The Best Ways To Reduce Or Eliminate Debt

controlling debt

It’s all too easy to get into debt, especially if the pandemic has caused you money problems, but it can be very difficult to get back out of debt. It can take only a few months to create a huge amount of debt, which can take decades to pay off. 

Everyone who pays of their debt does so in a different way. They will often combine strategies to gradually chip away at their debt, and stick to those strategies until the debt is gone. If you’re struggling and need somewhere to start, you can try some of these strategies to get out of debt. 

Stop Creating More Debt

This won’t get you out of debt by itself, but at least your debt won’t be getting worse. If you keep adding to your debt, it will be a lot harder to make progress on getting your debt down, if you make any progress at all. Reduce the temptation to run up more debts by cutting up your credit cards, or hiding them from yourself. 

Increase Your Monthly Payment

The less you pay toward your debt balances every month, the longer it will take you to pay off your dents. Interest can make it take even longer to pay off your debt. Any debt balance that is left will be racking up interest charges every month. 

Take credit card debt, for example. The average credit card interest rate is roughly 50%, which means that the credit card debt you have will get 15% worse every month. If you can increase your monthly payments, such as with a debt snowball calculator, you can reduce the balance that is subject to that interest. 

It’s only ok to pay the minimum on some of your credit cards when you have a debt repayment strategy that required you to make a big payment on one of your credit cards. The key is to make significant dents in at least one of your outstanding balances every month. 

Build An Emergency Fund

An emergency fund might sound counterintuitive if you’re trying to get out of debt. You might think you could be using that money to pay off your debt instead of putting it in a savings account, but an emergency fund can help you avoid creating more debt. Savings give you a safety net that you can use if an emergency expense comes up, instead of using your credit card. Ideally, your emergency fund should have six to twelve months of living expenses in it, but build up whatever you can manage to put into a savings account. 

Pick A Debt And Give It All You’ve Got

Some people increase all their minimum payments by just a little bit, but by doing that, your payments only drop by a small amount every month. You can make much more noticeable progress by making a big payment to just one of your accounts each month until that debt is completely cleared. In the meantime, you can make the minimum payments on all your other accounts. Clear one debt, then do the same with another, until they’re all paid off. 

Ask Your Creditor For a Lower Interest Rate

A higher interest rate will keep you in debt for longer, as so much of your payment goes toward the monthly interest charge, and not toward your actual balance. Interest rates can be negotiable, and you can ask your creditors to lower your interest rate. Most of the lenders that use open banking will agreeably reduce the interest rates at their discretion. So, customers who have a good history of making payments are more likely to be successful in negotiating a lower rate.

You might be able to find a lower interest rate by looking out for promotions. If you use a balance transfer to get a lower rate, you can try to pay off the balance before the promotional rate expires. After the promotional period, you’ll be subject to higher interest rates. 

Look For Ways To Put More Money Towards Your Debt

The more money that you can put toward your debt, the faster you will be able to pay it off for good. If you don’t already a budget, you need to create a monthly budget to better manage your money. Seeing all your expenses detailed like this can help you to work out where you can cut some expenses and use that money for your debt. You might also be able to find extra money for repayments by selling unwanted items or generating income via a hobby. 

Withdraw From Your Retirement Fund

In extreme cases of debt, you might think about pulling money from your retirement account to pay off your debt. If you do this though, be aware that if you do this, depending on how much is in your fund, you may face early withdrawal penalties and additional tax liability. The specific penalty will depend on the account that your drawn from and how you send the money. Remember that when it comes to retirement, your savings will be short, both from the money that you withdrew, but also from interest, dividends, and capital gains that you could have earned with the money. 

It’s possible to borrow from work-sponsored retirement plans, but this strategy does have risks too. If you leave your job, you will have to pay back the loan on a timeframe that could make your debt problems worse. 

Cash Out Of Life Insurance Policy

You might have accumulated some cash in your whole or universal life insurance policy that you could put toward your debt. Like raising a retirement find, this is a risky strategy that can come with tax consequences. Borrowing from your insurance policy is also an option, but it can affect the death benefit that any beneficiaries will receive. 

Settle With Your Creditors

Debt settlement can be a solution if your accounts are past due or you owe more money than you can repay over a few years. When you settle your debts, you ask your creditors to accept a one-off, lump-sum payment to satisfy the debt. Creditors who agree to this will agree to cancel the rest of the debt, but will usually only accept an offer like this on accounts that are in default or at risk of defaulting. 

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