Ignoring debt won’t make it disappear. Interest rates are compounding at the rate of 20% per month, every month. Wishing won’t make it go away, but you can start to make a dent in it by following one or more of the steps given here. Read a little further to find out more.
Pay more than the minimum, always! Usually the minimum is two or three percent of the balance, and only paying enough to get by is what the banks want. The longer you take to pay a debt, the more interest they squeeze out of you. The best thing to do is to pay as much as you can afford, and if that amount is twice the minimum, then that’s great. Paying more than the minimum might require a little sacrifice, but it will be worth it in the end.
When you’re examining all your credit cards, look at the one with the lowest rate. If you haven’t maxed it out, consider transferring a high-interest balance to that card. If the balance is too big to fit on one card, try to pay the minimum on all your cards but one. Concentrate on paying THAT one off, then work your way on to the next one. This way is sometimes called “snowballing”.
Take advantage of some of those offers that you get in the mail. Banks want you to accept their line of credit, often enticing you with a low teaser rate. Saving all that interest can mean more money in your pocket. Be careful, though, and read the fine print. Sometimes the interest rate can go up sharply, forcing you to do another balance transfer. Banks are starting to get wise to those who hop from card to card. Some are imposing harsh stipulations on balance transfers within the first twelve months, making it harder for some to pay large debts.
- You might also consider liquidating your savings, and using them to pay down your debt. If interest is twelve percent, then your investments would have to be at least eighteen percent to balance everything out. Pay your debt, and it’s like getting that 18% without any risk. The higher your debt’s interest rate is, the more sense that savings liquidation makes.
- If you have a life insurance policy, think about borrowing against it. The interest is usually lower than normal, and you can defer repayment. If you should die before it’s repaid, the loan amount will be deducted from the benefits your heirs get. This will get you out of debt now, but it could unduly burden your loved ones.
- Maybe a friend or family member could loan you some money. Unless you’ve burnt all your bridges, you should be able to get a loan with low or no interest. Make sure you pay them back, and always get it in writing.
- If you own a home, you could get a home equity line of credit. Using that money to pay debt can substantially lower your interest, and that interest could be tax deductible. But, beware. Many get a HELOC, pay off their debts, and then start charging up a storm again.
You could also dip into your 401k. Most allow you to borrow up to 50%, or $50,000, whichever is less. Interest is usually just above prime rate, and when you repay it, that money goes right back into your 401k. It’s not without its drawbacks though. The loan and interest are repaid with after-tax money, but the interest is taxed again when you finally start using your 401k. If you leave your job before you pay it back, you must immediately repay it.
You can always try to negotiate with your creditors. Let them know what’s going on, and tell them if they cannot work with you that you’ll have to declare bankruptcy, which will end their chance of ever getting anything back. Ask them for a reduced payment, or a lower rate. Most will work with a debtor to ensure that they get at least something repaid.
Filing bankruptcy is a viable option but it should be a last resort. Only if you cannot pay the debt under ordinary means should you file. There are times when people simply cannot repay their debts, and there’s no other choice. Bankruptcies stay on a credit record for ten years, making it hard to obtain credit at all. It costs money to file for bankruptcy, in the form of court and lawyer fees. There are two types of bankruptcy, chapter 7 and chapter 13. Chapter 7 basically discharges almost all debts, and chapter 13 forces the handover of financial control to the bankruptcy court. They will form a repayment plan that will span a three to five-year period. When you’ve satisfied all their requirements, you’ll come out debt-free.
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