5 Ways to Get out of Debt this Summer
Debt can make life seem a lot more difficult. It feels like a weight on your shoulders that follows you around wherever you go. If you have too much of it, debt can ruin your credit, and make it impossible to save for the future.
According to CNBC, the average person has $90,460 in debt including mortgages, credit cards, and installment loans. That’s a big number to deal with and try to get out of, especially if you only make the minimum payments required each month.
If you’re ready to feel free financially, here are the top 5 ways to get out of debt this summer.
Make More than the Minimum Payment
We’re all tempted to make the minimum payment because that’s all that’s required, but it’s the biggest mistake. When you make only the minimum payment, interest accrues on much larger balances.
Instead, look at your budget and figure out how much extra you can pay toward your debts each month. If you spend more than you make, look at your spending – where can you cut back?
Here are some common areas:
- Eating out
- Impulse shopping
- Excessive memberships or subscriptions
See what you can cut out or which bills you can cut down by negotiating with the credit or shopping around for different services. Allocate the money you save toward your bills.
Use the Debt Snowball Method
If you like a ‘plan’ to get out of debt, the debt snowball is a great strategy. It allows you to focus on one debt at a time and realize ‘quick wins’ so you can see your progress.
To use this method, organize your debts in order from smallest to largest balance (ignore the APRs). Write down the minimum payment required for each debt and work it into your budget. Next, figure out how much ‘extra’ money you have each month and allocate it to the first debt (the smallest balance). Make the minimum payment plus the extra money you have toward the debt each month until you pay it off in full.
Move onto the next debt, using the same strategy, but this time take the full amount you paid to the first debt (minimum payment plus extra) and add it to the next debt’s minimum payment. Keep doing this until you build a snowball so large that you’re out of debt.
Make Extra Payments
If you come into money, put it toward your debts. You may think ‘when do I come into money’? It happens more often than you think. Here are some examples:
- An inheritance
- Monetary gifts for holidays or your birthday
- Work bonus
- Tax refund
Also, if you receive a raise at work, you can allocate the extra money to your debt. Instead of letting lifestyle creep happen (expanding your expenses to meet your new income), keep the same lifestyle and use the money to pay off the debts you incurred.
The extra payments will lower the interest that accrues and help you pay down the principal balance faster, so you get out of debt this summer.
Even if you can’t make regular extra payments, but apply all windfalls to it, you’ll make a dent in what you owe.
Refinance your Debts
If you have decent credit, you may have several options to refinance your debt.
- Cash-out refinance – If you own a home with equity in it, you can use the equity to consolidate your debts. This leaves you with one payment, one interest rate, and the ability to pay your balance down faster. With today’s low mortgage rates, this is an option many people use.
- Home equity loan – If you don’t want to refinance your first mortgage, you can still tap into your home’s equity using a second mortgage (home equity loan). You can consolidate your debts with the home equity loan so you have one debt payment each month with a lower interest rate.
- 0% APR credit card – If you don’t own a home or don’t want to use your home’s equity, consider applying for a 0% APR credit card. You’ll need good credit for this option and a credit line large enough to cover your balances. Figure out how much you must pay toward your debt to pay the balance off in full before the 0% APR expires, usually 12 to 18 months.
Negotiate with your Creditors
If you’re in over your head and can’t afford any of the methods above, talk to your creditors. When you’re falling behind or know you will, they may negotiate a settlement with you. All you have to do is ask.
Creditors have many solutions including:
- Temporarily or permanently reducing your interest rate
- Creating a more affordable payment arrangement
- Creating a one-time settlement that’s less than the full amount but that the creditor will accept as satisfactory
Think about what you can pay and how it will affect your credit report. As long as you pay the debt according to the creditor’s guidelines or what they work out for you, your credit score shouldn’t be too negatively affected.
Getting out of debt this summer isn’t as hard as it sounds. Even if you have debt amounts in the six figures, it takes a plan and careful follow through.
Whether you make extra payments by finding more money in your budget, refinance the debt with another loan and aggressively pay it down, use the debt snowball method, or work out a plan with your creditors, there are ways.
The key is not to ignore it and to continually revisit your plan to make sure it’s working. If you aren’t making as much progress as you hoped, revamp your plan and start over. With the right steps, you can pay off what you owe and have more money to save for retirement or other large goals.
Tracie Breaux is the founder of The Cash Queen and she is passionate about empowering women to achieve financial independence.