It’s easy to get into debt. I see temptations all the time, even in places where you think there would be none. Like after you’ve checked your credit score on Experian, they may take you to a page of credit card offers. Seeing these after the sign-out page is like your dentist offering candy after a cleaning. You’ve gone through the checkup, they’ve said your teeth look healthy, but now they are tempting you to cheat?
Take a look in the mirror
If you’ve found yourself in debt, being honest with yourself about your situation is the first step to making a change. You’ve spent too much money, whether due to job losses or unexpected expenses, or just on frivolous items. You need a plan to pay off your debt in an organized way while reducing spending and if possible, increasing income. For most people, that starts with getting credit cards under control.
Credit cards
Credit cards probably create more headaches because they are easy to get, easy to use, and easy to abuse. I’m not going to go into all the problems that credit cards may cause, but one is the fact that spending on credit doesn’t feel “real.” Handing over a $20 bill and getting back a couple of dollars feels more like you’re spending money than swiping a credit card and having a receipt emailed to you. That’s why a lot of debt articles will say to stop using credit and start using cash.
To pay off your cards, you first have to understand what you owe and how much you’re paying in interest. Gather this information for each card. I would imagine you’re paying an interest rate in the mid-20% range. If they are all maxed out, there’s not a lot of wiggle room with moving balances to your lowest interest-rate card. But there are options with how to pay off your credit cards.
Pay the highest interest rate card first. Many financial planners advise you to send extra money to the card with the highest interest rate. Once that’s paid off, you just move down the list to the card with the next highest interest rate.
Consider the snowball plan. Other advisors suggest you pay off the card with the lowest balance first so you feel like you’re accomplishing something quicker. However, you will end up paying more in the long run if the card with the lowest balance isn’t the card with the highest interest rate.
Get another credit card. Another option is to get a balance-transfer zero-APR card and move your balances over to it, then pay it off over time (preferably before the free interest rate period ends). However, if you suddenly have all your debts at zero percent and your other cards have no balance, will you be able to resist the spending that got you in trouble before? This is where the honest look in the mirror comes in.
One other thing with credit cards: if possible, keep your oldest credit card account open even after you’ve paid off the debt. I realize that’s a temptation, and if it’s too much of a temptation then close the account. But credit agencies look at how long you’ve had credit, and if you can keep the oldest one open (and pay it off each month) it should boost your credit score.
Don’t forget your other debt
Car loans
Unless you had really bad credit or weren’t paying attention at the car dealer, you shouldn’t have a 20% car loan. That doesn’t mean you can ignore your monthly car payment. Most of us need our cars to get to work – if you lose yours, will you be able to get to your job?
If you’ve fallen behind on payments, contact your lender. This is a conversation no one wants to have, but it’s better than losing your car. You’re not the first person to have to renegotiate a car loan. Lenders may be willing to help you develop a catch-up plan or tack some time on the loan so you can keep and pay for the car.
And if you do have an astronomical car loan, see if you can get it refinanced at a lower rate. Most people don’t refi cars, but there are instances where it makes financial sense. Talk to your lender, find a nearby credit union (they often have better auto loan rates than the big banks), and see if you can get a lower rate.
Student loans
One of the more pressing concerns for recent graduates is student loans. The numbers are dramatic – $1.7 trillion in loans, more than a quarter of people behind on their payments, an average after-school balance in the $30,000 range. If you haven’t investigated your options, talk to the holders of your loan(s). Some will refinance your loan while others offer repayment plans that are capped at a certain percentage of your discretionary income (roughly 10-20% depending on the lender). I’ve also read about companies pitching in to help their employees pay off their student loans.
Don’t just ignore it. Although politicians have made noise about changing the terms of student loans, currently it’s extremely difficult to remove your loan burden through bankruptcy. Lenders can and will garnish your paycheck.
Which loan to repay first?
I agree with financial advisors who say to pay the highest interest loan first. So after you’ve got all your loan information in one place, look at the percentage rates. Start with the highest interest rate bill first and put any extra money toward that bill to get it down as quickly as possible, then tackle the next one. Make sure you are paying minimums on other bills so they don’t fall into default.
Stop using cards altogether?
This gets back to being honest with yourself. Can you only pay for gas and groceries (sticking to a list) with credit cards and use cash for everything else? It’s much easier to pay at the pump. But if credit cards will get you in trouble, stop using them.
Staying Positive
Watching your spending can be tiring, especially if you’re not used to it. If you feel yourself starting to slip, try to focus on all you’ve accomplished instead of how much you still have to pay off. Recognize that good feeling you get when you see your card balance decreasing. Keep seeing people and doing things – just focus on less expensive or free options. Board game nights or picnics by the river are much less expensive than dining out. And finally, research others who have paid off their debts; their inspiration may help you keep moving forward.
Photo by Stuart Miles