Escape My Debt – A Complete How-To

If you avoid thinking about your debt because it’s overwhelming, or wonder, “Can I really escape my debt,” then you’ve come to the right place. Here you’ll find a variety of debt solutions you can apply to your life and answers to your most important questions.

Situation: Credit card debt

Solution: Reduce expenses and consolidate debt

Part 1: Reduce expenses
For most people with credit card debt, overspending is the root cause of the problem, so you need to take a two-pronged approach. The first step is to reduce your spending. If you’re not sure where you overspend, write down everything you spend for one month. Be specific, for example,

Shoes, $54.65, Macy’s, 2/3
Food, $16.50, grocery store, 2/4
Cleaning supplies, $25.50, grocery store, 2/4
Candy bar, $.75, vending machine, 2/5

At the end of the month, total each category and then see where you can cut. Obviously, you can’t scrimp on the rent, but you could make an effort to reduce your electricity bill by turning off the lights when you’re not in the room and unplugging unused electronics. You can trim your food bill by using coupons and not buying convenience snacks or sizes.

Part 2: Consolidate debt
Reducing your expenses will give you more money to pay down your debt, but you’ll only make true progress if you consolidate your debts to reduce your interest rates. It’s hard to see progress when your debt is spread across five credit cards at 20%. If you own a home, consider a home equity loan to consolidate your debt at a much more affordable rate – preferably below 9%. Not only will your debt payments cover more principal, but you may also be able to deduct the interest from your taxes. Use the savings to pay down more debt.

If you don’t own a home, consider a credit card balance transfer to a 0% card. Look for one with no transfer fees and aim to pay off the debt before the offer expires. If you don’t succeed, transfer it again. You could also opt for a personal loan if you don’t qualify for a balance transfer.

Question: Will debt consolidation hurt my credit?
Your credit rating will see a small decrease due to the addition of a new credit account, but the reduction will be temporary. When you consolidate credit card debt, you can usually pay it off faster, which means your total debt to credit ratio goes down and your rating goes up.

Situation: Large student loan debt

Solution: Consolidation

If you haven’t already consolidated your student loans, do it now. Consolidation doesn’t necessarily reduce your interest rate, but it does make payments easier. Student loan interest rates are averaged, so the rate for all your loans is the same, but it usually extends the payment term. A longer term means lower payments. Nevertheless, you should accelerate your payments as your income improves.

Don’t consolidate your student loans into a home equity loan, though. Student loans are eliminated when you die and can be put into forbearance during hard times. Home loans don’t share that perk. Student loans should only be consolidated with other student loans.

Situation: Medical debt – both large and small

Solution: Negotiate for a payment plan or consider bankruptcy

If you have a medical debt that you just need more time to pay, contact the doctor or hospital to request a payment plan. In some cases, they may also be willing to negotiate a lower balance in exchange for regular payments. If you’re not comfortable negotiating, a credit counselor or medical bill advocate may be able to help you. For large debts that you’ll simply never be able to pay, you may have to consider bankruptcy. Although it’s never the best choice, costs for some illnesses are more than anyone can reasonably pay.

Situation: High mortgage payments

Solution: Refinance or sell

The solution to high mortgage payments depends on your situation. If you can afford the payments and maintenance, but feel your interest rate is too high, you should refinance into a lower, fixed rate. If your mortgage is more than you can reasonably afford, then you may have to sell the house and move into a smaller one. Although it’s hard to sell a house you love, it’s better than going into foreclosure. Contact your lender to explore your options.

For every debt situation, there is a solution. Your first step should always be to reduce expenses where you can. Then you can dedicate more money to paying down debt. Soon, you too can say, "I eliminated my debt."