It Takes Time And Determination To Conquer A Mountain Of Debt
But if youre equipped with the right knowledge and tools, the journey to conquering that mountain can be relatively smooth. Plus, you dont have to tackle that mountain of debt alone credit counselors are available to help.
Of course, no two attempts to conquer debt are the same a debt reduction plan that works for one person may not work for another. And unless you stick to your plan, youll likely have a tough time chipping away at your debt.
If youre not sure how to tackle your credit card debt, weve got some advice on steps you can take. While this advice wont guarantee success, it can help point you in the right direction.
Refinance Your Mortgageconsolidate Your Debt With Home Equity
If you own your home, you may have enough equity to consolidate all your debts into your mortgage. If you dont have much equity in your home, additional mortgage insurance costs could be expensive. Consider your options and seek advice from someone other than your lender .
Just like with a debt consolidation loan, when you consolidate debts into your mortgage, you also need to create a budget. If you dont, youll always be tempted to borrow more when emergencies happen.
Repeatedly using your home as an ATM can set you up to face retirement with a lot of debt, no assets, and no savings.
If normal banks and credit unions arent able to help you with refinancing your mortgage, dont immediately turn to a home equity lender. Instead, speak with one of our credit counsellors.
Understand How The Debt Happened
Figuring out how you got into debt might help you avoid overspending in the future. Try going over your credit card statements from the past few months to find patterns in your habits. Are there places where you can make some changes to your daily or monthly spending?
For example, maybe you can cancel the gym membership and work out at home or you can cook more of your meals instead of dining out.
If your credit card debt was the result of a large, unexpected expense, you might make a plan to create an emergency fund. This can help you cover big bills in the future without going into debt.
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Take Control Of Your Spending
Whether or not careless spending habits contributed to your situation, you will find it easier to start to pay off your debt if you keep close control of your spending and finances.
Take time to compare your monthly income with your expenses. Divide your spending into mandatory expenses, or needs, and discretionary expenses, or wants.
Mandatory expenses include things like:
- Rent or mortgage payments
- Home decor
- Personal grooming
To start paying off your debt, your monthly expenses will need to be significantly lower than your monthly income. You may be able to achieve this just by reducing your discretionary spending.
Pay your bills on time to save money. Late payments usually trigger fees or service charges that can make it harder to reduce your spending. Where possible, automate your payments to come from your checking account.
If thats not enough, however, you may need to take further control of your spending by lowering your mandatory expenses as well. You can use tactics like:
- Downsizing if you rent your home or negotiating your rent
- Renting out a room or floor if you own your home
- Choosing a cheaper cellphone plan
- Splitting internet access with a neighbor
- Choosing a less expensive health insurance plan
- Looking for ways to cook cheaply, such as eliminating meat from your diet
- Using public transit instead of your car
You can also look for ways to increase your income, even temporarily, such as:
Figure Out How Much Debt You Have
If you have more that one type of debt, it can be easy to lose track of how much you owe and how much you are paying in interest every month. But you cannot begin to pay off your debt until you know what those values are.
Make a list of all your debts, how much you currently owe, and the interest rate being charged. Use recent billing statements, canceled checks or bank statements, and your credit report to get a complete list of everyone you owe and the amount you owe. Be sure to include the minimum payment required for each account. This is the smallest amount that you can afford to pay on your debt every month.
Including the interest rate associated with each account will show you not only how much you currently owe but also which debts are the most expensive. High-interest debts, like credit card debt or payday loans, can cost you many times the value of the loan itself because of the amount of interest that is added on every month.
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Tap Into Your Home Equity
If you have equity in your home, you may be able to use it to pay down card debt. A home equity line of credit may offer a lower rate than what your cards charge. Be aware that closing costs often apply, but an extra benefit is that home equity interest payments are often tax-deductible.
If you do consolidate, keep in mind that its important to control your spending to avoid racking up new debt on top of the debt youve just consolidated.
Find A Payment Strategy
There are many different ways of getting rid of credit card debtso if youre looking for the best solution, focus on the debt payment strategy that is the best for you.
The debt snowball method, for example, tackles your smallest debt first. Continue making minimum monthly payments on your other debts, but throw all your extra money on your smallest debtand when that debt is gone, start throwing your money at your next smallest debt and so on. As each debt disappears, youll have more money to put toward your remaining debts. This is why its called a debt snowball.
