This is a guest post from Pauline of investmentzen.com
We have all been there. Debt payments are creeping up, and it is starting to get hard to keep up with them.
Whatever the reason you got indebted in the first place, this is not the moment to blame yourself, or to give up. It is time to take action, to make sure it doesn’t happen again, and you get back on track for a solid financial future.
Paying of debt is tedious. It’s like losing weight. You enjoyed that meal last week, but you don’t really want to spend your Sunday at the gym to work it off. Yet, if you don’t, things will get worse, and soon you’ll be overweight.
So let’s tackle your debt, one step at a time.
Step 1: Reduce the interest on your debt
You owe a certain sum of money, and we will see later what we can do about that, but for now, let’s try to lower our monthly payments by reducing the cost of our debt.
Make a list of all your debt:
- Credit cards
- Car loans
- Student loans
- Personal loans
And next to it write down the interest rate you are paying on said debt. It might look like:
- Credit card A 19.9%
- Credit card B 12%
- Student loan 6.9%
- Mortgage 4.3%
Your priority is to reduce the interest you are paying on your debt. A $1,000 balance over 12 months at 19.9% is costing you a whopping $199! Look for a 0% balance transfer and move all your credit card balances over there. If your credit score is too low for that, try calling your credit card company and let them know you would like your rate lowered, because paying off your debt is becoming increasingly difficult. Lowering the rate will be cheaper for them than chasing a customer in default so they might oblige.
Step 2: Reduce capital payments on your debt
Doing so will likely lengthen your debt repayment period, so that should be an option only if your current payments are too hard to honor. Unless you had a grace period on that 0% balance transfer. In which case, you should pretend like you are making the repayments, and put the money on a high yield savings account in the meanwhile, so it earns a little bit of interest for you.
Remember to put a date in your calendar for when your 0% deal is over, to pay the full balance, or it will revert to a super high rate. That is how companies make money. If you are still short, make another 0% transfer.
Step 3: Refinance your mortgage
Refinancing your mortgage is one of these “big wins” that won’t take a lot of time and can save you thousands of dollars over the life of the loan. A quick online search will tell you what the current rates are depending on your credit, and then a mortgage repayment calculator will tell you what your new payments will be.
Like with credit cards, if you keep your mortgage payments the same, you will be overpaying a little every month, and can shave months or even years off the life of your loan by doing so.
When refinancing, you might be tempted to open another line of credit to pay off your credit card balance. The catch is, you are switching from unsecured debt to secured debt. That means if you don’t pay your line of credit, your creditors can sell your house. If you don’t pay your credit card, the debt is not secured against an asset.
So now that you are aware of the risks, that might be worth considering if you were unable to get a 0% balance transfer.
Step 4: Refinance your other debt
Refinancing your student loans and other kinds of debt can be done over the same term, for a lower interest rate, or over a longer term, in order for you to have some breathing room in your budget thanks to lower payments. BUT if you go for a longer term, the final amount you’ll end up paying will probably be higher than the original loan figure.
So make sure you understand what the implications are before you sign anything. You can refinance all your loans together, also known as debt consolidation, or go on a per case basis with each lender.
All these steps are pretty straightforward and can not only save you a bunch in interest, but also lower your payments and help your cash flow right now. Even if you are able to make your current payments, why pay more in interest?