So, you’ve made the decision to get ride off your debts by 2022.
The good thing is there’s a multiple ways to do this. These tricks can be successful if you’re disciplined and patient and have lots of planning to repay all of your debts. You can accomplish this
Lets start following steps one by one :
Table of Contents
1. Pay more than the minimum payment
Review your budget and determine what extra money you could contribute to your debt. Making more than the minimum can save you the cost of interest and assist in getting rid of debt quicker.
Let’s imagine that you have a balance of $15,000 on a credit card that has 17 percent APR and a $400 minimum payment. If you make only the minimum amount of payment and it takes nearly four years to pay off the amount. The amount you pay will be around $5,500 in total interest.
If you pay $550 per month or more than the minimumamount, you can pay off the debt in less than 3 years, paying only $4,100 in interest. To find out more, you can use an online calculator for credit card payments.
What it does:Paying more than the minimum will help reduce the principal amount on your credit cards quicker.
How to begin: Schedule the extra payment prior to the due date of the current cycle of billing. It could also be included in the minimum monthly payment.
2. Calculate your debt-to-income ratio
Next, calculate your debt-to-income ratio (DTI). The DTI is a ratio of how much you owe and how much you make. This figure is often used by lenders to determine if you are eligible for loans or other services.
A DTI ratio of less than 35% is acceptable. A DTI ratio of between 36% and 49% indicates that there is room for improvement. Anything above 50% requires immediate action.
How to calculate your DTI Ratio:
1. Add up all of your monthly bills. Add up all your debts. This includes student loans, credit card balances, auto loans, and rent. It is possible to include household expenses such as utilities and groceries, but not required.
2. Next, divide your total monthly debt by your gross monthly earnings. The gross monthly income is the total amount of your salary before taxes.
3. This is your DTI percent.
3.Consider the Wintry Mix: Snowflake, Snowball & Avalanche
After you’ve collected information about your debts as well as your earnings and your expenses now it’s time to develop a strategy. There are three strategies that are well-known. I prefer to refer to as”the “wintry mix”:
- Snowflake uses small pieces of “found money”–the undiscovered $20 bill that was in your jacket pocket or the change in near the base of the couch to help you pay off your credit card. It might sound absurd, but it actually works.
- Snowball targets to pay off debt from the smallest to the biggest regardless of the interest rates. The concept is that the satisfaction of getting rid of all debts motivates you to continue your getting out of debt discipline.
- Avalanche is definitely my personal favorite. It concentrates on the credit card balance that has the most interest initially. 1 Once it’s paid off, return to the balance or loan that has the next-highest interest rate. Since interest costs are accruing on all debts that are outstanding each month, picking the highest amount of interest-rate debt first to settle could save you money.
Naturally, it is possible that you could make use of snowflake using any of the other strategies.
4. Settle for less than you owe
It is also possible to contact your creditors to negotiate a settlement of your debts, typically at a lower amount than what you have to pay. Although it is possible to handle the task yourself, a range of third-party businesses also offer debt settlement services with a charge.
Although paying less than what you owe, and getting rid of old debts can seem sensible however, you should know that Federal Trade Commission does mention certain risks. In the beginning, certain debt settlement firms will request that you not make payments on your debts while you negotiate better terms. This could affect the score of your credit.
The reason this works is: You’ll only pay only a small amount of what you owe , and can continue to move on knowing that you’re no longer owing those creditors.
What to do: Contact your creditors to negotiate settlements, and if they accept, you can get the terms of settlement in writing. You can also engage a reputable debt consolidation company to take care of the legwork for you.
5. Consider a Personal Loan to Consolidate
Although personal loans have a lower interest than credit cards, they can be more expensive than auto loans or home equity loans that are secured by houses and cars. However, a personal loan to consolidate debt can have a significant advantage. Your monthly payment may be lower than what your combined payments are now. However, the downside to this advantage is that your consolidation loan may have a later repayment date which could mean that you end up paying more interest than what you were paying today.
To shorten the loan’s life, it is a good idea to pay more than the minimum monthly payment for debt consolidation loans. Let’s assume you consolidate all of your debts and balances. This will result in a 40% reduction in monthly payments. This cash flow could be used to pay down the consolidation loan quicker, or you could use a portion.
6. Re-examine your budget
There are two methods to pay off debt faster : earn more money and spend less. It’s not always feasible to take on an hour-long job or a side business, but you could alter your budget.
Begin by looking over every item of your budget and then arranging them according to their level of importance. Label each line item as an essential or desired or want, and then highlight the expenses that can be cut down or eliminated. Make the necessary adjustments to your budget and use the funds to pay off your monthly credit card.
What it does: You can make temporary financial sacrifices to make money which can be used to pay down balances quicker.
What to do: Assess your spending plan to figure out which areas you could cut. Transfer the funds into an account called “debt-payoff fund” in your budget, and then use them to make additional repayments to your debts every month.
Follow these tips, pay off your debts, and change your financial destiny in 2022. If you stay motivated and disciplined, no one can stop you from reaching your goal.