One of the main reasons people are unable to achieve greater financial freedom is that they carry excessive amounts of short-term debt. This debt comes from credit cards, student loans, car payments, and personal loans, among other things. This guide presents several ways to better control debt that has gotten out of hand.
• Obtain interest rate reductions. Ask all creditors to whom you have paid your bill on time to lower your interest rate. If some of them agree to do so, you will be able to pay off the balances on those loans and cards sooner. You may also have more money to put toward paying other bills with the money you save from your lower interest rates.
• If you get a reduced interest rate on one or more of your credit cards, transfer balances from the higher interest rate credit cards to the lower rate card(s). Check to see if the card(s) with the lowest rates have any associated balance transfer fees. If so, is the spread between higher rate cards and lower rate cards even better when transfer fees are taken into account? If the difference favors making the transfer, do it.
• Get a consolidation loan. If your credit is above average and none of your creditors are willing to lower your interest rates, consider getting a consolidation loan. These loans often have rates that are significantly lower than credit card rates and often cost less than paying each creditor separately. 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 situation are good enough to qualify for an unsecured loan.
• Reduce your expenses. Take lunch to work instead of eating out every day. Cut your cappuccino splurges from five days a week to three days to zero. How many channels do you really need? Reduce your cable TV package. Use the money you save to pay off your debts. Your burgeoning financial freedom will love you for it.
• This next one might appear to be in left field, but it will actually work. Do you have a qualified retirement plan? Does your employer offer a matching contribution? Do you contribute more to your account than the amount your employer matches? So, it may be time to stop contributing above the match for a bit. If your employer will only match his contribution up to three percent of your salary, then don’t contribute more than three percent of his salary.
Use the extra money to pay off short-term debt. Here’s why: You’ll probably 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 averages a solid 11 percent gain year-over-year. That would be an exceptional situation, but let’s say it happens. Let’s also say that your average credit card rate is 13.99 percent. By using the extra money you’re saving in your retirement account to pay off your credit card debt, you’re essentially paying yourself an extra 2.99 percent per year on that debt. So pay it off. Then, if you want to restore your retirement contributions to their original levels, feel free to do so. There may be better places to invest that extra money, but that’s for a later discussion. You will have done a great job just freeing yourself from those short-term debt handcuffs!
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 discussed in this article, but using any of the listed ones is a step in the right direction—toward greater financial freedom.