Take the necessary steps to get out of debt

Millions of consumers these days are carrying significant debt across a number of different types of credit, and this can make it somewhat difficult to afford everything needed to live a healthy financial life. Fortunately, there are easy steps consumers can take to reduce their debt.

Cutting outstanding debt certainly isn’t easy, especially if consumers have a lot of it spread across a number of accounts. For instance, those who have credit cards, auto loans, student loans and a mortgage on top of all their other bills and obligations will likely face significant difficulties in chipping away at all the accounts if they don’t take a reasoned approach to doing so.

For instance, the first thing a borrower should do when trying to reduce their debt is to sit down and figure out how much everything in their life costs them, and compare that with their income. Depending on what they’re paying every month, and for what, they might be able to find areas where they can reduce costs, such as grocery bills, utilities, and the like. By doing so, they might be able to free up as much as $100 or more per month that they can contribute to their outstanding balances and more quickly reduce their debt.

But what debt should they tackle?

For those who find some extra money in their monthly budgets that can be put toward their outstanding debt, it might be a good idea to start considering exactly which balance those additional funds should be applied to. Generally, borrowers should look to reduce the balance they’re carrying that carries the largest interest rate first, since that will also add to their costs more quickly. This strategy can then be applied to their account with the next-highest interest rate, and so on.

But consumers should also be careful when employing this strategy, because, in some cases (most often when it comes to installment loans such as auto financing) they may face a penalty for successfully paying off their balance early. These fees are usually applied because the bank that extended them the financing was counting on the income from their monthly payment for the length of time specified in the original loan agreement. For this reason, consumers should first find out if such a fee will be applied to them when they pay off their balance, and if the cost of that fee will exceed what they would have paid over the life of the loan. In some cases, it may be a lower comparative cost to face the penalty.

Further, it’s important for borrowers to not close their credit card accounts when they reduce the balances on them to zero. This is because part of a person’s credit rating is made up of the average length of time they’ve had all their accounts, so closing older ones can take a chunk out of their score.

Posted in Finance
Learn how it works

Questions about credit repair?

Chat with an expert: 1-800-255-0263

Facebook Twitter LinkedIn