Getting Rid of Debt
Now that you have started to think about reducing your debt, you have made the first step, which is sometimes the most important one. Sooner or later you will consider ways in which to get rid of your debt and the sooner you do that, the better.
Finding the best way to get rid of debt becomes very complicated when you are overloaded with it. First of all you should determine which accounts need to be covered. After this prioritize them in order of importance and consider how much money you can allocate each month for payments. In this way you will manage to construct a plan on how to deal with your debt in accordance with your budget.
However, before you construct the actual plan you should determine the exact amount of money you should pay back, namely your debt. In order to do this you should provide yourself with a copy of your credit report, which you can request from any of the three major credit reporting agencies. The latter receive information on your obligations that is reported by the different institutions. In order to complete your list of obligations you can use the information from the statements from your creditors, because some of the debts may not be reflected in the report.
For each debt you have write the following:
- Creditor's name
- Amount you have to pay
- Monthly payments
- Interest rate charged
You should strive to cover bad debt first (e.g. credit cards, small loans).
After this you should order the creditors to which you owe money. It is recommendable that you list them in order from the highest interest rate to the lowest. This means that on the top comes the obligation that goes with the highest interest rate. On the other hand, you can get rid of the debts of the smallest amount. The reason for this is that the bigger debts may take more time to repay them.
As a rule of thumb select the method that you know that it will stimulate you to keep repaying your debts. If you know that the longer it takes to cover a debt, the less motivated you will be it is better to cover your small debts.
After you have prioritized your debts, it is time to consider how much you can pay each month. In order to do this you should make a clear view on the sources of income you have. However, you should deduct all your other financial obligations so that you receive the discretionary income you have. Thus, sum up all the sources of income you have and then deduct the monthly expenses you incur, such as food, utilities, transport and etc. You will get the disposable income you have, which you can use for covering your debt obligations.
So, until now you know the debts you should cover, the order in which to do it and the money you have available for the purpose. It is time to make an action plan.
Firstly, allocate the free money you have for the debts that come first in your priority list. You should make the minimum payments required every month plus this amount you have allocated. Do this until you have completely covered the debt. After this go to the next debt in your list and do the same with the money you have left. This plan should be followed until you have covered all of your debts from the list.
Stick strictly to the plan you have designed so that you manage to get rid of your debt successfully.
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