There was good news this week—more than half of American consumers have credit scores above 700. A good credit score like this will save you money when you apply for financing. However, at the same time, the number of consumers carrying debt is rising. Meaning that consumers are not improving their overall financial health.
How do you Get Rid of Debt?
Good Debt vs. Bad Debt
Student loans and mortgages are considered good debt because they are an investment in you. If you keep up with the payments and pay on time, your credit will not be harmed by these debts alone.
But there is debt that is not good, such as credit card debt, auto loans, and payday loans.
Those loans you get from retailers, such as furniture and appliance stores can be bad debt too. Especially the ones that allow you to buy everything you want today and pay next year. If you are not careful to save money during the “free period” you could find yourself facing a very high-interest rate bill that you cannot afford. Another danger of this kind of financing is that it encourages impulse buying. You think, “I have until next year to pay it.” And then you forget about it. By the way, retailer financing such as this is considered a loan, and it does appear on your credit report.
Consumers’ Financial Lives are not Healthier
The improved credit scores are not translating into healthier financial lives. Many consumers are struggling to make ends meet, living paycheck to paycheck, because of their cumulative debt payments. Add to this your monthly bills, and it makes for constant financial headaches.
The only way out is to reduce your debt load.
But, how do you do that?
Tips to Help You Get Rid of Debt
The Dave Ramsey “Debt Snowball Method.”
- List your debts from smallest to largest. Forget about the interest rates for now.
- Take on the smallest debt first and throw all your energy into wiping it out. In the meantime, you make the minimum payments on all your other debts.
- Once you have knocked out that debt, move on to the next one.
- Depending on your total debt load, this method could take you several months or several years. Of course, a lot depends on you. If you commit yourself to the plan, with grit and determination, you can accelerate the schedule.
This is a twist on the above method. Instead of beginning with the smallest debt first, you tackle the debt with the highest interest rate first. High-interest rates lengthen the life of the loan. Therefore, getting rid of high-interest rate debt could get you out of debt more quickly. As with the snowball method, once you have paid off the highest interest rate debt, move to the second-highest and so forth until all your debt is paid. The advantage of the snowball method is that you are rewarded with a sense of accomplishment much sooner. Paying off a loan or other debt gives you the incentive to continue.
This is a strategy you can use with either the debt avalanche or debt snowball method. Whenever you have extra money, you put it toward your debt. Paying yourself first is the best medicine you can take for financial health.
Balance Transfer Credit Card
If you have a lot of credit card debt and are struggling to make the minimum payments each month, try to consolidate that debt onto a single credit card with a 0% APR. Most balance transfer credit cards offer a period of 12 to 21 months during which time you don’t pay interest.
BUT this only works if you commit to paying off the debt you have transferred within the introductory period. And in the meantime, don’t charge anything new.
Debt Consolidation Loan
A debt consolidation loan is another way to get a handle on multiple debt accounts. The interest rate may not be so favorable. You need to do your research before applying. But, the advantage of a debt consolidation loan is that you only have one payment to make. And, if you make the payments on time, it can be a way to improve your credit score.
Getting Rid of Debt and Improving Your Financial Health
Funnel More Money to Debt Reduction
There’s no magic pill for getting out of debt, especially if you have a lot of it. Managing your money will provide you with more resources to put toward your debt reduction goals.
Budget and Track Your Money
You will never be able to manage your money if you don’t create a budget and stick to it. And the only way to create a realistic budget is to know where your money is going. Once you have a true picture of your income and expenses, you can begin to funnel more money toward debt reduction.
Pare Down Your Lifestyle
- Shop at consignment and second-hand stores.
- Cancel your cable service.
- Buy a coffee maker and make your favorite coffee drinks at home.
- Learn how to cook and eat in. Pack your lunch.
- Carefully plan your trips to the grocery store. Take a list and stick to it.
- Increase Your Income.
- Find a side gig or a part-time job.
- Ask for a raise.
Our blog is filled with tips on how to create budgets, track your spending, increase your income and savings, and other ways to improve your financial health. Check them out. Let us know what you think in the comment box below.