(Nerdwallet) – If you have high interest rate consumer debt, taking control of your money in the New Year can seem overwhelming.
Most Americans say the COVID-19 outbreak has caused financial strain, according to a survey released in October by the National Endowment for Financial Education, with 30% of debt being their main stressor.
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Face your debt
The first step is simple, but it can be the most difficult: you have to face the problem.
Angela Moore, a Miami-based certified financial planner and founder of Modern Money Advisor, which offers online consumer advice and education, says it’s common for her clients to know they are in debt but don’t know how much.
She recommends compiling your debt on a document or spreadsheet, listing all balances, minimum payments, and interest rates.
Although the task is intimidating, most of her clients feel relieved once it is completed.
“Debt is an emotional burden,” she says, “but often that crush goes away once you have clarity.”
Communicate with your lenders
After you’ve listed your debt, it’s time to call your creditors.
Request a temporarily lowered interest rate, a reduced monthly payment, or a waiver of late fees. Be sure to explain how the pandemic affected your finances.
Most creditors will be willing to work with you, says Dan Herron, California-based CFP at Elemental Wealth Advisors.
“It doesn’t hurt to say, ‘I always try to do the right thing, I always try to make payments. Where can we meet in the middle? He said.
Any break you get, take that money and apply it to your debt.
If you need help negotiating, contact a credit counselor from a reputable nonprofit organization, such as the National Foundation for Credit Counseling. Advisors have relationships with creditors and can negotiate on your behalf. Services are generally free for those experiencing financial hardship due to COVID-19.
If you have multiple types of debt, like loans, credit cards, and medical bills, you may want to take out an unsecured personal loan to consolidate it into one monthly payment.
A consolidation loan is only a good idea if you can qualify for a lower interest rate than your current debts. Some lenders have tightened their approval standards during the pandemic, but borrowers with good to excellent credit (690 FICO or more) should stand a good chance.
Look for a lender specializing in debt consolidation and offers benefits such as direct payments to creditors or rate reductions for automated payments.
If you have credit card debt, you can apply for a balance transfer card. While these cards typically charge a 3% to 5% fee, they do offer an introductory 0% interest period, so all payments go to your principal, helping you pay off debt faster. .
You will likely need good credit to qualify.
Charles Ho, California-based CFP and founder of Legacy Builders Financial, urges some consumers to be careful. While consolidation tools save money, they also free up your credit cards for more spending.
“It may make mathematical sense to consolidate your loans, but the math doesn’t make sense if we ignore our behavior and end up almost doubling our debt,” he says.
Choose a strategy and stick to it
If you choose not to consolidate, there are two common ways to approach debt refund: the snowball or the avalanche.
With the snowball method, you pay off your smallest debt first, while making minimum payments on the others, then move on to the second smallest, and so on. The Avalanche Method uses the same strategy, but you start with the debt that has the highest interest rate.
According to Herron, the avalanche method can get you to the finish line faster since the money you save on interest can be applied to other debts, but it is more important to choose the method that you prefer. motivates the most.
Break the cycle
As you get rid of your debt, start automating your finances.
Moore has his clients set up automatic bill payments and savings contributions, so that money is put aside without having to think about it. If finances are tight in the pandemic, build towards a $ 500 emergency fund.
She also advises clients to use a separate account for non-essential expenses – 30% of your after-tax income is a good goal to achieve in this account. Customers can use the money to buy whatever they want, but once it’s $ 0, “that’s it,” she says.
“By automating and building systems, it helps you stick to your financial strategy and take the emotional part out of it. This is the key. ”