Various factors could prompt a borrower to get out of debt fast, including the constant voicemails that collection agencies leave, the emotional and physical toll that high indebtedness can produce, and the financial trouble and increased interest rates resulting from a heavy debt load. To escape indebtedness, try to determine how much you owe, figure out what is in your credit report, and seek loans with better terms and conditions. You also should determine whether you're overextended and what it means to simply make the minimum payment required.
Do I Know How Much I Owe?
Knowing how much you owe is a good first step in figuring out the best way to get out of debt. Needless to say, you can't act on something you don't know, and since knowledge is power, it's important that you meticulously pore over your monthly loan statements to calculate your overall debt. First, look into your checkbook and pore over online bill payments to determine the lending institutions to which you send payments on a monthly basis. Then, call the lenders to confirm the amount owed at the end of a specific period, say, a month or quarter. The third step is to sum up the outstanding balance on each loan and credit card to determine your total debts.
How Do I Figure out What Is in My Credit Report?
The law entitles you to a free credit report each year, so contact the top credit bureaus via phone, email or fax. A credit management expert I've known for years recommends that after determining your total debts, you should compare that amount to what's in your credit report to ensure completeness and consistency. If you anything fishy or incomplete, notify the three credit agencies in writing, and if no solution is found after, say, 60 to 90 days, file a complaint with the Federal Trade Commission.
Should I Seek a Better Credit Card Deal?
Reaching debt freedom quickly also requires that your existing debts don't accumulate too much too fast, and this is where the APR concept comes in the equation. Your card's annual percentage rate depends on your credit history, credit score, current indebtedness and length of credit, among others. Bankrate.com recommends that cardholders just call and ask their credit card institutions when they want lower credit card rates. You should seek a better credit card deal even if you think your current APR is already low. Go through all your cards, listing the applicable rates from the lowest to the highest. Then start calling the lenders offering the high rates and ask them for a rate reduction, balance transfer or consider debt consolidation loans.
Am I Overextended?
Finance people would say that you're overextended if you live beyond your means, carry a high debt balance you cannot repay, and have difficulties making even the minimum payments. The best way to know whether you're overextended is to calculate your card usage ratio, that is, your total card balance divided by the credit limit. Also known as credit usage ratio or credit utilization ratio, card usage ratio affects a cardholder's credit score, which, in turn, affects the APR paid by the borrower as well as his or her ability to quickly get out of debt. Financial specialists recommend that borrowers maintain a credit usage ratio of less than 50%, meaning they don't tap more than half of their cards' total credit lines.
Should I Pay More than the Minimum Required?
You should always pay more than the minimum amount that your card company requires, if possible. That way, you can quickly repay the balance, limit the APR charges and ultimately get out of debt. Use our Credit Card Repayment Tool to determine how long it would take you to repay a card balance based on a specific minimum payment. For example, if your total balance is $10,000 and your APR is 12%, the Fed's tool estimates that your monthly payments would be $200; that it would take you 25 years to pay off your balance, assuming you only make the minimum amount required; and that you would pay $9,394 in interest, which is close to the initial amount owed, over 25 years. With the Fed's tool, you also can figure out how much to pay every month if you want to pay off your credit card balance sooner.
With patience, commitment and helpful professional resources, you can gradually take the necessary steps to get out of debt. That journey might be long, depending on how much debt you currently have, your income and your overall financial situation. Key elements to heed when discussing debt freedom include existing obligations, lower-rate credit cards and loans, and living within one's means.