Getting Out of Debt in 2023
Debt isn’t much fun to think about, especially when you’re longing for a new luxury car or thinking about buying a gorgeous designer handbag. But there are some pretty compelling reasons to get a handle on how much you owe — before it gets the better of you. It’s not that you don’t have plenty of company if you’ve racked up credit card balances this holiday season. And, with day-to-day expenses staying high due to inflation, more Americans are relying on credit cards to make ends meet.
Let’s look at the magnitude of the problem – According to the Federal Reserve Bank of New York, total U.S. credit card balances reached $925 billion in the third quarter of 2022. That’s just under the all-time high of $927 billion from the fourth quarter of 2019. And revolving credit, which includes mostly credit cards, grew by 16.9%. The Federal Reserve has been increasing interest rates to cool off inflation, leading to high interest rates for car loans, mortgages and credit cards. The latest fed report showed credit card rates 19.07%! A report by Bankrate.com found 46% of credit cardholders carry debt from month to month on at least one card, up from 39% last year. Still, you can get out of debt and here is the advice I give my clients:
Get a lower interest rate – Consolidate debt to a lower, fixed-rate loan or a low-rate credit card balance transfer offer. Stop paying exorbitant interest rates on credit cards; look for a 0% balance transfer card. Be sure to pay off the debt before the balance transfer expires. Be aware that, with balance transfer credit cards, it’s pretty typical to pay a fee of from 3% to 5% of your transferred balance. Look at putting all your credit card rewards toward cash payments instead of points. If you are a homeowner with equity in your property, you may be able to get a Home Equity Line of Credit (HELOC) and consolidate your other debts into the HELOC. As with a home mortgage, interest on a HELOC is often tax deductible, an advantage over other types of loans.
Prioritize those payments – If you can’t consolidate and switch to a lower-interest rate card, concentrate on paying off your high-interest-rate credit cards first. Always make at least your minimum monthly payment and do more if you can, especially on the high-rate cards. Creating a budget will help with this. Some good apps are Mint, PocketGuard, GoodBudget or Mvelopes. Check out the easy-to-use budget worksheets online.
Let your budget be your guide to trimming expenses – See where your money goes. What can you change to accomplish your goals? Use apps to take advantage of smarter, money-saving decisions and to take advantage of discounts and coupons.Stop the spending cycle.
Here are just a few ideas for spending less:
• Cut the cable TV cord and apply that $200 a month you’ll save on cable bills toward your debt.
• Eat out less and cook at home; you’ll be surprised at how much less you will spend for food.
• Choose a cheaper cell phone plan.
• Call your home/ auto insurance company to see how you can cut those costs, perhaps with higher deductibles, good student programs or safety classes
• Working remotely? Now may be a good time to sell that second car.
• Review your bank statements to identify expenses that you can renegotiate or cancel and subscriptions you can cut.
Wean yourself off credit cards – Use a debit card or cash as your payment method whenever possible when breaking from the debt cycle. This will help you learn to live within your means. If you must use a credit card, try to pay off the balance each month to avoid interest charges. Why pay to use someone else’s money?
Increase your income – Ask for a raise or get a second job. Start a side gig (there are websites to guide you.). If you have a special passion, explore using that to earn extra money. If you love animals, for example, walk dogs; you’ll get exercise along with the extra cash and likely flexible hours. In your spare time work for Lyft, Uber Eats, Instacart, or Grubhub. Sell gently used unwanted clothing or other items on ebay and Offerup.
Some other things you can do – Have a “budget date.” Revisiting your budget on a monthly, if not weekly, basis is a great way to remain on track. Consider renegotiating your agreement with one or two lenders to ease the pressure. Be proactive in asking for a discount or fee waiver. Even a temporary break could be well worth the ask.
You’ve likely heard that old expression, “Knowledge is power.” Too often, we try to avoid bad news, including looking at a budget that has gone off the rails. But knowing where your money goes is the first step to getting your spending back on track. Doing so could be your best, most successful New Year’s resolution ever!
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