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Living debt-free is a way to achieve financial freedom, but for many people, lines of credit are needed to afford many of life’s largest purchases. For instance, few people have hundreds of thousands of dollars in the bank to put down on a new home or a business venture. Few people have the funds needed to purchase a new vehicle off the lot with nothing but cash. Maintaining a good credit score helps to avoid excessive lending fees and interest on lines of credit, and keeping your debt under control can help you still enjoy financial freedom. There are certain ways to tackle debt that help you stay sane while paying off large numbers.
Taking Control of Your Debt
You may be paying your debts each month fairly easily, but what if your income or financial situation drastically changed? How hard would it be to make the monthly payments on all your outstanding accounts? A credit check will reveal your debt-to-income ratio or the amount of outstanding debts you owe compared to your income level. If this ratio becomes heavily skewed toward debt, not only will you be facing a tough payment road ahead, but you will also find you are less likely to be approved for new lines of credit. That’s why it’s so important to find efficient ways to tackle debt before it gets out of hand.
Making just the monthly payments on your accounts will leave you in debt for years to come. These payment mostly cover the interest charges on the account. To save yourself a lot and to make breathing room in the budget, you need to work to pay off your debt more quickly.
3 Ways to Tackle Debt Successfully
1. Avalanche Method
This plan is also known as debt stacking, and it attacks the credit account that has the highest interest rate first.
You will pay all of your monthly minimums as usual, but whatever leftover amount you can spare from your monthly budget you will put on the account with the highest interest rate. After this debt has been paid, move on to the account with the next highest rate. Repeat this process until all the accounts have been paid in full.
By paying off one account, you’ll free up extra funds to be put toward another. This method does take longer to notice an impact. Stick with it, as once the avalanche gets rolling, you will see impressive results.
2. Snowball Method
In the snowball method, you start to work on your debt at the smallest account. Continue making the minimum payments on all your accounts. Add any extra funds you have available to the account with the smallest balance. Once this balance has been taken care of, take any extra funds and the amount of money you had been spending on the payments for the zero-balance account and move them to the next smallest balance. Continue working through this process until you have paid off all your accounts.
Many people like to work on their debts through this method. The small victories of one debt after another provide the motivation to keep going. You can also improve your credit score more quickly since you will be lowering the utilization of each card sooner and changing the number of accounts with outstanding balances.
3. Personal Loan
You don’t want to borrow money to pay off debt but a personal loan may be the best option. It’s often the best way to get rid of a lot of credit card debt at one time. One large loan at a good interest rate can give your credit score a huge boost and make it easier to manage your monthly finances.
Now… Stay Out of Debt!
Once you have gotten your debt under control, carefully monitor your spending habits. You don’t want to bounce back into the deep end and start all over again.