Credit Sesame with suggestions on how to manage and reduce your debts in 2023.
Did your debt grow in 2022? You’re not alone. According to the Federal Reserve, U.S. consumer debt reached an all-time high last year. The timing could not have been worse.
Just as people ran up record levels of credit card debt, rising interest rates made that debt especially expensive.
Your debt could cost even more in 2023, because your finances are starting the year in worse shape than in 2022. Or, make a fresh start in and take 7 steps to reduce your debts in 2023.
1. Stop making the problem worse
Often, the first step towards solving a problem is to change the behavior that caused it. When it comes to debt, the underlying cause is that people often habitually borrow routinely instead of just for special expenses. For many, this habit got worse last year because of inflation.
Because prices rose so quickly in 2022, more families suddenly found their income could no longer cover routine expenses. Reaching for a credit card to compensate for the shortfall was a natural thing to do. However, it’s not a sustainable solution.
Borrowing to finance routine expenses leads to repeated borrowing and steadily growing debt. As a rule of thumb, it is wise to avoid borrowing money for longer than the useful life of whatever you buy.
So, a five-year loan to buy a car you might use for ten years makes sense. A five-year car loan for a car you may use for a year is not such a good idea.
Rein in your regular spending to get it below your take-home pay. That won’t solve your debt problem, but it helps to stop it from getting worse.
2. Start working on your credit score
A good credit score can make debts more manageable. The higher the score, the more likely you will qualify for lower interest rates. This allows more of your debt payments to go toward paying down the amount you owe instead of toward interest charges.
Sign up for free daily credit score updates and check your credit report to clear up any mistakes or other problems. Then sign up for credit monitoring so you can keep an eye on any changes to your credit.
Make it a priority to pay all your bills on time. Payment history is the most important single factor in a credit score.
While working towards paying down debt, keep all credit accounts open. The age of credit accounts can help your credit score. Also, having more credit available than you’re using is another thing that can help your score. The important point is more credit than you’re using. It is detrimental if you use close to your available limit every month.
3. Look for additional income opportunities
Currently, there is a shortage of workers. Employers need extra help and in many cases are willing to pay more to get it. You may be able to use this situation to your advantage in a few ways:
- Ask your employer for a better than usual raise this year
- Check the employment ads to make sure your employer is paying a competitive wage
- Ask your employer about promotion opportunities
- Be willing to work longer hours if it means overtime pay
- Take on a side gig for a little additional income
Any boost to your income means extra funds to apply to your debts.
4. Prioritize your debts in 2023
If you have multiple debts, look at the interest rate you pay on each one. Rank them from the highest to the lowest interest rate. The most efficient way to pay down debt is to first start with the most expensive ones.
Be sure to make the required payment on each of your debts. Then, when you have any extra money to put towards paying down debts, apply it to the debts with the highest interest first.
Paying off your most expensive debts first brings down the amount you pay in interest. This means mo of your future payments can go to reducing the balance that you owe.
5. Consolidate debt to lower your interest rate
After ranking your debts by the interest rate, check if you can transfer any of your high-interest balances to more affordable forms of debt.
Personal loans generally have lower interest rates than credit cards. If you don’t think you can pay off your credit cards within a few months, consider using a loan to pay off some of those balances. A zero-interest balance transfer credit card is an alternative.
The key to making debt consolidation work is that it should be part of a broader debt reduction plan. The new loan cannot be seen as an additional source of funds or you may end up worse off than when you started.
6. Pay more than the minimum required whenever possible
Each credit card statement shows the minimum amount you must pay that month.
Credit card companies make those payments low so it takes longer to pay off your balance. The longer that takes you, the more interest you will pay.
Think of paying more than the required minimum as making your credit cards work for you rather than the credit card company. Paying your balance down faster means more money stays with you.
7. Make a repayment budget
Plan for debt repayments when you rework your budget to reduce your expenses. It’s easy for other expenses to find their way into your budget, but debt repayments should remain a priority. Budgeting a set amount each week or month towards debt reduction helps prevent new expenses from crowding out those payments.
Any sacrifice you make to pay debts down faster is rewarded quickly. As your debt reduces, the more money you have available for other expenses.
Remember, interest on debt takes away from the money you have to spend on yourself and your family. If you start now, you could make a significant dent in your debts in 2023.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.