An overwhelming amount of debt can seem like a heavy load on your shoulders. Each month, the problem can seem to get worse as interest accumulates and bills continue to fill the mailbox. And this can affect people in several ways:
- According to a American Psychological Association study in 2015, some 72% of Americans said they had experienced money-related stress in the past month. For most Americans, money is one of the biggest stressors affecting their health.
- Accumulating debt and battling bad credit can lead to questionable financial decisions, such as consolidating loans on adverse terms, using payday loan services, or gambling.
- the Atlanta Federal Reserve have even found a link between debt and increased risk of mortality.
With all of this, how can the average financially struggling person create a plan that will keep them positive and confident that they can escape stress and turn around their credit situation?
Step one: clean up the cobwebs from your financial life
The first step is to eliminate your “financial cobwebs,” everything that you don’t need in your life that adds unnecessary stress to you.
Don’t be afraid to start small. Do you have magazine subscriptions that you pay for but never use? Overlapping TV streaming service subscriptions? Clean them first. The goal here is not to focus on saving, but to make your financial life easier to measure and calculate.
Most importantly, it will help you avoid being overwhelmed. It’s common for people in debt to start throwing away bills without opening them just because they don’t want to add to the stress they already have. Cleaning up some of your financial cobwebs will help you deal with the problem head on.
Step two: make a debt payment plan
Once you’ve set the stage for a turnaround, it’s time to think about how you’re paying off your debt. You can use the snowball method (organize debts from smallest to largest, and pay minimum payments on the rest until you have paid the smallest first) or avalanche method (focusing instead on the debt with the highest interest rate). Either method will work fine; the most important thing is that you choose one and write down your plan.
With that in mind, should you consider other methods of getting out, such as debt consolidation? Debt consolidation aims to simplify your financial life by allowing you to repay several loans in a single monthly payment. Be wary of these types of loans, however, and read the loan terms carefully to make sure they will help – and not hurt – your financial situation in the long run.
Step Three: Improve Your Credit Score
It can be tempting to try and pay off debt by cutting off all of your credit cards. After all, you think credit cards were part of what got you in this mess.
But it’s more important to change your internal beliefs about debt and the external habits that result from it. For example, if you’ve paid for large purchases with a credit card without having the money in the bank to cover them at the end of the month, you’ll find that interest and late payments add up quickly.
You should now treat credit cards like debit cards. Don’t charge more on a credit card than you can afford within your regular budget. Avoid accumulating more interest and debt, and use any excess savings to profitable old debt and interest.
Maintaining old credit accounts will also help you restore a high credit score, as the average age of your credit accounts tends to impact your score. Remember that a high credit to debt ratio is also important for this score; if you have too much debt, you can expect your credit rating to stay low.
You should also take full advantage of your credit card’s reward points and use those points for freebies and indulgences that you might normally put on your credit card. They are called rewards for a reason!
Fourth step: create a budget and up to
The last step is to create a budget that makes the new habits automatic. With a debt payment plan in place, you now know what kind of money you will need to set aside to pay off your debts. You need a budget can also help you plan. You will have a clear idea of what you need to do to maintain your lifestyle while paying off your debts. And while it may take a while to pay off the debt, you should use your budget to at least check your debt. is decreasing every month. If so, you are headed in the right direction.