Paying off your debt is possible when you know how much you owe and what you need to do to pay it off. If you feel ready to pay off your debt, you can start by following these steps.
Step 1: First, Call Your Creditors to Arrange Lower Interest Rates
It is a crucial first step that most people skip. People often never call their creditors to ask for lower rates. As a result, it becomes more complex for them to eliminate debt, leading to higher costs.
A lower rate means accrued interest charges consume less of every monthly payment you make. Therefore, you can pay off the principal (original debt) much faster.
To do this step effectively:
- Check the current interest rate (APR) on each credit card you use
- Write down relevant facts about your credit, such as:
- The duration of time you have been a customer of each account
- How long has it been since you’ve missed a payment?
- Check the current interest rates of credit cards to know the average rates at the country level for each type of credit card you have.
- Call the Customer Service Department on each credit card and request a rate reduction. They can pass the call on to a supervisor who can authorize a new rate—search tips on our website for information to help you trade effectively, or give us a call.
Step 2: Prioritize Your Debts
Now that your rates are as minimal as possible arrange all the debts you need to pay down from the highest APR to the lowest. You should pay off your higher APR debts because they cost more money. So, if you pay them first, you’ll save money on total interest.
Step 3: Streamline Your Budget to Exploit Cash Flow
Next, you must achieve more cash flow for your debt depletion plan. See how much cash flow you have in your accounts – that’s all the cash you have leftover after paying bills and necessary expenses. Then, see if you have non-priority expenses that you can temporarily reduce while working down your debt. Remember, you wcanresume those expenses once you have finished eliminating the deficit. Think of it like a diet you must stick to while losing additional financial weight.
The more cash flow you have to pay down debt, the faster you’ll do it. Faster also means fewer interest charges to your debt, so you’ll save money too. It pays to avoid some discretionary spending for a short time to pay off these high-interest debts quickly.
Step 4: Pay Off as Much of a Debt as Possible, Then Pay Off the Least of the Rest
Now, you can begin to eliminate your debts. You may think you should simultaneously put a little extra money on all your debts. However, this is not profitable. You’ll end up with $25.00 minimum charges to pay all at once.
It is more effective to focus on one debt at a time. Make the lowest required payment on all your credit card debt, except for the card with the highest annual percentage rate (APR). Use the extra cash you induced to make the most significant payment on that debt. Then, keep doing that every month until the balance on that card hits $0.
Step 5: Eliminate Your Debts, One by One
Once you remove the first debt, move on to the debt with the next highest APR. Pay in portions, then continue until you zero out the balance you owe. With each obligation you eliminate, you’ll free up more cash to use to pay off the next debt.
You can also bring non-priority expenses back into your budget that you’ve cut from time to time. It will guide you to avoid running out of budget, leading to overspending. Experts also recommend that some of the funds you used in those accounts be redirected into savings once you deposit your credit cards. So, if you save $500 monthly on credit card accounts, set up a $250 recurring monthly transfer to savings. This way, you can build a solid emergency fund, which prevents you from relying too heavily on credit cards.
The Best Way to Reduce Debt
The abovementioned procedure is the best because it is generally the most profitable. However, that does not mean it is the best method for every financial condition. If you have a large debt to remove, the above steps may not work with limited cash flow. It is especially true if your most significant balances are on your credit cards with the highest APRs. It’s easy to burn out from lack of progress and can stop completely.
So, in this case, it’s better to begin with your lowest credit card balances than your debts with the highest APRs. You will knock out the “lower fruit,” freeing up more cash to deal with your most significant obligations. The methods are the same as the five steps listed above. However, in Step 2, you organize your debts, starting with the lowest balance and ending with the highest.
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