People decide it’s time to get out of debt for a wide variety of reasons. Maybe you’re simply sick of dealing with debt-related anxiety. Perhaps a major life event has motivated you to want to make improvements and chase your dreams of entrepreneurship. You may have been thinking about it for a while—but now you’re ready to act.
Congratulations! The first step to finding financial freedom from your debt is simply deciding to do so. While it may sound simple, choosing to confront your debt head-on is no easy feat. Here are a few tips to help you along the way.
Why Minimum Payments Aren’t Enough
Did you know the average American has a credit card balance of $6,375? This represents a record high, which just goes to show how common it is to struggle with credit card debt in the U.S.
Most credit cards offer consumers the option of paying a minimum amount—either a fixed rate like $25 or a small percentage of the balance. Paying the minimum amount due is like postponing your debt; you’re avoiding late fees and delinquency, but you’re not really making any impact on your debt. Plus, interest rates keep piling up.
Andrew Housser, debt expert and co-founder of Freedom Debt Relief, “What a lot of people don’t know is that if you make the minimum payments on your credit card debt, it could take you 10, 20 or even 30 years to get out of debt.” Housser goes on to point out that paying the minimum on $20,000 of debt can lead to you actually paying $60,000 or more in the long run. Why? Because interest just keeps accruing.
The takeaway here is that paying the minimum balance is not a route to finding financial freedom; it’s like treading water when you really need to swim to shore.
Debt Elimination 101: Prioritize, Prioritize, Prioritize
It’s easy to get overwhelmed trying to figure out where to start. Instead of trying to solve everything at once, simply aim to prioritize your debts for do-it-yourself repayment. One popular example is the snowball method, which entails paying the minimum balance on all debts except the smallest balance—this one, you aim to pay off more aggressively. Once you’ve paid it off, you move up the line from smallest to largest. The purpose is to stay motivated.
There’s also debt avalanching, which entails paying off debts from highest to lowest interest rates, regardless of balance. While this method doesn’t offer the more immediate bursts of motivation, it tends to save consumers money in the long run because they’re reducing how much interest they’ll pay.
Any do-it-yourself debt repayment strategy requires savvy budgeting, so you can free up the money you need to make payments above and beyond the minimum. Anything you can do to reduce expenditures and increase income will help you pay down your debts faster.
Exploring Debt Relief Solutions
Massive debt might call for something more heavy-duty than DIY repayment. There are plenty of debt solutions to explore. The one you choose will depend on your exact circumstances. Here’s a sampling of debt elimination strategies available to consumers today:
- Credit counseling: Working with a credit counselor can help you lower your interest rates and come up with a workable repayment plan.
- Debt consolidation: If you qualify for a consolidation loan at a lower interest rate, you can use it to pay down high-interest debts. This makes repayment simpler but depends on paying it all back in full.
- Debt settlement: Settling, or resolving, your debts entails negotiating with creditors in an attempt to get them to agree to accept a lesser amount than what you currently owe. Enrolling in a reputable program gives you access to professional negotiators and a custom plan.
- Bankruptcy: Bankruptcy represents a clean slate, though it’s severely damaging to your credit score and may require you to liquidate some of your assets.
When you’re ready to find financial freedom from your debt, figure out how you plan to tackle your debts once and for all. This will help you avoid the trap of paying only the minimum balance endlessly.