March 13, 2013
By Quincy Enoch, Assoc. Dir. of Legislative Affairs & Military Liaison, National Association of Federal Credit Unions
Unfortunately, too many consumers have found out the hard way that paying off high interest debt can be a daunting task. Sometimes the sheer amount of debt along with the interest can be overwhelming. Since consumers in debt typically got that way through a series of bad decisions and poor financial management, it is not always easy to make the choices and take the actions to get out of debt.
With this in mind, I spoke with consumers that have dealt with debt, executives of financial institutions and financial counselors to come up with some tips to help you get started. They all were able to give me various tips. I have included those I see as most important, but the first tip on the list is one that I not only received from everyone I talked to but was also first on all their lists.
1. Seek financial counseling. The key to getting out of debt and staying out of debt is managing your finances appropriately. Many consumers explained to me that while they were able to dig themselves out of debt, if they didn't understand how to properly manage their finances they eventual found themselves back in debt. Speaking with a financial counselor will help you gain complete control of your financial situation. This will assist you in maintaining a stronger financial future even after you have paid off your debt.
2. Stop increasing your debt. Obviously, it is going to be twice as hard to pay down debt if you are still adding to it. You should stop spending on credit cards immediately, and refrain from taking on any additional unnecessary debt.
3. Renegotiate terms with your creditors. You should contact your creditors and explain your situation. They may work out a settlement or lower your interest rate. It doesn't always work, but it's guaranteed not to if you don't make any attempt.
4. Transfer your debt to the lowest interest rate possible. Take a look at all your credit cards. Find the one with the lowest interest rate. If it's not at the limit, consider transferring higher interest debt to that credit card.
5. Figure out your debt paydown fund amount. Develop a spending budget, and identify areas where you might be able to cut back. No one is suggesting that you come up with a budget that is unlivable, but you can use the money saved from trimming off your budget to pay down high cost debt.
6. Start paying it off. To save money and pay down debt faster, it’s good practice to pay the minimum on all debt except the debt with the highest interest rate. Concentrate on paying down the highest interest debt first because that debt is costing you the most.
7. Tap into savings. It is always a good practice to have emergency savings, but every dollar you have in savings beyond that is another dollar's worth of interest you will continue to pay. You should evaluate your financial situation and determine exactly how much savings you need.
8. Pay more than the minimum. Whenever paying off debt you should always pay more than the minimum. Typically, paying just the minimum amount means only a small portion of the payment will actually go to the debt. Most of the payment is interest charges. Paying even a small amount over the minimum could significantly reduce both the time it will take to pay off the debt and the total amount you will have to pay.
9. Don't give up. It's not likely that you got into debt in one day, and you won't get out of debt in one day. Taking ownership of your financial situation and learning how to manage your finances can be very empowering and relieve a great deal of stress.
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