When you want to get out of debt, the first step is to organize specific parts of your finances. Start by making a list of all of your debts (outstanding balances, interest rates and charges) and prioritize them in order of importance. Mortgage payments and vehicle payments are typically at the top of most lists.
Next, create a monthly spending plan and track your purchases to help you stay within your budget. This will maximize your ability to pay down your debt. Creating a spending plan (a budget) and tracking at least one month’s worth of your spending allows you to see what’s really going on with your finances. Most people find some surprises!
Based on what you observe about your spending habits, you can then put together a realistic plan to begin paying off you debts. The trick is knowing what your habits are and where your money is going so that you can make realistic changes. These changes will help you find the money to get out of debt. While it might be tempting, don’t skip tracking and creating a budget under any circumstance, if you want to get out of debt.
Set Goals to Pay Off Debt
Establish realistic goals for paying off your credit card debt and other consumer debt (lines of credit, vehicle loans, personal loans, etc.). While it is easy to run up credit card balances in a short period of time, it will take time and self discipline to pay them off. Just think back 3 years to your credit card balances then, and are they less, more or still about the same?
Monitor your progress regularly to help you stay motivated and on track to reach your goals.
Pay Off Your Credit Cards – Here’s How
Each month after you pay your debts that have fixed monthly payments (mortgages, vehicle and term loans), only make the minimum payments required on your credit cards with the lowest interest rates, but maximize your payments on the credit cards with the highest interest rates. Once a credit card is paid off, use this extra money to pay down your credit card with next highest interest rate. This will save you money and help you pay down your debt faster.
Consider paying off credit cards with small balances first. Psychologically it shows that you are making progress. Once paid, cut up and cancel the credit cards. Most people only require one major credit card and perhaps one retail credit card with savings incentives during special sales events.
Consider consolidating your debts with a consolidation loan or transferring your credit card balances to a low rate credit card. Carefully investigate the terms, conditions, any hidden fees and also evaluate the overall interest savings you may realize. Cut up and cancel your credit cards if you choose this option, otherwise you may be tempted to continue using your credit cards and get into debt even further.
Put your credit cards away until you have completely paid off the outstanding balances. Paying for your purchases with cash instead of credit will help you separate needs from wants.
Also, at a time like this, the furthest thing from your mind might be savings – setting money aside for spending later. But, if you don’t want to reach for your credit card the next time you face an unexpected expense, you need money set aside for times like that.
Review your monthly expenses and look for opportunities to cut your costs. Making your cup of coffee in the morning instead of buying a $4 specialty coffee will save you over $1,400 a year!
If you regularly contribute to a savings plan consider suspending the payments until you have paid off your debt. The money you save by paying down your debt faster will be substantially higher than the interest you will earn in a savings plan. Also consider using income tax refunds, pay increases or other unexpected funds to pay down your debts.
The sooner you start dealing with your debt, the sooner you see an improvement in your credit report If you need some help getting started with a plan, or if you’re not sure if your budget is realistic, contact a non-profit credit counsellor for free, confidential help. Typically, the earlier you contact us, the more options you’ll have.