Debt can be a crippling burden to overcome, and much of the time, reading about debt reduction strategies can feel overwhelming. If you’re already working a demanding job, it’s understandable that being told to work even more isn’t helpful. The average American has around $90,000 worth of debt, and rarely is this sum accumulated by not dedicating enough time to work.
If you’re one of the millions wanting to eliminate what you owe, read on to discover actionable, practical financial planning tips to reduce your debt.
Financial Planning Tips
Starting your year with thoughtful financial planning in place can not only prevent you from incurring additional debt, but it can also make debt relief a more straightforward process.
Before taking steps toward reducing your current debt, adopt these financial planning tips to manage your money effectively.
● Use your credit card wisely.
● Save for emergencies, if possible.
● Reduce unnecessary spending.
● Shop around for deals.
● Adhere to your budget.
● Schedule your bills.
With these four basics in mind, let’s continue with five of the most effective tips for becoming debt-free.
#1 Examine Your Current Circumstances
Financial planning is a crucial element of success in becoming debt-free. To eliminate your debt effectively, you need to clearly understand what you owe and what you have. To thoroughly examine your current financial circumstances, start by ordering a credit report from the three major credit bureaus (TransUnion, Equifax, and Experian). Americans are entitled to a free credit report once a year, so if you still need to claim your report, this should be your first step.
Dispute and Remove Inaccurate Information
Once you have copies of your reports, scan through the listings to pinpoint any charges you can remove from your history. Removable entries include those that are inaccurate (accounts in someone else’s name, incorrect amounts listed, etc.) and entries showing balances on accounts you’ve already paid off. In most cases, you can also have entries removed from your report that have gone more than seven years with no activity.
Once you have disputed removable charges and accurate debt documentation, you can create a reasonable payment plan.
Setting a Budget & Save
In addition to looking at your official debts, you’ll also want to examine your current expenses. Create a list of the bills you’re paying each month and compare the total against your income. This way, you can know how much money you have after each bill is paid.
If that amount is relatively low, look for expenses that can be removed from your budget. For example, if you go out to lunch every workday, try to reduce those days by half or bring lunch from home each day. Think about any subscriptions you pay for and cancel or pause the services you don’t need.
You might save money on groceries by using coupons, buying bulk items, or opting for store-brand items.
Reduce your energy bills by taking shorter showers, turning off lights in rooms you aren’t in, unplugging appliances you’re not currently using, and adjusting your thermostat two degrees above or below what you’re used to (depending on the season).
#2 Pay Off Smaller Debts First
Smaller debts are quicker and easier to eliminate than larger ones, so if you have a couple of accounts with small balances, pay them off as soon as possible. You may think that getting rid of smaller debts won’t make a difference when you’re struggling with significant debt. However, eliminating small debts will help you avoid late fees and unnecessary interest charges from increasing your debt.
#3 Negotiate with Creditors
After paying off your manageable debt, it’s time to move on to accounts with more substantial debt. This debt type usually takes the form of credit card debt, as 60% of people with credit card debt have struggled with it for more than a year. Other sources of substantial debt include student debt and medical bills.
In some cases, creditors will be willing to negotiate on different elements of an account. Take medical bills, for example. Simply asking for an itemized bill (one that lists each charge you incurred) from each medical creditor will often lower the balance. Medical billing agents are not above making mistakes, and when they prepare itemized medical bills, they’re more likely to notice and remove errors. If the itemized bill doesn’t result in a lower balance, you can at least ensure that you’re paying the right amount.
Some creditors are willing to offer payment plans, adjust the amount owed, or reduce the interest rates on accounts you’re making payments on. A typical example of these offerings includes discounts for single, in-full payments and payments made through a preferred financial company.
If high-interest rates make it difficult for you to make your monthly credit card payments, speaking with an account representative might present you with manageable options. Occasionally, creditors will be willing to change your due dates, reduce your interest rates, or assist you during a hardship.
If one or more of your accounts have been passed to a collection agency, you can also come to a more favorable agreement with the organization handling your account.
#4 Transfer Your Balances
You may have exhausted your efforts to come to favorable terms with creditors. You’re not alone, and though this may make your situation seem hopeless, there are other avenues worth exploring.
A balance transfer might help consolidate your debt. Balance transfers combine your debts up to a certain amount and create a single loan or credit account for them. With this option, you can pay the balance off on your high-interest accounts and focus on making payments that have lower interest rates. By paying lower interest on your loans or credit card debts, you can invest more of your money into reducing your balances rather than having so much of your payments contribute to interest charges.
Depending on your financial institution, various debt consolidation options may be available. For example, you can combine all of your debts into a single account with a low fixed interest rate, or you can take advantage of an interest-free introductory period.
Each financial institution will have rules and limits regarding balance transfers and debt consolidation options. If you don’t qualify for one option, continue researching other offers. In many cases, securing a debt relief situation that meets your needs will require you to utilize a process of elimination method.
#5 Work with a Financial Counselor
Finally, if you’re still struggling to find appropriate solutions for your circumstances, scheduling a consultation with an experienced financial counselor may be in order.
While searching for an organization that can help you reduce or eliminate your debt, remember that only some offers are legitimate. According to the Federal Trade Commission, credit repair scams are not uncommon, as scores of significant lawsuits have occurred between the FTC and fraudulent companies. Five of these cases progressed last year against Arete Financing Group, GDP Network LLC, Elegant Solutions, Inc., ACRO Services, and BoostMyScore LLC.
If you’re seeking credit repair or debt management services, take the necessary steps to ensure that you work with a legitimate organization. Watch out for common red flags that indicate a scam, such as receiving unsolicited calls from debt relief companies, having a debt relief agent demand payments upfront, and offering promises or guarantees for relief.
Furthermore, if the promises made by an agent sound like they’re too good to be true, beware. For example, if you’re told that an organization can remove legitimate debts from your credit report, you’re being misled.
Financial institutions or organizations that aim to help consumers eliminate their debt will usually present several options. These services may include credit or debt counseling, settlement assistance, or debt consolidation plans through low-interest loans or credit accounts.
Debt management professionals typically spend a significant amount of time with clients, examining their financial information, credit histories, income and expense ratios, and other individual details that provide them with a realistic profile to work with. Doing so helps present the most appropriate options and guide clients through decision-making and implementation processes.
Overcoming debt is rarely easy. If it were, millions of Americans would not be struggling with this task at any given time. But you’re not alone. At iTHINK Financial, our broad spectrum of financial services can help you stay on top of your finances while you pay off debt. Explore personal banking options, including no-fee checking accounts, flexible refinancing options for homes and cars, personal loans, credit cards, educational resources, and more.