Even with the best intentions to live debt-free somehow we create debt. In fact, the average household owes more than $6,000 to credit card companies. With holiday spending and New Year’s resolutions fresh in our mind, January is a good month to get serious about paying down your debt. Here are 7 things you should keep in mind as you tackle debt.
1. Take financial inventory.
In order to pay off your debt, you’re going to need some extra cash and one simple way is to look for wiggle room in your budget. Calculate the difference between your monthly income and your monthly fixed spending. This includes things like mortgage payments, insurance premiums and other bills, which you have little control over. How much is left each month?
2. Create a budget.
Now that you know how much of your income is available each month, it’s time to budget. Figure out how you can cut back on your variable spending, the things you do have control over. Groceries are a great place to start. By planning your menu around what is on sale and using coupons, you cut your grocery bill up to 40%. If you are driving to work and paying for parking, cut that bill by up to 50% by commuting. Some states will even allow a tax benefit for commuters.
3. No matter what, pay bills on time.
If the minimum balance is truly all you can handle, then at the very least, keep paying that! One of the worst things you can do to your credit score is pay your bills late. The largest chunk of your FICO score is based on payment history (35%), which means lenders want to know, did you pay on time?
4. Pay more than the minimum balance.
However, not close behind in credit score important is amounts owed (30%) and if you just pay the minimum balance you’ll never be able to dig out of your debt hole. Decide which account you want to pay off first and start paying more than the minimum balance, even if it’s just 5%, it’s a start.
5. Pay the highest interest rate off first (probably).
Okay, so now you’re paying all your bills on time, but which account do you pick to pay off first? The account with the highest interest rate is doing the most damage, so most people start there. Some experts recommend paying off your debts smallest to largest. This is more of a mental strategy. The theory is you will feel a sense of accomplishment and less overwhelmed when you see those debts knocked down one-by-one. That in turn will motivate you to keep going down your debt reduction pathway.
6. Use your rewards points wisely.
Rewards cards often carry a higher interest rate, so unless you can pay off your balance in full each month, your rewards may be negated by interest. If you’re in debt, do not use credit simply because you want to earn a reward. One thing you can do is cash out of a rewards program and put your rewards cash towards your debt.
7. Negotiate with your creditors.
You could go with a debt settlement company, but it’s not guaranteed to work, and if it does, then you may have more fees to pay. Try negotiating directly with your creditors. The key is working out a repayment plan before it is sent to collection. Keep records of all your correspondence and get everything in writing. Bottom line: if you have trouble paying your bills, don’t go MIA, keep the lines of communication open with creditors and they may be willing to work with you.