Are you paying off debt the right way?
After the economic recession of 2009, most Americans became quite conscious about managing finances in a better way. However, with time and glimpses of hope, they have again started piling up debt.
As per the experts, most people are still committing mistakes while paying back debts. In fact, as per housingwire.com, Americans are more in debt now than they were during the economic crisis back then.
As per the latest report published in the Federal Reserve Bank of New York’s Center for Microeconomic Data, current household debt is about $869 billion higher than the highest debt peak of $12.68 trillion in 2008.
The report says that mortgage debt has decreased but credit card debt and student loan debt have increased from $28 billion to $870 billion and from $1.44 trillion to $1.46 trillion, respectively.
People, when down with enormous debt, often make silly mistakes just because they freak out. They just try to put a band-aid on the problem. This way they try to keep it behind a curtain as well as hope it'd heal up the financial wounds.
Answer these 5 shrewd questions before paying off your nasty debts
Paying off debts should start with the right frame of mind and here’s a list of the 5 questions, answering which will help you create the perfect debt repayment plan.
Will my debt repayments fulfill my financial resolutions?
What you do to get off the creditors’ hook, make sure you achieve your financial resolutions. To make things normal, you’ve got to make smart use of resources to manage your money and be financially healthier. Set tangible goals and allot the means you’ll employ to achieve them.
Take for instance, you want to raise your new home’s down payment amount, then it’d be ill-advised to exhaust all your savings to pay off your debts. However, you’ll also have to make sure your indebtedness is low so as to qualify for the most lucrative loan possible to buy that home.
Did I create a financial cushion to meet unplanned expenses?
If you fail to plan for unplanned (emergency) expenses, then you’ve planned to fail in paying off your debts too. An emergency fund is an absolute must before starting to pay off your debt obligations.
Use the excess amount for debt repayments left after paying for your daily living costs and contributing to your emergency fund. It's a sustainable approach to get relief from your debts.
You can liquidate your emergency fund to pay for your unplanned expenses along with preventing a major financial disaster from destabilizing you financially any further; you can also continue making your monthly debt payments too.
What is my actual debt scenario like?
Before you begin to pay off your debts, you should have a clear picture of your present debt scenario. To start with, you must create a list of all your debts and the respective interests charged on them along with their creditor’s name, payment deadline, etc.
Your first priority would be to pay off high-interest debts like credit cards or payday loans. Paying off these costly loans will free off a lot of disposable cash in your hand. Sometimes, you may use your savings to pay off those debts that levy interests more than what you earn through your savings account.For example, suppose a credit card charges 28% on your balances whereas you earn a meager 15% on your savings account. It’d be better to pay off the outstanding balances of that credit card using your savings. This way you free up 13% extra cash as interest amount paid to the creditor.
Do I expect a financial windfall?
If there’s any extra income you’re expecting in the near future, then what are they? This could be a guaranteed commission for your excellent performance at work or a tax refund or a bonus vacation package, it could be anything that either saves you more money or provides you with extra dollars.Use that extra dollars to make larger debt repayments and become debt free faster.
Where will I get the funds to pay off debts?
You need to have a substantial amount of dollars as savings to meet your daily living expenses, besides paying off your debt. Your debt will erode your retirement fund to a great extent. It is usually a foolish idea to use your retirement funds (if you have any) to make the debt repayments.
Rather, you need to think of novel ideas to increase the amount of disposable cash in your hand and thereby, savings.
How to pay off debt correctly
Now, let’s discuss some faster and smarter ways to pay off debt.
1. Prioritize payoffs as per interest rates:
Many debtors think it wise to concentrate on paying off the credit card debt with the highest interest rate first, while making smaller or just the minimum payments on the other ones. If you are a like minded consumer, did you ever check how much you can save by doing so or how soon you pay off your debts? A couple paid off $125000 in credit card debt over four years. But they had decided to pay off the debt with the lowest interest rate first since it gave them some kind of boost to go after the second highest one. So, you need to plan a debt repayment strategy as per your financial condition.
2. Your debt plan is just like a diet plan
Getting out of debt is nothing but losing weight and getting in shape. Both require dedication and discipline. Prepare a list of things to do and just go for it. First try to shed off the fats that bother you the most. Work extra on those!! Get some refreshment once you accomplish a milestone. Get yourself a gift or go for a lunch with your family. This will undoubtedly provide you with the energy necessary to attack your next debt.
3. Never ever miss a payment
If you are up to nose in debt, but haven't missed a payment yet, make sure you don't. If you do, you'll just create problems for you. If you are current on your payments and haven't missed a payment since the beginning, you always have the opportunity to negotiate with your creditors to cut down interest rates. A bank or any traditional lender would definitely be more interested in getting your interest rates reduced to something convenient for you than making you default and getting nothing from you at all.
4. Think before opting for any debt repayment service
Do you know the difference between debt management and debt settlement? Debt management services are usually offered by non-profit companies that are accredited by the National Foundation for Credit Counseling (NFCC), while the latter includes for-profit companies. You can also approach a consolidation company to repay debts through single monthly payments. You need to know about this before approaching any of these companies.
As the debt settlement companies mushroomed after the financial crunch, complaints about them snowballed too. However, you need to choose a reliable debt relief organization. Check out the customer reviews to be sure that your chosen company has a satisfied clientele.
A common practice of the debt settlement is asking you to stop making payments and instead, pay towards them in the hope of a lump sum settlement. This tremendously hurts your credit score and in most cases, you see either you're summoned in court or paying hefty fees to the settlement company at the end of the program. So, make yourself aware of these things before choosing any option. It's not that credit scores don't get hurt in a debt management or a consolidation program. But as soon as you start making payments through a monthly program, the scores start taking good shapes.
5. Removing numerous payments
The easiest way to deal with your credit cards is to borrow the right amount to pay off everything right away. You can opt for balance transfer method. One payment instead of 4-6 will save your time and what is even more, your valuable money. Not to even mention your credit card's interest rate and fee.
6. Student loan debt forgiveness programs
Student debt holders, who work in the public sector, for the government or for a non-profit organization, should look for if they are eligible for debt forgiveness. As per the government's Public Service Loan Forgiveness Program, borrowers who are in public service can apply for loan forgiveness for the remaining balance of their Direct Loans only after making 120 successful payments. These loans are called Direct Loans as they come from the Department of Education. There are also several federal loan forgiveness programs you can opt for.
7. Work things out with bank
Unfortunately too many people fail to communicate with their banks. Believe me, banks would be more than happy to help you through a rough time.
If you credit is good, a lot of credit unions, banks, or finance companies will have no problem to provide their borrowers with a couple of thousands. Don’t you have good credit? Then it is high time to start building a trustworthy relationship with your bank. Be the first to offer collateral. It can be a car or maybe a boat.
Lastly, I would like to mention that if required, talk to a financial adviser or someone who has sound knowledge on financial matters.
So, all the best! Get rid of debts and enjoy life!