USE Credit Union Offers 4 Simple Steps To Get Out Of Debt

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Eliminating debt is essential for leading a financially healthy life. You need to figure out what is causing it and then take the necessary steps to balance it out. It takes work, but it can be done.

There’s no question that being in debt is stressful. When unpaid bills pile up and interest owed on credit cards keeps rising, trying to make ends meet – let alone save for the future – can seem overwhelming. However, creating an effective debt repayment plan can help alleviate some of the stress and motivate you to achieve financial freedom.

“If you have debt, you are not alone,” said Matt Lyons, director of loans at USE Credit Union. “Eliminating debt is essential for leading a financially healthy life. You need to figure out what is causing it and then take the necessary steps to balance it out. It takes work, but it can be done. “

Here’s what you need to know at the start of your debt-free journey.

1. Assess the damage

Before you start making a plan to get out of debt, you need to figure out exactly how much you actually owe. Collect all of your recurring monthly bills and add up the totals, along with the outstanding balance and interest rate for each. With the numbers right in front of you in black and white, you’ll know exactly what you’re dealing with. Once you are organized, you can choose which debt repayment strategy to use.

2. Determine how the debt has accumulated

It’s also important to spend some time thinking about how or why you got into debt in the first place. Perhaps the loan repayments for your home or car make it difficult to pay off your other financial obligations. Maybe your income isn’t growing as quickly as you would have hoped after college, making it difficult to pay off your student loans.

If you find that most of your debt is related to shopping sprees or other unnecessary expenses, you will need to find ways to reduce those unnecessary expenses. Do you impulse too much or eat out too often? Do you have a problem with online shopping or a more serious problem like gambling addiction? It’s important to take these factors into account – when seeking outside help if necessary, such as from a reputable credit counseling service – to ensure that once you’ve gotten out of debt, you don’t. would not.

3. Choose your debt reduction strategy

When it comes to paying down 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 the interest rate. This is achieved by making minimum payments on all of your debts except the one you are trying to pay off. This debt receives the minimum payment, plus any additional amount you can afford, applied each month until it is paid off. Then the funds you freed up by paying off your smaller debt are applied to the next smaller 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 it usually doesn’t take a long time to pay off any debt, but the sense of accomplishment is a powerful motivator to encourage you to keep up the momentum and keep paying off your others. 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 its outstanding balance is lower than your other debts. This strategy is more efficient financially because it will save you more money on interest. However, since it may take longer to pay off the first debt you focus on, it may take a bit more discipline. You won’t get the same psychological “boost” as using the debt snowball method.

Whichever debt reduction strategy you choose, remember to focus on not adding more debt to your personal balance sheet. It means living within your means and using online money management tools to help you stay on a budget, so you don’t have to rely on credit cards to fill the gaps. In addition, if your income increases, whether due to an increase at work or a sideline activity, you should plan to devote any additional funds to paying off your debts until you reach your goal of free yourself from your debts.

4. Refinance or Consolidate Your Debt

If you need to lower your monthly loan payments or want to save on interest, explore your options. You may find a suitable solution for your situation. For example, many borrowers on federal student loans have taken advantage of income-oriented repayment plans to help them manage their student loan payments.

Likewise, if you have a large credit card balance or have multiple cards with varying amounts, you may want to consider a consolidation loan. This type of personal loan allows you to pay off your high interest credit card debt with a lower interest rate, simplifying your finances by combining multiple debts into one, with a single competitive interest rate and a single monthly payment. . However, if you choose to get a loan to pay off your unsecured debt, it is essential that you do not add to your debt load. Continuing to charge for unnecessary items will make it all the more difficult to reach your debt reduction goal.

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

5. Why is debt management important?

If you are currently paying the minimum amounts on all your loans and credit card bills each month without a problem, you might 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 benefits to paying off debt faster.

If you only make the minimum required payment on your credit card, it will take much, much longer to pay off the balance, and that is assuming you don’t continue to use the card and accumulate even more money. fresh ! Paying more than the minimum balance will help you get out of debt much faster and also save you a significant amount of interest over time.

Additionally, owing a lot of money to different creditors can negatively affect your credit score and increase your debt-to-income ratio (DTI), both of which are rated 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 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. We are proud to offer access to GreenPath Financial Wellness, a program that provides credit and debt counseling to help members get out of debt, and offers free webinars and online courses on many different financial topics.

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