Throughout 2020, many people were financially impacted by the pandemic and relied on credit cards and loans to get them through the year. To further assist those impacted by COVID or those who are simply trying to get out of debt, Headway Wealth has put together a list of 8 tips to reduce (or eliminate) your debt in 2021.
To get out of debt, you simply need a plan and follow through on actually executing it. Below are the 8 ways to assist you with your action plan .
1. Gather Your Data
To get rid of debt, you first need to know where you stand. To have a comprehensive picture of all your outstanding debt, here’s what you will need to gather:
- Recent billing for all credit cards and loans, including student loans.
- Credit reports so you can verify the accuracy and identify all recorded debts.
- Your credit rating to ascertain if you are eligible to lower your interest rates or take out a loan to consolidate your debt.
2. Compose a list of your debts and income
As soon as you have all your data on hand, make a list of all your debts, based on the following:
- Creditor’s name
- Balance
- Minimum monthly payment
- Interest rate
Next, you need to list how much you need to pay to minimise the debt to zero within three years, or whatever your timeframe is. Remember to include items not listed on your credit reports, including family loans, medical bills and recurring bills, like groceries and utilities.
And know your monthly take-home pay. This is the starting point you have to work with to pay off that debt and pay your regular expenses such as groceries, utilities, etc.. The amount will also give you insight on whether you can afford to pay more debt off or find other income sources.
3. Reduce Your Interest Rates
Interest on loans or credit cards can make attempting to get out of debt seem like running a losing race. The more you owe, the more interest you will be charged and the more you owe. And round the cycle goes.
If you have more credit card debt or loan debt than you can deal with, one way to at least clear that debt is to pay less interest if possible. Here are ways you might lower your interest rates.
Getting a lower interest rate credit card
Depending on your credit rating, you may qualify for a credit card with a better interest rate than your current card. Better yet, you may qualify for a credit card with an introductory 0% interest rate for 12 or months or more.
You need a credit rating of at least “good” for the best chances. If you don’t know what your credit score is, you can get your credit score for free through Experian’s website.
If your credit score is good or better, look at a low APR credit card and see if you can beat your current APR.
Here’s what a lower credit card interest rate may mean: Let’s say you have a loan or credit card with ₤5,000 outstanding, make a payment of ₤ 200 and don’t charge the card for anything else.
At a 15.24% APR, you’re charged ₤ 1,054 for interest and will pay off the balance in 31 months.
At a higher APR of 29.96%, you’re charged ₤2,937 and will pay off the balance in 40 months.
That’s a difference of ₤1,883 and 9 months of payments. Even a few percentage points off your rate can make a huge difference to how quickly you get out of debt.
In that same circumstance, if you paid an extra ₤50 a month, for a total of ₤250 a month, you would pay off the balance in 24 months at 15.24% APR and pay ₤805 in interest. At the higher APR of 29.96% you would pay off the balance in 29 months and pay ₤2,014 in interest. Paying just ₤50 extra a month could shave off 7 to 11 months of payments and save you quite a bit in interest.
You might also be able to negotiate with your credit card issuer to get a lower interest rate on your current card.
Get a balance transfer credit card with a lower interest rate or 0% introductory rate.
Another option is to get a balance transfer credit card with a lower interest rate and/or an introductory 0% APR. With a credit card, you can transfer funds from your old card to the new card.
If this ₤5,000 balance on a card can be transferred to a 0% interest deal over 18 months, you’ll get ₤1,498 + interest each month. And if you put money saved, toward the card’s balance, you pay the full ₤ 5,000 balance off in just 7 months!
Get a Loan with a Lower Interest Rate
Another way to get rid of high-interest debt is to take out a personal loan, another loan, or a home equity line of credit with reduced rates. Personal loans often come with lower interest rates than credit cards and if you have a home, and can tap into its equity, you can get an even better interest rate.
If your car loan is the cause of your debts, you can re-finance a high-interest car loan.
4. Pay More than You Have to
You can pay more.
Look at that ₤5,000 credit card bill to see how making more than the minimal payment can help. If your monthly payment is ₤114, you’ll have to continue to make payments on that card for more than five years to pay it off and you’ll pay a total of ₤7,292 (including the ₤2,292 in interest).
Increase that ₤114 payment to ₤300 and the card is paid off in just 19 months and you pay only ₤642 in interest.
The same principle applies to any loan– a mortgage, a car loan or home equity line of credit. If you pay your mortgage off early, make sure there’s no prepayment penalty.
5. Earn More Money.
An additional way to get out of debt is to make more money. You don’t have to get a new job or a raise, although those would help, it can simply mean taking a side gig or some other tactic to add extra money for a certain amount of time.
Other options include taking part in online surveys, selling things on ebay, walking dogs, babysitting, etc.
6. Spend Less Money
The flip side of earning more is spending less. Ideally, depending on how far out of debt you need to get, you might do both and there are numerous ways to save small amounts that can add up long term. From eating out one less day a week to skipping your morning coffee out or taking your own snacks to the cinema rather than paying ₤30 for snacks, sweets and a soft drink.
The extra money you save can go straight into paying down your debt.
7. Create a budget and debt repayment plan and stick to it
After you’ve confirmed your total debt and have decided how much extra you can pay each month, readjusted your interest rates and earning or spending, you want to have a goal and detailed action plan. A simple budget and/ or debt management or debt repayment plan can help, and they don’t need to be complicated. In fact, many online banks and credit unions offer free budgeting tools.
A budget plan shows you what you’re spending on and where it makes the most sense to put your money, whether it’s from interest saved or pounds earned. The latter becomes your debt repayment plan. It can be a part of your budget or separate.
A good way to approach a debt repayment plan is to take the total payout figure you calculate after you compose a list of your debts and income and use it as a target to work toward:
Sum up the three-year or your chosen timeframe pay-off amount for all your credit cards.
Adding up monthly payments for all other debts.
Writing down the result as “Your Total Monthly Payment”
Now you have that, determine whether you can afford to pay the full monthly payment until your debt is repaid. If not, contact a credit counselling agency and/ or an insolvency lawyer. Remember, however, that insolvency has a huge impact on your creditworthiness, and if you are able to work out a payment plan with your creditors, it can be avoided. Below are some repayment suggestions:
- Start with paying off the debt using the highest interest rate or lowest balance. Paying your target debt off first is known as the “debt snowball” or “avalanche” method.
- Set up “auto pay” for the required minimum payment for all but your target debt.
- Pay as much as you can towards the target debt until that debt is repaid.
- Choose a new target debt and pay extra for it and so on.
8. Rinse and Repeat
Keep a close eye on your spending and habits to make sure you’re making progress. Check your budget and adjust until your debt is repaid.
Create an emergency fund
You may think you have no money to save when you reduce debt but saving is important. Life is going on, and when something comes up, like losing a job, medical bills, or car repairs, you have to be able to cover it.
The suggested amount to have in an emergency fund is three to six months’ worth of expenses. If that amount isn’t possible, aim for one month’s worth, which is still an excellent starting point.
Whether you are beginning to save now or paying down debt first, make it your goal to have an emergency fund. As you pay off your debt, you can move the money you used to pay off the debt to pay yourself when setting up an emergency savings account.
Stick to It
Just like losing weight, losing debt takes time. Don’t worry if you have to make adjustments or slip on the way. Take small steps to help you get there and keep your eye on the goal: be debt and worry free!
Headway Wealth is committed to its clients’’ financial success and would like to offer a free, no obligation consultation* to get your started on the right path.
Book your appointment by clicking here or email us at [email protected], we’d be happy to help.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage
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