Regardless of what kind of debt you have, debt is still debt and needs to be eliminated in order for you to achieve your goals and dreams.  Here are several ways to begin reducing and eliminating debt forever:  

1. List all your debts

This is probably one of the most important steps.  You need to know exactly what your current debt situation is in order to do something about it.  You will need to list every debt you have, great or small. You can physically write it down on paper or create a spreadsheet showing the following elements:

• Account Names.  This is important so that every creditor is accounted for and if you have any problems or questions, you know exactly who to contact.

• Current Balances.  You can find this on your monthly statements.  You want this number to be as accurate as possible.

• Minimum Payments.  This is the lowest amount that you are required to pay monthly.  This amount will vary depending on the type and size of your debt.

• Interest Rates.  This can be found on your statements and will vary based on the type and amount of debt.  You will see that some will be fixed while others could be variable.

• Due Dates.  This also varies depending on the creditor and type of debt.  Here, you will be able to accurately see when your payments are due every month in order to not incur late fees or charges which can hurt your credit in the long run.  Many creditors allow you to auto-pay so you don’t forget to pay, but it is still important to have this information.

2. Follow a budget 

Write down your monthly income after taxes and subtract out all of your monthly expenses.  If you have money left over at the end of the month, part of it could go towards helping to pay down your debt even faster, depending on your current financial situation.

3. Stop creating more debt

This is easier said than done.  It will take changing your mindset and focusing on your priorities, which hopefully include reducing and eliminating your debt.  One way is to see what got you in debt in the first place. You can review your previous credit card statements and ask yourself if you truly needed certain items.  Once you begin changing your habits, you can focus on not creating more debt.

4. Attack your debts with either the Snowball or Avalanche Methods

So you now have all your debts listed but don’t know where to begin.  The two big methods out there to help pay down debt faster are known as the “Snowball” or “Avalanche” methods.  Both have you pay the minimum payments except on one debt. They both are very effective and the main difference is the order in which you pay your debts.  It ultimately comes down to personal preference as to which method you choose.   

• Snowball Method.  With this method, you pay your debts starting with the smallest balance to the largest balance, regardless of the interest rates.  So for example, you pay all the minimum payments on all your debts and you take any extra money you have and apply it toward the smallest debt.  Once that is paid off, you take the money you were paying toward the smallest debt and apply it to the next smallest debt until all your debts are eliminated.  You, in essence, create a “snowball” effect.

• Avalanche Method.  With this method, you pay your debts from the highest interest rate to the lowest interest rate, regardless of the balance that you owe.  For example, you continue to pay all the minimum payments on your debts and you take any extra money and apply it toward the debt with the highest interest rate.  Once that is paid off, you take the money you were paying toward the highest interest rate debt and apply it to the next highest interest rate until all your debts are paid off.

5. Lower your interest rates 

So now that you have written down all your debts, you have begun to see the interest rates that you are being charged, which could shock you.  Did you know that credit card companies will sometimes lower your interest rates on your outstanding debt? But for the most part, you have to call and initiate it.  

Before you contact your creditor, be prepared and do your homework.  Always be polite to whomever you are talking with, especially in this circumstance when you are asking for a lower rate.  Depending on your situation, which will vary from person to person, they may be able to reduce your interest rate by a few points.  Even an interest rate that’s a few percentage points lower can make a big difference in the overall amount of interest you pay.

6. Look for ways to earn more money

You don’t have to get another full-time job, but you can look for some side gigs in order to help pay down your debt.  Consider even taking things you do not need or use anymore and selling them on Craigslist or eBay.  

7. Remember why you want to eliminate debt

There will definitely be times that you think you will never get out of debt.  It is a journey and not a sprint, so you will have ups and downs. Write down the reason why you want to eliminate debt and when times are tough, look at that reason.  Many times just having a “why” will help you overcome the challenge you are facing at that point and allow you to continue on fighting debt.

Summary

Getting and staying out of debt is definitely a commitment requiring hard work, sacrifice and a drive to succeed.  There will be times that you want to quit, but if you are willing to persevere, you will be much better off.  Staying consistent will be key to your success and I have faith that you can overcome debt.