Steps to Get Out of a Bad Debt
Managing debt is an important skill that needs to be developed. Money is one of the main causes of stress. When debts pile up and you fear looking at bank accounts – it’s easy to see why.
It can be a slippery slope but there are answers, here are some top tips…
DON’T hide under the bed covers.
One of the first things experts from all over the financial world recommend is be proactive. This means contacting your lender and telling them clearly and honestly why and how you may be struggling to pay off their debt. Lenders are obliged to help their clients and most offer refinance options which may include extended loan terms and reduced payments.
Here are some outcomes:
You contact your lender and explain your situation: you’ll likely be offered a payment plan that you can manage better. You’ll avoid damage to your credit file and avoid having assets repossessed.
You don’t tell your lender: you miss payments and damage your credit file. The amount you owe next payment increases, making things even worse. Your lender assumes you’re refusing to pay and calls and sends letters wanting payment.
Try the ‘debt snowball’ method.
This method involves making a list of all your debts and ranking them from smallest and quickest or easiest to pay off down to largest and longest to pay off. You focus as much as possible on the smallest one, making maximum repayments on it to knock it off as soon as you can. Meanwhile, you pay the minimal amounts possible on the other debts. This allows you to reduce the total number of debts as soon as possible.
The snowball method allows for small ‘wins’ quickly. After a while, you’ll be able to focus only on the big ones.
Keep your receipts.
Or at least a note on your phone about exactly what you spend money on. This is an old idea but a good one. It’s amazing the things we spend money on that we want but don’t need. By first assessing what you actually spend money on during your week and then looking at where and on what you could save on is hugely effective.
For example, as one contributor’s week noted:
Chips at service station: $5
Coffee delivered to work (x2): $16
In-app purchase: $8
Drive through car wash: $14
Dinner with friends: $30
Total: $73 in unnecessary expenses in one week.
Packing your debts into one. If you’re new to the idea, it may seem a little strange. Consolidating debts means taking a large loan to pay them all out, then you’ll have one debt to pay off rather than several smaller ones. The huge benefit is paying far less in repayments per month. Most financial lenders offer loans for debt consolidation as it’s pretty common.
If someone has, for example, a car loan, a personal loan and a credit card debt – consolidating them can really help. Taking out a larger loan to pay off all the above three will result in one payment per month as opposed to three.
The old classic – it can really help. Splitting your expenses into categories and designating income towards each category makes a big difference. For example, groceries, rent/bills, loans and luxuries.
You might allocate the following positions of your income:
Rent / bills: 30%
Another, simpler budgeting idea is an account split. This means having two bank accounts; one for loan repayments and one for everything else. As soon as you receive your income, put the total of your loan expenses into one account and leave. In the other account, you’ll have the remaining to live off. Furthermore, always create a shopping list before going to the supermarket to make sure you only buy what you need.
The bottom line.
Don’t stress. You’re definitely NOT alone. Australians owe $33 billion in credit card debt and $1.84 trillion in household debt. By following the above ideas, you’ll be able to get out of bad debt sooner than you may realise – and with far less stress. If you feel like you’re even beginning to struggle, check your lender’s website and your loan contracts to find out the options available.
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