Getting out of debt
While credit can be useful, it can also lead to uncontrolled spending, anxiety or even bankruptcy. Here are some ideas to help you reduce debt.
Develop a debt reduction strategy
To begin chipping away at your debt, it's helpful to make a plan. First, get the complete picture of all the debt you owe by getting your free credit report at AnnualCreditReport.com (opens in a new tab). Review your accounts and make a plan for how much you'll pay off for each account each month. Focus on paying down accounts with higher interest rates first and if you're close to paying off an account completely, do it. It's one less account to worry about and gives you more confidence. Upon developing an overall strategy, you can begin to focus on a plan for each type of debt you have or may incur.
Decide on a credit card strategy. Remember every time you charge something on a credit card, you have to pay for it. Don't charge things you can't afford. Try to pay your entire balance each month to avoid finance charges, and be sure to make the payments promptly to avoid any late payment fees.
Choose a credit card that offers the right combination of fees, rates and benefits. If you pay every credit card bill in full and don't incur any finance charges, it may be fine to have a card that has a high interest rate but offers rewards for use (like air travel or money back) or has no annual fee. If you carry over balances and pay finance charges, the interest rate becomes more important.
If credit cards are too tempting, get rid of them. Using checks or a debit card can eliminate the risk of buying things when you don't have money in your account to pay for them. Cash works too.
If considering a new home purchase, first identify the type of mortgage that matches your behavior. If you plan to sell your house soon, you may want an adjustable rate mortgage (ARM) with a potentially lower interest rate. If you plan to stay in the home or can't afford any increase in payments if interest rates rise, consider a long-term fixed rate mortgage.
You may also wish to consider switching to a shorter-term mortgage. Depending on how the numbers work, you may be able to keep your monthly payments about the same and switch from a 30-year mortgage to a 15-year mortgage. And, you'll be debt-free much sooner.
Examine the rates
Eliminate high-cost borrowing. Determine if you can convert high-interest debt to another type with lower rates. If you're paying high interest rates on credit card balances, find a card with a lower rate, but watch out for teaser rates. If you have equity in your home, consider a home equity loan or home equity line of credit.
What if you can't pay your bills? This is when you should get help. First, stop incurring more debt. Quit using or destroy your credit cards. Then, contact your creditors to work out a payment schedule. Explain your situation and that you want to pay what you owe.
You can also seek a credit counselor for help if you need it. There are several nonprofit organizations that help consumers when all else fails. The Federal Trade Commission offers facts for consumers to consider when choosing a credit counselor. Be wary of organizations that offer to fix your credit rating or that want you to pay a fee to get you out of debt easily.
The bottom line
Getting out of debt takes time and discipline. By developing a plan and approaching credit options in a wise way, you can begin to reduce your debt and maybe even eliminate it.
Developing and using a wise borrowing strategy
Learn the basics of how proper borrowing can lead to a healthy financial life.
Build a solid credit history
With a solid credit history, you can get credit when you need it and borrow at the lowest possible rates.
How do I build credit?
Establishing credit is the first step toward future life purchases such as a house or car.