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DO IT YOURSELF: Reducing Your Debt
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Written by Caitlin Wood
DO IT YOURSELF: Reducing Your Debt
Sure, you could apply for a debt consolidation, reduction or settlement program, but many often overlook the benefits of reducing debt on their own. While working directly with a debt expert does have its many advantages (their experience is invaluable), sometimes it’s smart to take care of your debt management yourself. You’ll even save on debt counselling fees, but it’s going to take some proactive and responsible actions. So let’s get started:
1. See where you stand
If you want to reduce or get out of debt without any help, you first have to see where you stand. You have to evaluate your financial position, and most importantly, figure out how much debt you have. In order to do this, you first have to collect all your financial documents and identify who you owe to, and how much you owe. Getting a copy of your credit file is a good way to start, you can get a copy from either TransUnion or Equifax.
Next, figure out how much you owe to each account, and take note of the interest rates and your monthly payment amounts. This list should include your mortgage, car loans, payday loans, your credit cards – all debt that you have.
2. Analyze your budget
Now that you know what you owe, the next step is to determine how much you can pay. Calculate your monthly, after-tax, income and take away all of your fixed costs from that amount (including your rent, mortgage, utility payments, groceries, insurance and so on). The remainder is the amount that could go towards paying off your debt. If the remainder just doesn’t cut it, you will have to look for ways to reduce your fixed expenses. The goal is to reduce your debt, and it may come with some sacrifices but in the end you will bounce back stronger and without debt.
Once you have determined that you can meet all of the minimum monthly payment amounts for all of the different debt accounts that you have, you should use any cash left over to pay off the debt from your debt account with the highest interest rate. The faster you pay off the high interest rate accounts, the easier it will be to get out of debt. Once you clear off your most expensive debt account, move on to the next highest and work like that. It will take time, but this is the best way to work toward financial recovery. As you pay off your more expensive debt accounts, your debt payments will become cheaper and cheaper over time until you are debt free.
Whether you can or can’t meet your debt payment requirements you should still include negotiations as part of your strategy. It’s a good idea to contact your creditors and negotiate better terms. Extending the term of your loan or reducing the interest rate can go a long way. These changes will make it easier for you to meet your payment requirements while avoiding hefty missing payment fees and shots against your credit score.
Finally, if you have home equity, obtaining a home equity loan to pay off your high interest debt is always a good idea. These loans come with low interest rates (because they are secured against your home) and long terms, and that’s one of the best ways to manage and reduce your debt.
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