(Akiit.com) Suffering from bad debt problems? If so, you are not alone. The United States population is currently close to racking up a billion dollars on credit card debts alone. Something is going to give eventually, so tackling your financial issues now is going to give you the protection you need.
Paying back debt isn’t a task many people find enjoyable. But, if you can look ahead to the future and see a life of no debt whatsoever – other than a home loan – then it’s a wonderful goal to aim for. So, if you have bad debt problems, read on – we’re going to show you the best way of attacking them, to get your finances back on track. Let’s begin with a closer look at what ‘bad debt’ actually is.
Bad debt vs. good debt
Not all debt is bad, of course. It enables us all to buy a home, for example – which is the very symbol of the American Dream. It gives us the secured loans we need to take a vacation, which we can pay off over time. And, it can even help us out in an emergency situation if we can’t access our savings. The problem starts when we begin to borrow too much, and that we can’t afford to pay back. 
This is bad debt – and it can be a tricky situation to get out of. However, there are a few things you can do to sort out your finances and get back on track. Let’s take a look at those now.
Check your credit
The first thing to do when you are in debt is to check your credit score. If you have a poor rating, you need to identify why. Checking your credit score will also tell you if all the debts on your report are yours. Fraudsters could be using your personal information to borrow money, or there could be a mistake made by a creditor. Check in with Experian, Equifax, and TransUnion, and check your report with a fine tooth comb. Just because you are in debt, doesn’t mean you should pay for someone else’s debts as well, or for someone else’s mistake.
Pay off short term problems
Next, identify any debts that are going to cause you serious issues if you don’t pay them back shortly. Tax payments are, of course, essential. There could be grave consequences if you don’t fulfill your legal responsibility. You might have threats from a court over non-payment of fines, too. It’s important to pay these off as quickly as possible so that you don’t face any legal action. Payday loans can come in handy for this, but there are a few rules you need to follow. Never take one if you don’t know when you can pay it back – the interest rates can skyrocket quickly. And, you should make sure that you pay it back as soon as you can – preferably with your next paycheck.
List your debts
Now you have your debts in front of you and have discounted any issues; it’s time to make a list. Rank your debts in order, from lowest to highest, making a note of the amount of interest you are paying for each one. It’s not going to be a lot of fun doing this – but there is a good reason for it! Try not to get too upset about it as writing down all your debts is the only way of getting started on the path to financial stability.
Write down your income
Next, you need to make a note of every single piece of income you have come through your accounts. Wages, allowances, interest from savings – any money you bring in has to go down here.
Work out your expenditure
Now, you need to work out how much you spend, and where your money goes in a budget. Stick to the essentials. Work out your mortgage or rent payments, utility bills, children’s activity fees – everything. You should also write down what you spend on entertainment every month, as well as allowing for clothes, food, and beauty products. Be realistic, and try not to con yourself into thinking you spend less than you do. This is all part of your problem, and you have to be true to yourself if you want to dig yourself out of your hole.
Work out minimum payments
Next, work out the bare minimum payments you have to make for each of your debts. Once you have the total, make an arrangement with your bank and creditors that you will only pay the least amount possible. Don’t class this as spare money – it’s cash that will keep your credit rating up to scratch, and improve your score. Now, you can work out whatever you have left over from your monthly budget. This will be the amount you can afford to pay back your debts one by one. If you have no spare cash, then you will need to go back into your monthly budget and look at areas that you can cut back on. Spending too much on clothes? Cut it in half. Expensive TV package? Cancel your subscription and look for free, online alternatives instead. As soon as you have a surplus, you can move onto the next stage.
Pay back your debts
Identify the bad debt you want to attack first. There are two ways of going about this. First of all, you can pay off your smallest debt first. This will give you a quick win, and help propel you onto the next debt quickly. The second method is to pay off the debt with the highest interest first. Going down this route will see you saving money over the long term, as it is the debt that is costing you the most. Whichever method you choose, it is important that you pay more than the interest rates – otherwise, you won’t be touching your debt at all.
Move on to the next debt
Now you have paid off one debt, use all that money to throw into the next problem on your list. If you have managed to free up any cash in this period, put that in as well. Not only will you be putting more money in, but you will also be adding to your minimum payment. So, you can see a kind of snowball effect starting to happen. Because you are putting more money in, you should clear the next debt quicker, depending on its size.
Clear all your debts
Once you have finished paying off the first and second debts, keep going. You will have made significant headway into your debt problem, and the end will be in sight. As long as you take all of the money you put into each debt, you will soon be building up a large repayment fund each month. By the time you get to your greatest debt, it will seem much smaller – and you could be debt free within a matter of months.
The future
As soon as you are debt free, it could be tempting to use all your repayment money each month to have a wild old time. While one month of partying isn’t going to do you any harm, we suggest you reign it in a little. Just think, you have been living a normal lifestyle without needing that money, so why spend it now? It could go into your savings pot, or into a retirement fund. You could use it to contribute to your children’s future education. And, most importantly, it will give you a buffer so that you never experience bad debt again. Good luck!
Staff Writer; Bobby Carter