The debt avalanche method, on the other hand, tackles your highest interest debt first. Similar to the debt snowball, you make minimum payments on all your other debts, but with this strategy you throw your extra money at the debt with the highest interest rate. Once that debt is paid off, repeat the process with the debt that has the next highest interest rate, and so on.
If youre not sure whether to start with the debt snowball strategy, the debt avalanche strategy or any of the other debt payment strategies out there, try using a debt management calculator. If you want to know how long it will take to pay off $10,000 in credit card debt, for example, a debt calculator will give you the answer. You can also use debt calculators to learn which debt repayment method might be the easiest, and which one might save you the most money over time.
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Ask Your Card Issuer For A Lower Rate
It’s always advisable simply to ask your credit issuer if they’ll lower your interest rate. Most people assume there is no wiggle room with rates and fees, but that’s often not true.
Also approach your lender with a repayment plan you know you can meet.
“Many lenders are open to coming up with a payment plan for you that customers don’t know about. Be proactive and ask for a certain payment plan,” said Kristy Kim, co-founder and CEO of TomoCredit, a new credit card company for people without credit scores, like young adults and immigrants.
“If your lender doesn’t agree with a payment plan or your APR is too high to begin with, you can find products where you can consolidate your debt in one place at a lower APR,” Kim added.
Schulz at Lending Tree said that while few people ask their lenders to lower their interest rates, the majority of cardholders who do seek rate reductions are successful.
Taking Advantage Of Balance Transfers
If youre into a transient financial struggle due to employment loss or unexpected medical expenses, balance transfer will help you rack up much of your interest charges. Moreover, while several companies offer insurance protection, it will cost you less when doing a balance transfer as you wont have to pay the insurance premiums each month.
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Consider A Balance Transfer
Consolidating balances from multiple credit cards onto one card may be a good option. A balance transfer involves transferring the money owed on multiple accounts to a single card with a lower interest rate. This could save you hundreds or even thousands of dollars in interest charges. Paying off a single card instead of many may feel more manageable to some people.
Balance transfers may involve a fee , so be sure the long-run savings outweigh the hit you’ll take in transfer fees.
The Difference Between Secured And Unsecured Credit Cards
There are two types of traditional credit cards: secured and unsecured. Both offer easy access to credit, a convenient way of paying for many goods and services, and possibly rewards programs. Secured and unsecured credit cards, however, are very different when it comes to the credit card companys rights when a consumer fails to make their payments.
In the case of a secured credit card, the money advanced to the consumer via the credit card is secured against real property the consumer owns. Thus, the credit card company has collateral it can go after in the event the cardholder does not make his or her payments.
The most common collateral used on a secured credit card is the cardholders home. Some Canadians have signed a Master Credit Agreement with a Canadian financial institution, under which the consumer receives access to a certain amount of credit in exchange for collateral, typically a mortgage on the consumers residence.
If a credit card company issues a credit card to a consumer and does not take some kind of security interest or collateral, then the card is an unsecured credit card.
Many credit cards in Canada are unsecured. These tend to have higher interest rates than secured credit cards. In the event that a consumer with an unsecured credit card stops making payments, the credit card company has no collateral to look to in order to recover its monies. Therefore, the company will use other methods.
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Balance Transfer Credit Card
A balance transfer credit card is a credit card you can use to pay off other cards. You’re essentially moving your debt from one credit card to another. Why would you do that? Many balance transfer credit cards have a big benefit over traditional credit cards: They don’t charge interest on debt you transfer from other cards for a set number of months. Depending on the card you choose, you could avoid credit card interest for a year or more.
You can transfer multiple credit card balances to a single balance transfer credit card. This is a good way to consolidate your credit card debt. Instead of having to juggle several credit card bills every month, you’ll have just one credit card to pay off.
There are two drawbacks of balance transfer credit cards:
- They typically charge a fee, known as a balance transfer fee. The fee amount depends on the card. Most charge 3% to 5% of the amount transferred. So if you transfer $100 in credit card debt to a balance transfer card, your new balance transfer card will probably charge you a $5 fee. If you transfer $1,000, you’ll likely pay up to $50 in fees.
- You need good credit to qualify for balance transfer cards with a 0% intro APR. If your isn’t 670 or higher, it’s hard to get approved.
Learn more:A Complete Guide to Balance Transfers
How Do Credit Card Balance Transfers Work
A credit card balance transfer can be completed in a few easy steps. But take note that the process may vary depending on the card issuer.
