How to Finally Pay Off Your Debt in 4 (OK, 5) Easy Debt Repayment Steps
Good debt is anything that can be considered an investment, such as a student loan, a home loan (both of which have tax deductable interest) and even business loans. You probably already know what bad debt is: credit cards.
Second, Face the Debt Head on but Know Who You Owe and How Much.
For example, you can owe money to two types of lenders: personal (family, friends) or institutional (banks). Make a list. Gather all your statements and starting with the highest rate first, create a table with the following columns:
- Balanced Owed
- Interest Rate
- Minimum Payment
- Single or Double Billing Cycle
Note that if you have any credit cards that calculate interest on two cycles, everything else being equal, you should transfer the balance to a single billing cycle card (see How Two-Cycle Billing Works).
Third, Confide & Commit
Confide in a friend about how much debt you owe. This is hard to do but it makes both the debt and the desire to reduce it more real by putting it all out there for both you and someone else to see.
To cement your commitment to reducing your debt, try signing up at a site like StickK:
StickK (the capital K is legal-writing shorthand for contract) was born of a simple behavioral economic principle: people are more likely to achieve their goals if they stake their reputations — or their bank accounts — on success. To use the site, the resolute enter their goals, put money on the line (entering credit card information up front, though it’s charged only upon failure) and designate where the money will go if they don’t succeed. A user might select a favorite charity or — for perverse added incentive — a charity they would never support. They then pick a person to be a referee (to verify that they actually shed those five pounds) and choose others as virtual cheerleaders (NYTimes: I Resolve. World, Don’t Fail Me Now).
Forth, Consolidate Your Debt – but first!!!!!!
Debt consolidation is a great way to reduce your monthly payments and lower your overall debt burden — but don’t try it yet! (Note we’ll link to “Debt Consolidation Help Ends Debt Permanently if Done the Right Way” after it’s published). First, try going 2 or 3 paychecks without using your credit card. See if you can spend LESS than what you make (minus bills, savings and other expenses). If you can go 2 or 3 pay periods w/out going into more debt, then debt consolidation will work for you and it is a great next step.
An easier and faster option may be to simply call up your creditors and ask for a lower rate. However, rather than beg, first find a credit card with a lower rate. Write down the rate and then call your current credit card company and say something like, ‘hey, I’m trying to lower my monthly payment rate and I found this other card I can get that will give me a lower interest rate than you, but before switching cards, I thought I’d call to see if you could match this rate.’ One of three things will happen: either they’ll say yes, no, or they’ll offer you a lower rate but not as low as this other card. If they say yes or offer you a lower rate but not as low as the other card, obviously take it, and see if you can qualify for the new card and rate anyway – but DON’T use it for new charges. Instead transfer higher interest balances to the new card.
WARNING: If you are able to switch to a lower interest rate card, make sure it’s not a special introductory rate that will automatically jump to a new much higher rate later on. As always, read the fine print and call and ask questions.
Finally, consider one of the newer ways to consolidate your debts such as a personal peer-to-peer loan. These typically will have some of the lowest rates around.
One Final Thing
Whether you can consolidate or not or whether you can switch to a lower card or not, no matter what, pay more than the minimum. Paying more than the minimum will save you more than you probably realize. To see the difference between paying just the minimum and paying more, play around with this surprisingly simple and easy credit card repayment calculator from the Board of Governors of the Federal Reserve. For example the difference between paying a minimum payment of $200/mo. and $225/mo. on a $10,000 15% APR credit card balance is saving over $1000 in interest and getting out of debt a year earlier!
These are only the beginning overall steps. Getting out of debt, especially serious debt, will take time and daily deliberate re-commitment: everyday – decide: I will not go more into debt. And there are many sites out there, most free, with great resources and tools. Here’s a couple to check out: