The US Federal Reserve recently increased its benchmark interest rate by 0.75 percentage points, reaching a range of 2.25-2.5%. This is the second rate rise in a short period, and experts expect more of the same in these challenging economic times.
Consumers have to make various concessions to save money, and one of the most critical considerations is something many people don’t like to address head-on: debt.
Debt becomes a more considerable burden when interest rates are higher. Now is the perfect time to look at your debt and try to pay it down as much as possible so you can save more of your money. Let’s take a look at some ways you can do this.
Paint Your Financial Picture
Start budgeting now if you haven’t already. First, ensure your spending aligns with your savings goals by identifying how you spend your money compared to how much income you earn each month. Cut unnecessary spending to avoid further debt.
Create a list of your debts, your creditors, and your interest rates, listed from highest to lowest to get a complete picture of the debt you carry. Do some research or talk to a financial consultant to determine if you can reduce your interest rates by consolidating debts.
Check Your Credit Report
Periodically review your credit report and check your credit rating for accuracy. The three major consumer credit bureaus provide information on credit ratings, and you can choose various membership levels, some of which are free of charge.
To begin, you can view your credit report and score for free, but note that you can only get your credit report free once a year. Several free credit score services require you to subscribe to a monthly credit monitoring service that will charge you a monthly fee if you don’t cancel it.
Credit reports allow you to see where missed payments or other debt factors may have lowered your credit score. Just one or two late or missed payments can impact your score and land you in the “high risk” category.
Make a Start
Once you have a list of your debts, make a plan to repay them. Financial experts often recommend two methods for dealing with debt: the “avalanche” and the “snowball.”
With the avalanche strategy, you pay off your highest interest rate loans or credit cards. All your other loans are paid at the minimum while you aim to pay down loans with the highest rates. With the snowball approach, you pay off the smallest amount of debt first. Regardless of which method you choose, the most important thing is to start repayment.
Consider Debt Transfers
A zero-balance credit card is an excellent option if you have good credit. Interest-free loans are offered by many providers for up to 21 months.
Also try to avoid adding more to the balance, and focus on paying it off. Read any fine print before signing up, including information about the fees, deadlines, and other relevant points. The cost for transferring a balance is usually around 3% to 5% of the balance, so if you do your research ahead of time to find the best rate, you’ll prevent costly transfer fees. Personal loans with low-interest rates are another option for paying off credit cards.
Negotiate, Negotiate, Negotiate!
Identify your creditors and meet with them. Prepare your documents in advance and make sure they are all in order. If you have outstanding debts with lending institutions, visit those institutions. If you owe money to more than one bank, start with a bank where you have the best track record as they’ll be most likely to negotiate with you.
Ask for a renegotiation of your debt with that institution based on the debt you’ve already cleared to avoid defaulting. In more complex cases, you may also consider speaking with a debt relief or settlement company.
Choose Your Battles Wisely
Creating a plan of attack to pay down debt can help you stay organized and efficient. It can be helpful to establish a hierarchy of debt. Many choose to pay off high-interest debt first, followed by nondeductible, low-interest debt. Tax-deductible debt may fall at the bottom of the hierarchy.
If you carry significant debt, it is a good idea to avoid taking on more high-interest debt. One way to do this is to avoid purchasing goods on credit. Plan your spending according to what you can afford, keeping an emergency fund and credit card available for unforeseen circumstances that may arise.
When possible, double the payments on your debt with a high-interest rate. Although doubling the payments is not as efficient as consolidating, it can speed up the payback period. As soon as you have eliminated the highest-interest debt, double your payments on the next-highest debt.
Reducing your debt faster will make the bank more likely to grant you a consolidation loan when you’re getting closer to a magic number. Likewise, by doubling your payments, you will be able to pay off your consolidation loan much faster.
Differentiate Between Wants and Needs
It might not always be easy, but one way to practice discipline is to avoid taking on new, unnecessary debt. It can also mean cutting back on other unnecessary purchases.
The more financial discipline you exercise, the more money you’ll have to pay off your high-interest credit accounts. This will put you in a healthier financial position in the future and provide you with cushioning if rates climb any higher.
Meeting with a credit counselor is one of the most helpful steps to reducing debt, and the earlier you ask for help, the sooner you can improve your financial position. You’ll receive many helpful tips from a credit counselor, and they’ll make sure that your repayment plan is on track.
Remember that both high and low-interest rates don’t last forever; the economy is fluid and constantly changing. By establishing better financial habits, you’ll be able to survive and thrive no matter the factors out of your control.