Paying Off Debt on Your Own

There are a few ways you can get help with your debt – a debt management plan, an IVA, or bankruptcy. However, all of those options come at some cost. With a debt management plan, you have a monthly fee and your credit report may be updated to reflect that you’re on the plan. Both an IVA and bankruptcy are placed on your credit file and hurt your ability to borrow in the future. Paying your debt on your own can help you avoid the negative effects of the other debt payment options.

One of the reasons many people avoid paying off their debts is that they don’t know where to start. When you don’t know how to do it, making a plan to pay off debt can be just as difficult as sticking to the plan. All you need is a little guidance to make a get out of debt plan for yourself. Here are the steps you can follow to make a plan pay off your debt on your own.

Take stock of your debts. You need to have a complete picture of your debt situation. You can use your credit report and billing statements from creditors and lenders to figure out how much you owe. As you gather your debt information, write down the name of each account, the amount you owe, the interest rate, and the minimum payment on the account.

Use your budget to figure out how much you can put toward your debt each month. We’ve talked about budgeting to pay off debt. Here’s where it fits in the grand scheme of debt payoff. Your budget will help you decide what you can afford to spend on your debt. For instance, if you have a net income of $500, you can put that money toward paying off your debt. You should also use your budget to figure out places to cut back and get more money for repaying your debt.

Call your creditors and ask for a lower interest rate while you pay down your debt. If you have high interest rates (think double digits, especially in the 20’s), you might call those creditors and ask them to lower your interest rate. Explain that you’re trying to pay off your debt and a lower interest rate would help save you from bankruptcy. If you’re lucky, your creditors will agree and reduce your interest rate. Don’t be surprised if you can’t negotiate a lower rate. Few credit card issuers are lowering rates in this economy.

Pay off your accounts one at a time. Starting with the account that has the highest interest rate, begin sending a lump sum payment (what your budget says you can afford to spend) each month. Meanwhile, make the minimum payment on your other credit cards. The reason you start with the highest interest rate balance first is that you will save money on interest charges by the time the debt is paid off.

Track your progress. As you send payments, update your account balances on the chart where you first listed them. Watching your balances go down will help motivate you to continue paying off your debt. Not only that, you’ll always know where you stand on your debt payoff.

When you’ve paid off one debt, begin making lump sum payments on another credit card or loan. Continue until you’ve paid off all your debt.

Pay any extra money toward your debt, even if it means sending several payments during the month. Check with your lenders to make sure there are no prepayment penalties on your loans. If there is a penalty for paying early, find out how you can have it waived. Otherwise, pay those accounts per your contract. The goal is to ultimately reach financial freedom, not waste money unnecessarily by paying off a balance that could wait.