Many people get into debts. Some get into debts forcefully as they had no other choice but to borrow. Incidents like unexpected medical fees or helping family members with gambling addiction are usually the most common cause.
Some others get into debts voluntarily on the assumption that they can pay their debts easily as they earn enough regular income. They often buy things they don’t need and spend more than what they can afford.
During this uncertainty due to covid19, where jobs can easily disappear as businesses are going through difficult times, people start to panic and question the certainty of their income to pay their debts on time and avoid unnecessary late fees and interest charges.
This is the time where many people think it’s better to live debt-free, to stop buying unnecessary things, and start saving. So how do you begin the journey of getting out of your debts?
Here are a few steps to get out of your debts:
1. Write All the Details
Firstly, write down all your debts details, including the creditors, the amount of your debts, the interest percentage of the debts, the date when the balance of debts is recorded, and when the next payment is due.
This means, build a spreadsheet or just handwrite columns and rows like the following:
After you have all the details, you will have a clear understanding of what to negotiate with you are trying to consolidate your debts explained in the next step.
2. Consolidate Your Debts
The most important points to remember when consolidating your debts are saving time and money. Save time by paying only one creditor, save money by paying lower interest. These can be done by:
Balance Transfer
Search with the keyword “balance transfer” where many institutions offer credit cards with 0% per annum for a certain amount of months, usually 22 months.
This means you can pay all your existing debts (that have interest) with the credit card that offers 0% interest
If you can pay all your debts within 22 months, you should be able to do the balance transfer. Not only do you save headaches by paying to only one institution, but you also save a lot of money by not paying interest.
Borrow From a Lower Interest Creditor
Perhaps due to your credit rating, a balance transfer is not possible. When this happens, consider borrowing from an institution that can offer lower interest than the current debts, like the bank you regularly deal with for example. The point is, try to consolidate all your debts and deal only with one creditor that offers lower interest.
For example, the interest of a personal loan of NAB (National Australia Bank) in Australia is 12.69% per annum. A credit card generally has 21.49% interest per annum. If most of your debts come from credit cards, try to consolidate them by borrowing from an institution that has a lower interest.
3. Budget – and Stick to It!
Be disciplined if you really want to get out of debt. Having a budget is a must. Begin with tracking your expenses and income. You may want to apply a reverse budgeting method as I discussed here, Replace the ‘saving’ to ‘paying debts’ as your current priority is now paying all your debts and stop them from growing. As soon as you pay off all your debts, your savings should be your priority in managing your money along with paying all bills on time to avoid late payment fees and interest charges.
When Paying off Debts Is Not Possible – Declare Bankruptcy
When paying off debts is not possible and due to poor credit ratings debt consolidation is not possible, declaring bankruptcy might be your last option to get out of all debts, to give you a fresh start with your finances.
However, this should be your last option as it comes with a hefty price as it impacts your credit score as your name will be recorded in the national record. In the US, declaring bankruptcy could prevent you from obtaining new lines of credit and may even cause problems when you apply for jobs for 7-10 years after filing bankruptcy.
