While I plan to write other posts, some going into more detail about ways to reduce or eliminate debt, I figured I’d write a short post on things you can do now to start making some progress.
1. Stop using your credit cards
If you have any cards that are still active and have limits, stop using them. You need to stop increasing your debt level in order to reduce it.
Remove your credit cards from your purse and either store them somewhere in the house, where you can’t easily get to them. A classical trick is to place the cards inside a watertight bag and freeze them or if you really can’t trust yourself just cut them up!
2. Make a realistic budget
You need to determine exactly how much money you have coming in each month, and the amount going out. Start with only the things that are essential and fixed with expenses, such as a mortgage, rent, utilities (general idea, if it varies widely, start keeping a spreadsheet so you can determine an average and plan for spikes), car, insurance, etc.
Then set an amount for groceries and other variables that are essential. If you don’t know how much you’re spending, look at old bank statements to get an idea of what you spend when you go. You may even need to get on board with using coupons.
If you are hundreds of dollars from making ends meet each month, you either need to cut your expenses to the bare bones required minimum payments, or consider increasing your income, perhaps with a part-time job while also cutting back to bare bones, until you are at a break-even (or preferably get ahead) amount each month.
And just a note on what’s considered ‘essentials’. If you are really struggling financially, then this is really just your food, basic travel to work and other things that you need to function. It doesn’t include new clothes, food takeway, luxury food, television packages, gifts for yourself or others, cosmetics etc. For the time being, you will have to go without to be able to get your head above the water again!
3. Set aside some money for emergency savings
Even if it’s only £10 a week, it’s a start. I suggest working towards a goal of saving 10% of your income for emergency savings, but if you haven’t been saving, and you are in debt, this may take some time to work up to.
The point is to get into the habit of saving something each pay period. If you literally have nothing left to save, you might need to get a second job on a part-time basis or perhaps work overtime or extra hours at your current job. Having cash savings will help you avoid using credit for emergency situations.
4. Get a copy of your credit report
In order to know where to start, you have to know where you are. Getting a copy of your credit report will show you exactly what your situation is. You can get figures on who you owe money to, the total amount of your debt, and your minimum monthly payment.
I suggest setting up a spreadsheet with this information. Include the annual interest rate. Then, map out a plan using the snowball method to pay it off. Some prefer to pay off the highest interest rate first, others to pay off the smallest balance. You have to determine what will work best for you to keep you encouraged and motivated.
Obviously, make sure you are paying at least the minimum amount on each card on time each month. Another suggestion is to set up a column with a % of available credit. Depending on where you are, set goals to reduce this amount. If you are maxed on all cards, I suggest aiming for 80% on all cards, followed by 50%, then 30%, then 0%. Getting your debt ratio under control will help improve your credit score.
It should go without saying to make sure you are current on all your bills before you start paying down others. Getting and staying current should be the top priority, as that will be the biggest improvement in your credit score.
5. Call your creditors
If you’ve caught up with all your payments, call your creditors and try to negotiate lower interest payments. This will help you pay off your debt faster.
If you are all up to date with your payments, but at a high % of available credit, call and ask for a limit increase. Don’t use this amount, instead, allow it to instantly lower your % and increase your credit score.
If you are behind with your payments, call and try to work out an arrangement to get up to date with your payments. Sometimes, your creditors might be willing to freeze an interest rate, reduce the minimum monthly payment, allow you to become up to date with your payments after 1-3 on time payments, or even write off part of your debt.
Explain to them why you can’t make your payments, what measures you’ve already taken to improve the payment situation and what you’d like them to do for you. Try to negotiate, they may not always agree, but it is worth a shot. Make sure you get any new agreement you make with them in writing in case you have any issues you need to dispute down the road.
Other practical tips
- How to start saving money when your budget is already tight >>
- Top tips on sticking with your budget >>
- Do you really need emergency fund? >>
I think so much of how we interact with money depends upon how we’re raised. For instance, I look at the grocery flyers each week, and use the sales to help decide what I’m going to cook. I do research on the best prices before I make a purchase. I’m careful to consider value over price when I shop, because if the item that costs twice as much lasts 5 times as long, I guess it is the better deal. And I pay my credit card bills in full every month. Used that way, credit cards are just month-long interest-free loans for a month (ONLY works if you don’t carry a balance).