Develop a debt reduction strategy
To begin chipping away at your debt, it’s helpful to make a plan. First, get the complete picture of all the debt you owe by getting your free credit report at AnnualCreditReport.com Review your accounts and make a plan for how much you’ll pay off for each account each month. Focus on paying down accounts with higher interest rates first and if you’re close to paying off an account completely, do it. It’s one less account to worry about and gives you more confidence. Upon developing an overall strategy, you can begin to focus on a plan for each type of debt you have or may incur.
Decide on a credit card strategy
Remember every time you charge something on a credit card, you have to pay for it. Don’t charge things you can’t afford. Try to pay your entire balance each month to avoid finance charges, and be sure to make the payments promptly to avoid any late payment fees. Choose a credit card that offers the right combination of fees, rates and benefits. If you pay every credit card bill in full and don’t incur any finance charges, it may be fine to have a card that has a high interest rate but offers rewards for use like air travel or money back or has no annual fee. If you carry over balances and pay finance charges, the interest rate becomes more important. If credit cards are too tempting, get rid of them. Using checks or a debit card can eliminate the risk of buying things when you don’t have money in your account to pay for them.
If considering a new home purchase, first identify the type of mortgage that matches your behavior. If you plan to sell your house soon, you may want an adjustable rate mortgage with a potentially lower interest rate. If you plan to stay in the home or can’t afford any increase in payments if interest rates rise, consider a long-term fixed rate mortgage.
You may also wish to consider switching to a shorter-term mortgage. Depending on how the numbers work, you may be able to keep your monthly payments about the same and switch from a 30-year mortgage to a 15-year mortgage. And, you’ll be debt-free much sooner.
Examine the rates and eliminate high-cost borrowing
Determine if you can convert high-interest debt to another type with lower rates. If you’re paying high interest rates on credit card balances, find a card with a lower rate, but watch out for teaser rates. If you have equity in your home, consider a home equity loan or home equity line of credit.
The bottom line
Getting out of debt takes time and discipline. By developing a plan and approaching credit options in a wise way, you can begin to reduce your debt and maybe even eliminate it.