Analyse Your Situation
It’s necessary to know exactly where one stands at the moment and get a clear picture of one's financial situation. Doing the following will accomplish this:
- Compile all accounts, including loans and other credit information. Know the fine details of each of these.
- Write down the monthly payments and interest amounts on each debt.
- Write down net income (take home pay) and each expenses.
- Estimate what assets are available, such as home equity, car, jewellery, etc.
- Get a credit profile and credit score, to use it as a baseline to track one's progress.
Prepare a Budget
This cannot be done without a budget. Figure out monthly spending and find a way to reduce these so that it's possible to apply at least 10% towards debts. If that can't be done, find as much as possible. Even small amounts count… For example, cutting down on eating out once a week can become significant… $25 to $50 a month or more. And that can really help in reducing debt.
Once the savings have been found, take that amount and apply it towards debts. The fastest way to do this is to take a list of all the debts, showing the minimum payment on each. Rank them by the highest interest. Then take the extra amount that was found and put it against that debt.
When first debt has been paid off, celebrate. A lot of advisors say to keep going, but do something to celebrate, even if it is just cooking a special meal at home or dancing around the kitchen. Then continue to apply the extra money, including the minimum payment from the debt that was just paid off, to the next debt. It will go much faster this time. And that chance to celebrate again will come sooner!
Negotiate and Consolidate
This means to try and obtain lower interest rates on whatever possible, particularly those items with the highest interest rates. Call all creditors and see if they will negotiate a lower interest rate. Many credit cards won’t allow this, so seriously considering consolidation is an option. If possible, move some of the debt to lower interest rate credit cards. Maybe even need to open a new account. This can cause a temporary (small) drop in one's credit rating, but it will be worth it in the long run.
High balances can also hurt a credit score. If any balances are above 50% of the limit, then this is what needs to be examined. Is it worth shifting the credit around to lower one's rating or is having one or two items with high balances, but lower interest, better for the long term?
If Necessary, Refinance
Reducing an interest rate by a few percentage points, especially on large debts, can save hundreds of dollars. What is currently outstanding and what can possibly be refinanced? How about the mortgage? Car loan?
It is sometimes a good idea to talk with a mortgage broker about a home equity loan. If there is equity in the house, then it's possible to use this to consolidate debt and reduce the interest expenses overall, thus eliminating the debt quicker.
Create a Plan and Stick to It
It is sometimes hard to really stick to a plan, but it's truly required in order to gain control. Put the payments on a calendar and follow it religiously. It can help to sign up for automatic bill payments through one's bank. However, when this is done, make sure that the payment lands on the right date for the credit card deadline. The payment deadline can sometimes shift a day in one direction or another. And that can mess up credit ratings, budget, and increase interest charges.
Put credit cards away someplace where they cannot be used. Many people put them in the freezer, literally “freezing” the credit cards. Build an emergency fund so that if anything goes wrong at least there is something to fall back on.
And remember, celebrate each time a major milestone is reached!