Becoming debt-free is a noble goal shared by millions of Americans, and it may be one you are eager to accomplish. But you didn’t get into debt overnight. You likely have student loans from your years in college, in addition to any auto loans, mortgages and credit card debt that piled up over time. Keep in mind that, like getting into debt, repaying old debts takes time.
Depending on how much debt you have and how much you’re capable of repaying, you have several options. For some individuals, a sturdy budget and repayment plan can do the trick. For others, debt consolidation or debt settlement could be the right option in helping reduce debt load.
Create a BudgetThe first step to becoming debt-free is resolving not to rack up any additional debts. To do so, you’ll have to track your spending habits for a few weeks to a month so as to determine where your money actually goes. Figure out where you’re spending too much and where you can cut back. Then adjust your spending habits accordingly.
If you have high credit card debt, stop using your cards altogether. Paying cash forces you to stick to a budget, and you won’t be able to spend money when you can’t afford to do so. Use the money you save to pay down the balances on any existing debts you owe.
Repay Debts in Order
For many people, it’s tempting to repay the smallest debts first; it cuts down on the number of bills you need to pay each month and simplifies the debt resolution process. However, this could end up costing you more money in the long run.
Rather than getting rid of the smallest debts first, it’s more prudent to repay those with the highest interest rates first, which are typically credit card debts. Put as much money as possible toward higher-interest debts while only paying the minimum on other bills. This cuts down on the total amount of interest you pay, which makes your debts less costly overall.
Debt Resolution Strategies
If your debts are too much for you to handle and you can no longer afford your monthly payments, you have other options to reduce your debts.
Debt consolidation is the simplest solution. When you consolidate your debts, you roll all of them together into one larger debt. Almost all common types of debt are eligible for consolidation, including student loan debt. In addition to simplifying monthly payments, consolidation can actually save you money. Most consolidated loans come with lower interest rates and fewer fees.
Note: It is dangerous to consolidate federal loans into a private consolidation loan.
Debt settlement is arguably the most helpful solution. Whereas consolidation reduces the number of debts you owe, settlement reduces the actual amount you owe. Working with a debt settlement firm significantly simplifies the process and increases your chance for a successful deal. A credit counselor at the debt settlement firm of your choice will contact each of your creditors one by one to negotiate your debt.
When successful, a negotiation can reduce the amount you owe, and any reduction—great or small—is a helpful step in the right direction. Although there are more restrictions on the types of debts eligible for settlement, common types of debt like credit card debt typically can be settle