When you have high-interest consumer debt, it may sound overwhelming to take control of your money in the new year.
According to a National Endowment for Financial Education survey released in October, most Americans say the outbreak of COVID-19 has caused financial stress, with 30% citing debt as their top stressor.
Despite the pandemic, you can still reduce your debt with the right plan. Here’s how.
Face your debt
The first step is easy, 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 virtual advice and education for consumers, says it’s common for her clients to know they have debt but not how much they owe are.
She recommends compiling your debt in a document or spreadsheet and listing all balances, minimum payments, and interest rates.
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Although the task is daunting, most of her clients feel relieved when it’s done.
“Debt is an emotional burden,” she says, “but often this overload goes away once you have clarity.”
Communicate with your lenders
After listing your debts, it’s time to start calling your creditors.
Ask for a temporarily lower interest rate, a reduced monthly payment, or a waiver of late fees. Make sure you explain how the pandemic has affected your finances.
Most creditors will be willing to work with you, says Dan Herron, a California-based CFP at Elemental Wealth Advisors.
“There’s no harm in saying, ‘I’m still trying to do the right thing, I’m still trying to make payments. Where can we meet in the middle?’” he says.
Every break you get, take that money and apply it to your debt.
If you need help negotiating, contact a credit counselor at a reputable nonprofit like the National Foundation for Credit Advice. Advisors have relationships with creditors and can negotiate on your behalf. The services are usually free for people experiencing financial difficulties due to COVID-19.
If you have multiple types of debt, such as B. Loans, credit cards, and medical bills, you may want to take out an unsecured personal loan to consolidate them into one monthly payment.
A consolidation loan is only a good idea if you can qualify for a lower interest rate than your current debt. Some lenders have tightened their approval standards amid the pandemic, but borrowers with good to excellent credit ratings (FICO 690 or higher) should stand a good chance.
search for one Lender specializing in debt consolidation and offers perks like direct payments to creditors or installment discounts for automated payments.
If you have credit card debt, you can apply for one Credit transfer card. Although these cards typically charge a fee of 3% to 5%, they offer a 0% introductory interest period, so all payments go into your capital, helping you pay off debt faster.
You probably need good credit to qualify.
Charles Ho, a California-based CFP and founder of Legacy Builders Financial, is urging some consumers to be cautious. Although consolidation tools can save you money, they also free up your credit cards for more spending.
“It might make mathematical sense to consolidate your loans, but the math is meaningless if we don’t take our behavior into account and we end up nearly doubling our debt,” he says.
Pick a strategy and stick to it
If you choose not to consolidate, there are two common approaches debt settlement: 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.
Herron says the avalanche method may get you there faster because the money you save in interest can be used on other debt, but it’s more important to choose the method that motivates you the most.
Break the cycle
Start automating your finances on your way out of debt.
Moore lets her clients set up automatic bill payments and savings so that money is put aside without a second thought. If finances are tight during the pandemic, build on 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 hits $0, “that’s it,” she says.
“By automating and creating systems, it helps you stick to your financial strategy and take the emotional edge out of it. That’s the key.”
This article was written by NerdWallet and originally published by The Associated Press.