5 Steps to Follow for Reducing Debt
Feeling behind on your bills and loaded down under a mountain of debt is a terrible feeling. It’s a burden when you work each month only to still feel crushed by the amount you owe. Unfortunately, many Americans are in that situation. In 2011, 69 percent of U.S. households were in debt, USA Today reports, and the median debt load was $70,000. But there is a light at the end of the tunnel. Follow these five suggestions and you can put yourself on a path to being debt free.
1. Evaluate your situation
You’ve committed to doing whatever it takes to get rid of your debt. In order to do that, you need to figure out exactly what your situation is. Bankrate recommends you begin by pulling your credit report. It doesn’t have to cost you anything to get one, either — you receive one free credit report each year from Equifax, TransUnion, or Experian. The most important part of the process is to make sure you’re reading your report correctly. Don’t underestimate what you owe. This is the time to be honest about the amount of debt you have.
2. Match assets and liabilities
“This is a Cardinal rule at banks, pension funds and insurance companies. It’s also the idea behind target-date mutual funds, which gradually move from stocks to cash over a period of years when you are saving for college or retirement. The idea is to have assets available at the time you’ll need them,” Time writes. This means you should avoid financing any of your long-term assets (such as your house) with a short-term loan from a credit card because you can’t use the value of your home to pay the bill. So while it may seem like an easy fix, do not borrow long-term for a short-term asset.
At this point, you need to stop spending and figure out which expenses can be cut. Bankrate suggests that you use cash instead of a credit card. Looking for ways to start cutting out bills? Consider cutting your cable and Internet service (or at least opting for a cheaper package), make your coffee at home, take a look at your car insurance, and review things such as your gym membership. Grocery shopping? Start using coupons. View budgeting as your way of getting back on track. That means getting creative and giving up some stuff initially so you can start reducing the debt you’ve built up.
4. Pay your bills on time
This can be hard when you always feel short on cash, but this is a step you need to make happen. Each time you pay a bill late, you’re charged with a late payment. So in addition to paying off the money you owe, you’re also paying a late fee. “If you use a calendaring system on your computer or smartphone, enter your payments there and set an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment, by then it could be reported to a credit bureau,” About writes.
5. Work to improve your credit score
Start to re-establish good credit, Bankrate says. After you’ve started to chip away at some of your debt, look again at your credit reports. See what your credit card is, and then begin to figure out what you can do to help re-establish your credit. One suggestion? Try a secured credit card — just make sure your credit grantor reports to the credit bureaus, according to Bankrate. And open a savings account at your bank. You’ll have some set aside to help out if you need to pay off any additional debt, and it shows creditors that you’re working toward building up savings.