When You Need to Make a Debt Reduction Plan
When you have a mountain of debt, you may feel too stressed and frustrated thinking you won’t be able to achieve your financial aims.
While the debt payoff process can be overwhelming and time-consuming, there are still opportunities for you to repay your high balances, review your spending habits, boost your earning potential, and finally accomplish your monetary targets.
Making your debt reduction plan can be beneficial if you want to speed up this process. Here is what you need to consider.
Monitor Your Credit
Consumers with a lot of debt usually have a less-than-credit score. Why does it happen?
When you fail to pay your current credit card balance on time or forget about the timely loan payments, your credit gets damaged and lowered by several points.
If you apply for a new lending option at the credit union or the local bank, the lender will most likely conduct a hard inquiry to check your creditworthiness.
Those without a solid emergency fund often look for 1000 loan no credit check to borrow money. It’s necessary to admit that every lending institution will perform a credit inquiry, although alternative creditors just make a soft credit check that doesn’t damage your rating.
When you start the debt reduction plan, you will notice how your rating gradually goes up. Hence, it’s important to monitor your credit to see where it was and how it will change over time.
Create a List of Your Debts
Now that you know your current credit and understand that you need to improve it, you should make a list of all existing debts so that nothing is left behind.
List all your loan and credit card accounts. Ordering an annual credit report may help you check if you’ve missed anything.
This list can include funds owed on:
- Personal loans
- Student loans
- Car loans
- Credit cards
- Medical bills
Don’t just write down the general type of your debt, but also the name of the crediting company or lender, the interest rate, the total amount owed, and the minimum payment you need to make every month.
Avoid Scams
The Debt Collection Rule issued by the CFPB explains some provisions of the Fair Debt Collection Practices Act (FDCPA) that came into action on November 30, 2021.
According to this act, you should avoid having business with any organization that promises to settle your debt in case this organization:
- Claims that it may settle all debt for a percentage reduction
- Asks you to pay fees before the company settles the debts
- Guarantees it can make the whole debt vanish
- Claims it can prevent you from having further lawsuits or debt collection calls
- Claims you should stop talking with your lenders at all
Contact the local consumer protection agency or your state Attorney General before you start any negotiations with the debt settlement organization.
They will tell you about potential consumer complaints about these companies to help you avoid scams and save your money.
Pay attention to the documents of the company as well. Debt settlement firms are obliged to have a license in some states.
Track Your Spending
It’s necessary to take a closer look at your spending. How will your financial situation improve if you change your spending habits?
You will be surprised to find out that many consumers overspend or have impulse purchases that add up and increase their debt. If you create a monthly budget, you will be able to track how much money you earn and how much you spend.
If there is nothing left by the end of the month, this is the major reason for having an endless debt cycle.
Dividing your expenses into needs and wants is beneficial for consumers who want to lower unnecessary expenses.
For instance, you may cut down some entertainment costs, subscription services, and another discretionary spending to maximize your debt payments and savings.
Ways to Make a Debt Reduction Plan
The following figure shows the Share of US Householders with Medical Debt by householder age. At least 20% of households had medical debt for all age groups where householders were under 65 years old.
This share lowered in families with people over 65, reducing to 15% for those aged 65 to 69, and 9% for people aged 75 and older.
If you are ready to tackle debt and reduce it, there are two main strategies.
- Avalanche strategy. This method can attack your debts with the highest interest rates. It helps consumers to save funds in interest charges in the future. If you select this strategy, you will put aside additional money toward the highest-interest loans and credit cards. Of course, it will be needed to make minimum payments on other debt obligations. Once you repay the highest-interest debt, you should move ahead to the next debt with higher rates. On the other hand, the progress in debt reduction will be slower and noticeable only after some time.
- Snowball strategy. This method can attack your debts with the lowest interest first. It is aimed at creating additional money quicker by eliminating accounts with low balances in the first place. You will notice progress in debt payoff faster if you choose this method. If you select this strategy, you should allocate additional money toward paying down the smallest debt first while you make on-time minimum payments on other debt obligations. When the lowest balance is repaid, you should keep on repaying the next debt with the lowest rates.
The Bottom Line
It’s easier to accumulate debt than to repay it. Yet, you need to be determined and proactive to take the necessary steps and get rid of existing debt.
If you need additional advice from professionals, you may turn to debt relief companies or credit counseling programs.
Watch out for the red flags mentioned above to spot and avoid scams. Improve your spending habits, make a budget, avoid taking out more debt, and choose the most suitable debt payoff strategy to become financially independent.
With a solid foundation in technology, backed by a BIT degree, Lucas Noah has carved a niche for himself in the world of content creation and digital storytelling. Currently lending his expertise to Creative Outrank LLC and Oceana Express LLC, Lucas has become a... Read more