Get Out Of Debt

Getting into debt is easy, to get out of debt is hard. One of the main reasons for this is that the interest on the loans continually adds to the overall debt burden. The key is to get your income up and your expenses down. A simple way to save money is to get some personal finance software to track your expenditure and find where you can save the most money. Note that these methods may temporarily give you available cash but this money should be put to work paying down the debt rather than spending it again otherwise you will be in a worse situation down the line.

Reduce your debt

  • The first step to get out of debt is to itemize all the outstanding loans you have from mortgage to credit cards.
  • Find out the annual percentage rate (APR) you are paying on the mortgage (this is the amount of interest you are paying on the loan), all legitimate lenders should provide this on your statement or if you call them up.
  • Go through the list and rank the loans by APR. The loans with the highest interest rate should be top priority. Generally these will be credit cards.
  • When you have extra money aside pay off the highest interest rates first
  • If you have a mortgage on your house and have significant amounts of equity (e.g. your house prices is higher than your mortgage amount), then you can potentially refinance your mortgage at a higher amount, then use the extra money to pay down some of your higher interest debts. This assumes that your mortgage APR is not already the highest APR.
  • If you have credit cards, see which has the lowest APR and only use this one from now on, and see if you can transfer over the debts from the other cards onto this one.
  • If you have a credit card, then you can look to doing a balance transfer to another card, many cards offer an introductory period of 0% balance transfer. Make sure to read the terms and conditions though as some offers are not as good as they sound. Generally it is better not to use the card you balance transferred to. Once the introductory offer is about to run out, then transfer to another card.
  • Look into your credit rating, the better your credit rating the more easily you will find it to arrange new loans and credit cards, and the more likely you are to get a lower interest rate.
  • If you have a very small loan outstanding, even if the APR is not that large it may be useful to clear it so that you can focus on the core loans
  • You can look into a consolidation loan, this is where you put some loans together at a lower interest rate. This has the immediate benefit that there are less loans to concentrate on and less interest is being paid.
  • Before you sign up for any new loans, be sure to look at the terms and conditions, things to look out for would be an introductory period of interest rate which then increases, or a fee if you want to pay the loan of more quickly.

Refinance example

Mortgage: 100k Property value: 200k APR:6%
Credit card 1: 10k APR:20%
Credit card 2: 20k APR:10%
Amount paid out each year in interest: 10k
Strategy: Refinance mortgage (assumes you can refinance at same Apr)
Mortgage 130k Property value: 200k APR:6%
Amount paid out each year in interest: 7800
Saving: 2200 per year

Balance transfer example

This strategy relies on having a good credit rating.

Credit card 1: 10k APR:20%
Credit card 2: 20k APR:10%
Amount paid out each year in interest:4k

Strategy 1: Balance transfer to a 0% card, once introductory period over transfer again.
Credit card 3: 30k APR:0%
Amount paid out each year in interest:0k
Saving: 4k per year

Strategy 2:Balance transfer to card 2. If your credit limit is too low you can call up your credit card provider to see to get it increased.
Credit card 2: 30k APR:10%
Amount paid out each year in interest:3k
Saving: 1k per year

Consolidation example

This strategy relies on having a good credit rating.

Credit card 1: 10k APR:20%
Credit card 2: 20k APR:10%
Amount paid out each year in interest:4k

Strategy: Take out a consolidation loan
Consolidated loan: 30k APR:8%
Amount paid out each year in interest:2400
Saving: 1600

Reduce your expenses

Reducing your expenses will be different for every different person, You can set yourself a target to cut back say 100 a week, if you can do that you are saving over 5000 a year which should go some way to getting out of debt

  • Create a budget with all your expenses on it
  • Saving will depend on each individual aspect
  • Look at home insurance and auto insurance quotes, you may be able to save
  • See how much you are spending on entertainment, renting movies rather than buying can be a cheaper alternative, as well as meeting up at a friends house and eating there rather than eating out

Increase your income

Another great way to get out of debt is to get your income level up. Ask for a raise, if your work is valued it might work and it can't hurt. Alternatively look for a second job, if you have any skills you can teach then tutoring can be an avenue to go down. For example if you can play a musical instrument or know two languages.