USE Credit Union Provides 4 Simple Steps To Get Out of Debt

By Heath Fellows.
Updated Jul 20, 2021

SAN DIEGO (PRWEB) July 20, 2021 - Theres no doubt about it: being in debt is stressful. When unpaid bills accumulate and the interest owed on credit cards keeps growing, trying to make ends meet let alone saving for the future can feel overwhelming. However, creating an effective debt payoff plan can help alleviate some of the stress and motivate you to reach financial freedom.

If you have debt, youre not alone, said Matt Lyons, Chief Lending Officer at USE Credit Union. Eliminating debt is essential to living a financially healthy lifestyle. You have to understand whats causing it and then take the necessary steps to bring it into balance. It takes work, but it can be done.

Heres what you should know as you begin your journey to become debt-free.

1. Assess the Damage Before you start making a plan for how to get out of debt, you have to figure out exactly how much you actually owe. Collect all your recurring monthly bills and tally up the totals, along with the outstanding balance and interest rate for each one. With the numbers right in front of you in black and white, youll know exactly what youre dealing with. Once youre organized, you can pick which debt repayment strategy to start using.

2. Determine How the Debt Accumulated Its also important to spend some time thinking about how or why you got into debt in the first place. Perhaps the loan payments for your home or car are making it hard to afford your other financial obligations. Maybe your income isnt increasing as quickly as you hoped it would after college, making it hard to pay off your student loans.

If you find that most of your debts are related to shopping sprees or other unnecessary spending, youll need to find ways to curb this wasteful spending. Are you making too many impulse purchases or eating out too often? Do you have a problem with online shopping, or a more serious issue like a gambling addiction? Its important to address these factors seeking outside help if necessary, such as from a reputable credit counseling service to make sure that once you get out of debt, you stay out of debt.

3. Choose Your Debt Reduction Strategy When it comes to paying off debt, there are two popular approaches: the debt snowball method and the debt avalanche (or high-interest rate) method.

With the debt snowball method, you pay off the debt with the lowest balance first, regardless of what the interest rate is. This is achieved by making minimum payments on all your debts except the one you are trying to pay offthat debt gets the minimum payment, plus any extra amount you can afford, applied to it each month until it is paid off. Then, the funds you freed up by paying off your smallest debt are applied to the next-smallest debt, and so on, creating a snowball effect as more and more of your monthly income becomes available for debt repayment.

The advantage of this method is that typically it doesnt take very long to pay off the smallest debt, but the sense of achievement is a powerful motivator to encourage you to build on your momentum and continue paying off your other debts one by one.

The debt avalanche method, on the other hand, focuses on paying off the debt with the highest interest rate first, even if it has a lower outstanding balance than your other debts. This strategy is more financially efficient, because it will save you more money on interest. However, because it may take longer to pay off the first debt you are focusing on, it may take a bit more discipline. You wont get the same psychological boost that you would by using the debt snowball method.

No matter which debt reduction strategy you choose, remember to focus on not adding any more debt to your personal balance sheet. That means living within your means and using online money management tools to help you follow a budget, so you dont have to rely on credit cards to cover any gaps. In addition, if your income increases, whether due to a raise at work or a side hustle, you should plan to direct all extra funds to paying off your debts until you achieve your goal of being debt-free.

4. Refinance or Consolidate Your Debt If you need to lower your monthly loan payments or want to save money on interest, explore your options. You may find a solution thats right for your situation. For example, many borrowers with federal student loans have taken advantage of income-driven repayment plans to help them manage their student loan payments.

Similarly, if you have a large credit card balance, or multiple cards with varying amounts owed, you can look into a consolidation loan. This type of personal loan allows you to pay off your high-interest credit card debts with a lower interest rate, simplifying your finances by combining multiple debts into onewith one competitive interest rate and monthly payment. However, if you choose to obtain a loan to pay off your unsecured debts, its essential that you dont add to your debt load. Continuing to charge unnecessary items will make it that much harder to reach your goal of getting out of debt.

If youre currently making car payments and your credit is good, refinancing your auto loan for a better rate and term could be another great option.

5. Why Does Debt Management Matter? If you currently pay the minimum amounts on all your loans and credit card bills each month with no problem, you may be wondering if these tips apply to you. The answer is, absolutely! Even if you are able to meet all of your financial obligations, there are still advantages to paying off your debts quicker.

If you only make the minimum payment required for your credit card, it will take you much, much longer to pay off the balanceand thats assuming you dont continue using the card and racking up even more charges! Paying more than the minimum balance will help you get out of debt much faster, and will also save you a significant amount of interest over time.

In addition, owing a lot of money to different creditors can negatively affect your credit score and increase your debt-to-income (DTI) ratio, both of which are evaluated by lenders. So if you have a high DTI due to large credit card balances or outstanding student loans, it may be more difficult for you to get a mortgage loan and the most affordable interest rate.

As a member-owned financial institution, USE Credit Union is committed to helping our members achieve their financial goals. Were proud to offer access to GreenPath Financial Wellness, a program that provides credit counseling and debt counseling to help members get out of debt, and offer free webinars and online courses on many different financial topics.