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Steps to Eliminating Debt
Debt is easy to get into. We all buy things on credit, take loans
out to get instant money or pay for goods on credit cards. Credit
can take minutes to build up, but years to pay off. When debt builds
up we end up paying regular monthly payments that simply increase
every time we get more credit.
The first thing we all have to do to clear debt is stop getting into
any more debt. If you never took out another loan and cut up your
credit cards then after a while you will pay off all your debt
(provided you are making regular monthly payments).
However, there are lots of clever ways to pay off debt quicker and
help you to become debt free. Simply make a list of all the debt you
have. This is everything that you pay to a creditor and includes any
loans, credit cards, financed items such as the finance on your car
or furniture and also the big one, your mortgage.
You should know:
1. How much the debt is for or the total amount
2. How much is left to pay off the debt
3. What you pay every month
4. How many months you have left to pay
5. AND the interest rate you are being charged
If you add the amount of debt (number 2 above) you have left on each
one of your debts then this is how much you owe to creditors. If you
then add up all the monthly payments (number 4 above) then this is
what you have to pay every month. Once you have worked this out then
you are in a good position to start working out the fastest and
cheapest way to clear this debt.
Paying off the debt as quickly as possible:
There are several ways you can pay off debt quickly. Some will be
better than others and it also depends on the type of debt you have.
The interest pay off – Targeting number 5 on the list above
If you have a credit card or mortgage then you should be charged
interest monthly on the amount of credit you have left to pay. If
you pay off larger amounts off this then amount you have to pay
every month goes down. The more you pay off the less you have to pay
in interest every month. If you take the credit card or loan that
charges you the highest rate of interest, then paying this off
earlier saves you the most amount of money every month. Once it is
paid off, you move to the next credit with the biggest interest
rate. Because mortgages usually have the lowest interest rate out of
all your loans or credit cards and is secured debt you should leave
this until last on your list.
For some loans, creditors can sometimes charge the entire interest
on the full amount across the time you have to pay the loan so that
if you decide to pay a loan off early, you may still end up paying
the same amount as if you continue to pay the loan every month. In
this case you are probably better off not paying that specific loan
early and focusing your efforts on a different loan.
The minimum loan pay off – Targeting number 2 on the list above
If you take a look at all your loans and start paying extra on the
smallest loan then this will be paid off the fastest. Once you pay
this off, take the amount you were paying on that loan and use it
towards paying off the next smallest loan. Eventually you will again
end up with only your mortgage left which if you use all the money
you used for your other loans this will also be paid off much
faster.
The biggest payment pay off – Targeting number 3 (or 4) on the list
above
This works best for small loans with fixed payments and is great for
people who find themselves with lots of loans with money to pay off
on all of them. Because you want to reduce the amount of time and
money you have to use to pay off the loan you simply target the
largest payment you have to make every month. This may be the loan
with the highest interest or the one the one with the highest
balance. Once you put everything you can into paying this off your
monthly payments will suddenly drop.
You can also do this by targeting the loan that has the least number
of months left to pay off the debt. This will reduce the monthly
payments quicker.
This will leave you with a lot more money every month and helps to
control your finances better especially for people that struggle to
pay off their loans. Clearing the loan that takes the highest
payment every month has the biggest effect on your bank balance
every month. Clearing the loan that has the least number of monthly
payments left has the fastest effect on your monthly bank balance.
The clever part is to then use the money you save once you have paid
off the loan to pay the other loans off faster and not to get
comfortable with the debt you have left.
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