How To Pay Off Debt

Clearing away debt is crucial to peace of mind and a happy life. This is a task that takes time, patience and perseverance. By making some tough adjustments and sticking firm to the resolution to be debt-free by a certain point of time in your life is a very much doable activity if you're willing to slog it out. Listed below are some simple and foolproof methods by which you can pay off existing debts.

Step 1

Take stock. The first step towards recovery is acceptance of the fact that you have a problem. Being plagued by debt is nearly equivalent to being addicted to dangerous drugs or habits. Once you are able to accept that you have a big problem on your hands, you can look for ways to mitigate it. Make a list of all your debts, big and small with details of the amount, interest rates, minimum monthly payments, etc. Next, make a similar list of your sources of income and how your money is spent. Laying aside the required some for your basic living expenses, mortgage or rent and transportation, calculate how much money you are left in hand with. Cut down on all extraneous and frivolous or impulsive spending and if at all, there is some stuff which you really need to buy, pay cash instead of using your credit card.

Step 2

Classify your debt. Much of the accumulated debt you have will be on account of credit cards and other unsecured loans. These are also the ones which require the maximum effort and will-power to clear-off. Reducing the amount of unsecured debt will go a long way in springing you out of the debt trap, but not if you turn around and start securing credit indiscriminately again! Cut up all credit cards but one, the surviving card should be a low-interest and low-balance one, which you will use only in emergencies.

Step 3

Make regular monthly payments. The next step in your "being debt-free" plan is to make the regular monthly payments on all credit cards and loans. Then, select one loan or card balance and pay additional money over and above the monthly payment into that account for the next few months until you've brought the account balance to nil. Repeat the process with the rest of the account balances until you've paid off all outstanding dues.

Step 4

Transfer card balances. Another method to cut down credit card debt is to transfer the outstanding balance from a higher interest rate account to one with a significantly lower rate of interest. A lot of card companies offer deals where you can not only transfer existing balances, but will also provide some fixed period during which the card will be interest-free and at the end of such period revert to the normal albeit lower interest than your existing one. Make maximum use of the interest-free period by repaying larger sums of money during the valid period. At the end of this period you should be left with a nil or very small balance on the card. While juggling card balances across different companies to make use of favorable terms, remember not to add to the existing debt by going on additional spending sprees!

Step 5

Negotiate with the provider to settle debts. If you have multiple cards on which you owe money and a couple of these balances are just an accumulation of interest and finance charges. This situation arises when you've used the card for a few big value purchases and have then spent the last 3-4 years paying off the bare monthly minimum. The principal amount may have actually been paid off during this period, but you are still bogged by the mounting interest and financial charges. Call up your card company and negotiate for a final settlement of the outstanding, since you are finding it difficult to service the debt. The company could be willing to offer you a lower interest regime, or they could waive some amount of interest and finance charges and freeze the outstanding balance. This balance can be then repaid over the next 4-6 months (going up to a year) and the account closed. Such schemes for debt settlements are an easier burden for you to carry, the company is able to recover some money instead of writing the whole amount off and as long as you adhere to the settlement plan fully and regularly, it will not have much of an effect on your credit rating as well. This is because potential creditors will be able to appreciate your "willingness to pay", even in adverse circumstances.

Step 6

Borrowing equity against large tangible assets. If you own your home or have other large tangible assets such as plant and machinery which you own, you can borrow equity with these assets as security at a much lower rate of interest and longer repayment periods. Use such borrowed equity to clear off all outstanding credit cards and unsecured loans. You can also borrow against intangible assets such as a substantial insurance policy or your 401(k) retirement plan at work. In these cases, however, make sure to read and understand all the terms and conditions which come with such loans, because there will be conditions attached to the period of repayment plus taxes and penalties applicable for premature withdrawals.

The steps listed above are some of the methods by which you can pay off all your debt. However, probably the easiest way to be debt-free is not to get into such excessive debt in the first place! While that could be a little difficult considering the credit-friendly society we live in, be cautious about your spending, avoid splurging on impulsive purchases for products which you may not end up using at all. Your buying philosophy should be to buy only that which you need and can afford to pay for without borrowing extraneously (read credit cards).


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