One of the best things you can do for yourself is to get out of debt. Besides feeling greater freedom without a constant financial burden hanging over your head, you also have the liberty to buy some things you have always wanted. Getting out of debt is not always easy, but it will be even more difficult if you make the following mistakes.
Paying Off the Debt With the Lowest Interest Rate First
If you want to get out of debt fast, you need to put your money where it will reduce your debt the fastest. Paying off your largest debt first may not be the best way to reduce your debt fast. Instead, put extra money toward the debt having the highest interest rate. Debts with low-interest rates—such as your mortgage—are considered “safe” debt.
Credit cards often have notoriously high-interest rates. It is where your interest is probably growing the fastest, and paying it off—or at least reducing it quickly—will slow down the interest you owe each month. If you only pay the minimum balance due, financial advisor Suze Orman says that you could easily end up paying up to four times as much for your purchases.
Not Eliminating Payday Loans Quickly
One type of debt you want to avoid completely—or pay off as quickly as possible—is a payday loan—if you have one. The interest on a payday loan is ridiculously high—possibly as much as 400 percent—and worse if you miss a payment.
Payday loans can cause you to become dependent on them—particularly if you do not have good spending habits. Learning to control your spending can help break your dependency of not having enough cash each month.
Setting up a budget can reveal where your money goes each month and what you have left to spend in each category. After spending the money in a particular category—such as food, entertainment, gas, etc.—do not take from other categories—unless absolutely necessary.
Paying Off More Than One Debt at a Time
Instead of trying to pay extra on all of your debt, Fool.com advises you to focus on putting more toward one debt at a time. Of course, you still need to pay the minimum on all your bills. After paying off one debt, you have more money to put toward the next bill. You will be encouraged when each bill is paid off—enabling you to keep going and reduce all your debt.
Continuing to Spend the Same Way
Unless you change how you spend money, you will stay in debt. Setting up a budget will help, but if you do not stick to it, you will never be debt free. Once a credit card is paid off, do not charge anything else to it. Pay only with cash until your debt is under control.
Not Taking Advantage of Debt-Consolidation Options
If you have several debts to pay off and some of them have a high-interest rate, there are two options you need to consider:
- A balance-transfer credit card
If your credit score is still in good shape and you do not have a lot of debt, getting a new balance-transfer credit card might help you. These credit cards may be the best way to get out of credit card debt because they enable you to transfer other credit card debt to the new card and will give you 12–18 months without charging any interest.
Although it does not remove debt, the advantage is that you can reduce your debt faster during the interest-free period—and it also enables you to make one payment each month. You will not pay any interest during the introductory offer period—but you need to make sure you do not miss a payment during that time—or your interest rate could go up to 29 percent or higher.
- A debt-consolidation loan
You also can take out a personal loan to help reduce your debt. RocketLoans says that all your debt can be paid off with this kind of loan and let you to make just one monthly payment. It can be of great value to you if you can get a loan with an interest rate lower than the interest rate on your current debt. Do not put any debt with a lower interest rate under this loan.
Not Cutting Back on Extra Spending
You can get out of debt faster by knowing where your money goes each month. Eliminate unnecessary expenditures and adopt a bare-bones budget. Keep a little money aside for some simple pleasures (your kids will appreciate it, too), because making it too tight will make you want to drop the strict budget before long.
Not Increasing Your Income
If you can get a side job or increase your income in some way, Forbes says it can help you get out of debt fast. Even a temporary job will help to reduce your debts faster. At the same time, be sure to create a budget and stick to it so that the extra money is used to reduce your debt—rather than to purchase new things. Bringing in a little more money each month may also help you avoid debt later.
Not Having an Emergency Fund
Although an emergency fund will not help pay off your debt, it can enable you to stay out of debt when a need for immediate cash rises. Setting aside enough cash for at least three to six months’ worth of expenses enables you to meet many emergencies without having to get into more debt. Without this fund, Fool.com says, you could be setting yourself up to stay in debt in a cycle that never ends.
Knowing how to get out of debt and doing it are two different things. You can do it if you set your mind to it and think about how being debt free would enable you to do more desirable things with your money. Taking the recommended steps above will help you on your way toward a debt-free life.
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