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5 Big Picture Tips to Help Eliminate Debt
Getting out of debt can seem like an uphill battle—but taking control of your finances is possible when you have the right tools. Let's take a look at five tips that you can use to get started on your journey of paying down your debts:
1. Address Debts With the Highest Interest Rates First:
This debt elimination method is often called the avalanche method by financial professionals. They call it this because an individual will usually start by paying off their debt with the highest interest rate first. This is done to minimize how much interest they pay over the long term. A similar approach is the debt snowball method, which focuses on debts from the smallest to the largest, ignoring the interest rates. This is thought to be effective from a psychological standpoint because you often see your first account paid off more quickly.
2. Try to Lower the Interest Rates:
You may not have total control over your interest rates, but there are some actions that you can take to prompt adjustments to them. For example, let's say an individual usually pays their bills on time every month. If this is the case, they might call the credit card issuer and ask them to lower their interest rate due to their excellent payment history. Another approach is to see if you have options to refinance your loans or do a balance transfer to a new card with a lower interest rate.
3. Reduce Spending
When you're trying to eliminate debt, every dollar counts. So whenever possible, consider looking for ways to lower your spending in your everyday life. You can start with a review of your budget and work from there. If you don't have a budget, this is a great time to make one! Taking time to make a budget can help you see where your money is going each month and determine if unnecessary expenses can be eliminated.
4. Improve Your Credit Score
Having a better credit score can produce better deals. This is because lenders evaluate a borrower’s risk partly based on their credit score. Those with higher scores are often viewed as more qualified borrowers, as the higher credit score presents a lower risk to the lender. A few ways people can increase their credit score are:
- Ensuring payments are made on time
- Keeping their balance low compared to the account's credit limit - ideally under 30%
- Having a healthy mix of installment loans and revolving lines of credit
5. Build an Emergency Fund
It might seem counterintuitive to focus on saving when you have debt to pay off. However, setting up an emergency fund can help you avoid taking on more debt in the future to cover unexpected expenses. This can include emergency car repairs, a job loss, or a surprise medical bill.
Paying off debt can be challenging, especially when you don't know where to start. Whether it's through the avalanche method, cutting back on spending, or a combination of all of these suggestions, there are many options available for those looking to pay down their debts more quickly.
For more information on tips to eliminate debt, read here.
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