Debt is a necessary part of life. We use it to buy things that would normally fall outside our financial reaches: homes, cars, collegiate education, and more. Debt also has the power to build credit by illustrating positive payment history and management. Despite these benefits, there comes a time when all debts must be repaid, especially if they are hurting your income, debt-to-income ratio and credit score. Read on to learn how to get serious about paying off your debts.
- Create a budget. A monthly budget is a roadmap to financial stability. Creating a financial plan allows you to understand where your resources are used and how to create positive change. Download our free dynamic template to begin your journey. Sites like Mint.com also provide valuable tools to help you track spending throughout the month. Whatever method you choose, education is the goal. Paying off debt isn’t possible without a clear view.
- Cut spending by 15%…today. We talk a big game as a society, but Americans are bad at saving money. In fact:
- Only 37% of Americans have enough savings to cover a $1,000 emergency
- A combined 38% would need to cut spending or rely on a credit card for an unexpected expense
- The average worker saves only 8% of their income for retirement.
- Nearly half of all Americans die with $10,000 or less in assets
- Two-thirds of surveyed Americans don’t believe they’ll have enough to retire
Although these grim statistics don’t encourage much hope, savings is the common thread that could repair each problem. The key is frugal living. Although some expenses like mortgages and insurance premiums are fixed, others like food, utilities and entertainment expenses are negotiable. Aim for a 15% spending reduction as soon as possible. Use your funds to establish an emergency fund and begin chipping away at your debt.
- Repair your credit quickly. Credit health is a vital part of savings and debt reduction. Why? It all comes down to interest rates. Credit scores allow lenders to assess risk when deciding whether to work with you. A low credit score is likely to yield higher interest rates on fixed loans like mortgages and auto financing. It also means high rates on revolving credit accounts, i.e., credit cards. Review our quick ways to boost your score. A better score equals savings — savings you can use to get serious about paying off debt.
- Verify credit repair changes. It’s not enough to pursue credit repair. An improved score isn’t worth much without results. For example, suppose you raise your credit score from 675 to 742. A drastic improvement means you qualify for a better interest rate on your mortgage, a lower variable interest rate on your credit cards, and even lower rates on your insurance premiums. These changes aren’t automatic, and you’ll need to take steps to ensure that your hard work is rewarded. Consider applying for loan refinancing for fixed-interest accounts. Contact your creditors and ask them to adjust your rate based on current information. The bottom line: Take an active stance and work to secure the savings you need for debt reduction.
- Focus on long-term goals. Saving money and paying bills can be difficult tasks to achieve. Both involve living on less and sacrificing wants for greater needs. Sure, the immediate tasks of debt reduction aren’t that exciting, but consider the future. Freeing yourself from burdensome debts means more opportunity to secure new debts with better terms. It also provides the ability to save for retirement and enjoy life without worrying over unpaid bills. Find your drive by making a list of the things you want in the future. Talk to our credit repair team about your goals and allow them to help you create a game plan of success. It’s never too soon to start planning. Don’t let debt stand in your way.