29 Dec
2009

The key to mastering your debts in the New Year involves two things: paying down what you can and lowering what you pay on your debts. Together, these two things can help you get out of debt. Here’s how to make your debt go away using these two principles:

1) Evaluate your debt. Take a look at the total amount you owe, how much you are paying in interest and fees on your debts, and how much of your paycheck goes towards your debts each month. This can be an eye-opener. Be especially vigilant about credit cards, unsecured loans, and payday cash advances – these unsecured debts have higher interest rates and may cost you more.

2) Create a budget and a plan for paying down your debt. How much can you afford to put towards your debt each month? Do the math: with that amount, how long will it take you to pay off all your loans? If the answer is “too long” you need a better plan. Come up with ways to bring in more cash (see our series about maximizing your income) and put your extra earnings towards your debt.

3) Tackle the highest interest rates first. Credit cards, payday loans, and signature loans have higher interest rates. It makes no sense to pay off your mortgage faster if you have these debts. Look at the highest interest rate you have and put all your extra cash into paying down that debt. Then move on to the next highest interest rate and so on.

4) Lower your interest rates. You don’t have to pay the full price of your debts. In many cases, you might be able to negotiate for better terms or a better rate. Read our guide on how to lower your credit card interest rates, for example. Talk to other lenders about slashing rates and fees – many lenders are willing to do this rather than risk losing you to a competitor. If this is not an option (because your credit is not perfect), consider consolidating your debts so that you pay less interest. Paying less interest means that more of your cash can go towards paying down the actual loan amount, and this can help you get out of debt much faster.

5) Remember your emergency fund. Even if you want to pay off your debts very quickly, you still need to pay yourself. Put aside money in your savings each month.

6) Avoid new debt. You knew that, though, didn’t you?