A wallet, after debt reduction.
Personal Finance

5 Ways To Become Debt Free

Looking to become debt free? Whether it is college loans or those pesky credit cards, debt is a huge problem. Let’s take a look at 5 steps that you can take to finally get rid of that debt.

Prioritize Your Debt

The first thing that you should do is make that debt a priority. I am sure it is a concern of yours, but is it a priority?

The difference is that those who prioritize debt know everything about it. Do you know exactly how much you owe and how much interest you are paying?

Take the time to add up all of your debts and then organize them. Know what your most expensive debt is so that you know where you should focus your attention.

Consolidate Your Debt

If you have good credit, consolidating your debt into one loan is both a convenience and a money saver. It also could very well improve your credit score. Let’s dig in.

On the convenience side of things, it puts all of those tiny accounts into one big account that will be easier to manage. This will allow you to make one payment every month and will make it easier to chart your total loan debt. That will allow you to easily keep track of your debt reduction.

As for saving money, if you have at least good credit, you should be able to secure a loan with interest lower than your credit card rate. Since average credit card interest is greater than 17 percent, this should not be hard to do and the savings should be substantial.

Now for the credit score increase. What happens when you pay off all of those credit cards with a consolidation loan? The balances go to zero and your available credit will skyrocket. Since credit utilization is the second biggest factor on your credit score, this should give you a noticeable score increase. In addition, the new installment loan may add to your credit diversity, giving you even more of a boost.

If you had good credit going into your consolidation loan, you might very well find yourself with excellent credit after a few months.

Transfer Your Debt

If you have excellent credit, you should take advantage of it in order to pay down your debt faster. A zero percent credit card offer can turbocharge your debt reduction by allowing you to pay down your principal much faster. Instead of spending hundreds of dollars a year in interest, all of your payments will go towards the principal.

The key to using those zero percent offers is being disciplined. The credit card companies want you to continue to carry the balance so that you pay interest when the term is done. You need to make paying down the debt a priority, so keep making large payments.

Ideally, you will have your debt paid off by the time the interest free period ends. If not, simply apply for another zero interest card.

Boost Your Income

Having a hard time making more than the minimum payment on your credit card? Consider adding an extra income to ramp up your debt reduction.

Even when the economy is down, there are jobs available. The two biggest areas where there is need is with the grocery and food service industry. Neither of these industries can currently find enough employees and they both are open nearly 24 hours a day. That means that you can find a shift to fit any schedule.

Just adding two 4 hour shifts a week can make a dramatic impact on your debt. Over the course of a year, that is over 5000 dollars in income that you can use towards your debt reduction.

Choose A Debt Strategy

Last, but not least, let’s develop a debt reduction strategy. Here are some examples.

Debt Snowball

First, you have the debt snowball method which works well if you need motivation and positive reinforcement.

Organize your credit card accounts by balance. Then, pay the minimum on all accounts except the one with the lowest balance. Pay as much as you can on this one until it is paid off. Because this account has the lowest balance, it will be the easiest to pay off fast.

The advantage of this method is that you get the reward of a paid off account much sooner. That will motivate you to continue. Once you pay off your smallest card, simply move on to the next smallest card.

Debt Avalanche

Next, you have the debt avalanche method. This one uses logic.

Organize your accounts by interest rate. Then, pay the minimum on all accounts except the one with the highest interest. Pay as much as you can on this one. The idea here is to maximize your money by paying down the costliest debt first.

If you want to make the most of your money, this is the method for you.

Debt Snowflake

Last, but certainly not least is the debt snowflake money. This method allows you to use small windfalls to make big reductions in your debt.

The idea is that any “found” money will go directly towards your debt. If your friend owes you five bucks and they give it back to you, put it towards your debt. Get a free lunch at work, use your lunch money to make a credit card payment.

A few dollars here and a few dollars there can really make a big difference, over time.