This time in our series of posts on how to master your personal finances, we are focusing on one of the most requested topics – debt settlement.
If you missed the previous article, don’t worry, you can always go back and review our advice on establishing your financial goals to gain your desired financial freedom as fast as possible.
Unless you live in a jungle or on some remote island away from civilization, you probably have had some financial debt in your life. It’s not necessarily a bad thing, but debt has to be managed correctly. Don’t stress if you are not sure how to exactly do that – this post is here to become your debt settlement guide.
Debt types
First of all, there are two main types of debt: secured and unsecured.
- Secured debt is when your loan is guaranteed by an asset that acts as collateral and includes things like auto loans and mortgages.
- Unsecured debt is when you agree to repay your lender without an asset being held as collateral. Unsecured debt includes revolving debt, like credit cards, and installment debt, such as medical bills and student loans.
Having the correct kind of debt and making all of your payments on time is a good thing. Over time, all these auto loans and home mortgages can help you build a strong credit score. So don’t shy away from these types of debt, provided, of course, that taking them makes sense, and you will be able to meet your monthly payment requirements.
The type of debt that should send you packing is revolving credit card debt. If you don’t have any, or you pay it off at the end of each month, then that’s great. However, if you are like 81% of Americans, then you have some revolving debt with very high APR that takes years to pay back.
It’s time to use the debt calculator
After you complete this debt calculator, you will have a pretty good idea of how long and what monthly payments it will take to settle your credit card debt. If you are feeling overwhelmed, don’t panic. Now it’s time to make your debt reduction plan.
Create a debt settlement plan to master your personal finances
It’s true about any of life areas: if you want to make a breakthrough, to get to the top, to be successful, you need a plan. Mastering personal finances isn’t different. We’re glad to help you get hold of your finances with this step-by-step plan on debt settlement:
Step #1
Write down all of your current debts, including loans, credit cards, medical bills, etc.
Step #2
Separate your fixed loan payments, like your car payment or mortgage payment, from your revolving debts, like your credit card.
Step #3
Take your credit cards out of your wallet. Leave just one for emergencies. Increasing the size of your monthly credit card payments won’t help if you continue to spend.
Step #4
Contact your credit card company and ask if they are willing to reduce your APR. This doesn’t always work, but an estimated 40% of credit card providers will reduce the interest rate of their credit cards if they are in good standing.
Step #5
Calculate how much money you have left after paying your bills every month.
Step #6
Use this money to pay off your credit card debt. It needs to come ahead of putting money into retirement funds and saving accounts. If you don’t have any money left or if you want to boost your debt settlement plan, look at how you can reduce your monthly spending. One strategy for debt reduction is that you can try to pay only the minimum due on all of your cards except the one costing you the most. Once the most expensive card is paid off, you move to the second most expensive card and repeat the process.
Step #7
Once your revolving debt is completely paid down, begin to work on your fixed loan payments. You can do the same thing you did with your revolving credit. Get aggressive and pay down as much as you can!
Step #8
If you are unable to pay off your credit card debt, visit the American Fair Credit Council to learn about getting out of debt. It can also help you to work with creditors and educate yourself more in order to settle your debts.
Conclusion
Now that you have a step-by-step plan on debt reduction, it’s time to act on it. Don’t wait around for things to get better on their own – take action and master your personal finances today!
Here’s this week’s activities to help you stay on track of managing your personal finances:
- Tell 3 friends or family members about this week’s issue.
- Complete the debt reduction calculator.
- Make a debt settlement plan.
- Act on it!
Stay tuned for our next article where we will discuss how to reduce your monthly spending. Meanwhile, you can benefit from reviewing our articles about assessing your financial health and setting up your budget. As always, share your experiences and resolutions in the comments below!
Still looking for more? Feel free to check out our comprehensive personal finance guide to learn more about managing your budget and staying financially healthy.