You can transact a balance transfer over the phone by calling the customer service number that can be found at the back of your card. But for the majority, the most preferred way to do balance transfer is done online.
Heres how you can do a balance transfer online:
- Log in to your credit card account and choose a balance transfer offer.
- Read and evaluate the terms of the offer. It will include regular purchase APR, length of the intro APR period, and any balance transfer fees.
- Give the details of your transfer, such as the account number of the card and the amount of debt you want to transfer.
- Lastly, double-check and verify the information you entered. Make sure theyre correct. Once confirmed, submit the transfer.
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Create A Debt Repayment Strategy
If you’ve reviewed your spending and determined how much you can afford to pay toward debt repayment each month, the next step is choosing a repayment method. There are two options you can try: the debt snowball or the debt avalanche.
The debt avalanche is the most mathematically logical method because it requires you to pay off your highest-interest debts first. This will result in the most financial savings over time, but if you have large balances on your accounts, it may take a long time before you feel like you have made any progress.
If that approach seems too challenging, you could try the debt snowball method instead. This involves paying as much as you can toward the debt with the lowest balance first while paying the minimums toward all your other debts. As you pay off a debt, you roll the payment amount over to the next debt on the list.
The debt snowball can give you a quick win if you’re able to pay off one or two small debts right away. When you’ve paid off one debt, you will likely feel inspired to pay off the next one and the one after that. Although this approach isn’t the most logical, it provides faster progress, which can encourage your new habit of eliminating debt.
Ask Your Creditors About Hardship Programs
If youre having trouble making payments on your credit cards, your first step should be contacting your creditors. First, explain your financial situation and why you cannot make your payments in full. Then ask to work out a modified payment plan to help make those payments more affordable.
This might involve temporarily reducing the interest rate or lowering the payments until youre back on your feet. You will likely have to pay your balance in full eventually, but this can give you a temporary break from your usual payments. Plus, you might end up paying fewer interest charges overall.
Its important to contact your creditor ASAP. If you wait too long, they may close and charge off your account, which can complicate matters. Look for their phone number on the back of your card or your account statement. When speaking to a representative, be polite but persistent and take notes, so you have a record of the discussion. If the person you talk to isnt helpful, ask for a superior and try again to explain your situation, and ask for ways in which they can assist you. Also, be sure to get any new agreements in writing.
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How Can You Dig Yourself Out Of Real Estate Debt
In 2020, U.S. mortgage debt ballooned out into trillions of dollars. If your mortgage debt is too high, there are a few steps you can take to help lower it. First, if your credit score is high enough, ask your mortgage lender about refinancing your mortgage for a lower percentage rate. By doing so, you might be able to lower your payments. Another way to dig out of your mortgage debt is to make extra payments towards the principal on your mortgage loan. By doing so, you will lower the overall mortgage.
If you can’t actually pay your mortgage, call your mortgage lender immediately. Ask about working out a payment plan or ask for a loan modification. You could consider selling your home if market conditions are strong and settling your debts. Of course, you need to make plans for new housing if you go this route.
Secure An Additional Source Of Income
If you’re already on a barebones spending plan, or you’d rather earn more than spend less, look for ways to make more money you can use to pay down debt. For instance, you might sell items you don’t want or need anymore, which could secure you a quick infusion of cash. Renting out an extra room, your car or your parking space when you’re not using them via platforms like Airbnb, Turo and JustPark, can also be lucrative.
Or make extra money from home by tutoring online, freelancing on the side or user-testing digital products on sites like UserTesting.com. You can also take on a part-time job, or work at your own pace with a side gig like shopping for groceries on Instacart or delivering food on DoorDash or Postmates. Do the math on how much extra you need to earn in order to start paying down your debt taking on too much work on top of your current commitments could lead to burnout. Another option is to ask for a raise at work, once you’ve researched the market in your industry and you’re willing to demonstrate how you’ve brought value to the company.
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Paying The Card Bill With The Least Balance
Once you pay off the credit card bill with the higher interest rate, you can switch to the card with the least balance pending.
This completely depends on what bills have accumulated and on which card. It might not always be this way. Sometimes, the bill which is the lowest might be with the card which has the highest balance. In that way, you are clearing off two important bills.
Once you are done with clearing the credit card with the highest interest, you can shift to the bill which has the least pending balance. Paying this provides you with a much-needed mental boost of clearing the rest of the bills.