Check this debt

Check this debt

One of the main reasons people are unable to achieve greater financial freedom is because they have excessive amounts of short-term debt. This debt arises from credit cards, student loans, car payments, and personal loans, among other things. This guide presents several ways to better manage out-of-control debt.

• Get interest rate reductions. Ask any creditor to whom you have paid your bill on time to lower the interest rate. If several of them agree to do so, you’ll be able to pay off the balances on those loans and cards sooner. You may also have more money to apply to paying off other bills with the money you saved from the lower interest rates.

• If you get a reduced interest rate on one or more of your credit cards, transfer balances from credit cards with higher interest rates to a card(s) with a lower rate. Check if the card(s) with the lower rates have balance transfer fees associated with them. If so, is the spread between the higher rate card(s) and the lower rate card(s) still better, factoring in transfer fees? If the difference is in favor of the transfer, do it.

• Get a consolidation loan. If your credit is above average and none of your lenders are willing to lower your interest rates, consider getting a consolidation loan. These loans often have interest rates that are significantly lower than credit card rates and often cost less than paying each creditor individually. Keep in mind, however, that your particular situation may require collateral, such as your home, to secure a consolidation loan. Not all lenders require collateral. So it’s worth shopping around if you think your credit and financial picture is good enough to qualify for the unsecured loan.

• Reduce your expenses. Bring a lunch to work instead of eating out every day. Reduce your cappuccino waste from five days a week to three days to zero. How many channels do you really need? Downgrade your cable TV package. Use the money saved to pay off your debts. You’ll love your burgeoning financial freedom because of it.

• The next one might seem like it’s out in left field, but it really will work. Do you have a qualified retirement plan? Does your employer offer a matching contribution? Are you paying more into your account than the amount your employer matches? After that, it might be time to stop contributing above the match for a while. If your employer will only match your contributions up to three percent of your salary, then don’t contribute more than three percent of your salary.

Use the extra cash to pay off your short-term debt. Here’s why: You’ll likely never see earnings in your retirement account that come close to what you’re paying in interest on your short-term debt, especially if much of it is on credit cards.

Let’s take a closer look. Let’s say your investment portfolio grows a solid 11 percent on average year over year. This would be an exceptional situation, but let’s say it happens. Let’s also say your average credit card rate is 13.99 percent. By using the extra money you set aside in your retirement account to pay down your credit card debt, you’re essentially paying yourself an extra 2.99 percent per year on that debt. So pay it. Then, if you want to restore your pension contributions to their original levels, don’t hesitate. There may be better places to invest that extra money, but that’s for a later discussion. You’ll have done a great job just by freeing yourself from those short-term debt shackles!

Excessive short-term debt can become a serious financial burden if left unchecked. Finding a place to start dealing with it can be difficult in the midst of everyday life. There are more ways to reduce debt than are covered in this article, but using any of these is a step in the right direction toward greater financial freedom.

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