Achieving Financial Freedom: Tips On How To Pay Off Debts

Debt can be a significant source of stress and financial burden for many people. Whether it's credit card debt, student loans, or a mortgage, paying off debt can feel like an uphill battle.

However, with the right strategies and mindset, it is possible to take control of your finances and become debt-free. In this article, we'll explore some practical tips on how to pay off debt and achieve financial freedom.

From creating a budget to negotiating with creditors, these tips will help you develop a plan to pay off your debts and improve your financial well-being.

Assess Your Situation

Your first step in getting debt under control is to understand debt and make a plan to pay off your balances.

Secured Debt

Secured debt is 'secured' by assets. These include mortgage, auto loan, and home equity loans. The benefit of a secured loan is lower interest rates and a set term to pay off the loan.

The downside of secured debt is that defaulting on the loan allows the creditor to foreclose on your home or repossess the car.

Unsecured Debt

Unsecured debt includes most personal loans and revolving credit like credit cards. Interest rates tend to be higher and are based in part on your credit report and history.

There are more distinctions like fixed interest rate versus variable interest, but these are the two most important for beginning to understand your situation.

Listing Out Debt

Your next step is to write down the name of the creditor, type, amount owed, monthly payment amount, interest rate, payment date, and if you are behind in payments.

Separate out the secured loans. Since these are generally necessities, they get dealt with last.

Add up all your unsecured debts and see how much you need to pay each month.

Create a Budget

Next, create a budget. These can be as simple or as complex as you want. The main goal is to understand your spending habits, and your monthly bills.

We have many blogs on how to budget, types of budgets, and budgeting apps. To get more detail, click one of these links:

• How to Budget
• Budgeting Apps

If your monthly income minus monthly expenses is positive (yay!) or negative (boo!), you can now make a plan. If positive, decide where to spend extra money in order to pay off your debt quickly.

If negative, you need to cut down on expenses to save money. We will discuss that later in the blog.

The next step is to Stop Using Your Credit Cards. If you cannot survive without credit cards, you must cut a lot of expenses very quickly and get a new source of income to get enough money to pay your bills.

Let's assume you have extra cash.

Prioritize Highest-Interest Rate Debt

Now that you are not adding to your credit card debt, you have a chance to pay off your credit card debt.

Sort your debt by interest rate. Your goal is to pay off the highest interest debt quickly. Any additional money goes into the highest interest debt while maintaining payments on all other debt.

What is High Interest Debt?

The definition of high interest depends on which expert you ask. Many say that anything over 14% is high interest, making the current credit card interest rate of 20% a high interest debt.

The reason to focus on paying off higher interest balances is that it costs you a lot. Since the highest interest debts tend to be credit cards, understanding how they work is vital.

For more detail, consult:

The short version is that not paying off credit cards in full each month immediately means that you are charged interest on that revolving amount. If you do not pay the credit card debt in the second month, you pay interest on the old interest charges and the old credit card balances, and any new charges.

Let's look at some numbers.

• Credit card balance: $5,000
• Interest rate: 14%
• Minimum payment: $104
• Time to Pay off: 71 months (5.9 years)
• The total amount paid: $7,379

Now compare that to high-interest rate debt.

• Credit card balance: $5,000
• Interest rate: 20%
• Minimum payment: $104
• Time to Pay off: 98 months (8.1 years)
• The total amount paid: $10,166

Using this example, it should be very clear that high-interest debt will cost a fortune and it is extremely important to pay it off.

Making Payments on High Credit Card Debt

Your goal is to put as much money as possible toward the highest interest debt while continuing to make the minimum payment on all other debt (the Avalanche method).

Let's look at what happens if you add an extra $50 to the payment.

• Credit card balance: $5,000
• Interest rate: 20%
• Minimum payment: $104 now with extra: $154
• Time to Pay off: 98 months (8.1 years) now 48 months (4 years)
• The total amount paid: $10,166 now a total: $7,257

That $50 makes a significant difference in your repayment method.

Let's look at some ways to help free up some cash.

Twice a Month Payments

If you cannot afford extra on the credit card's due date, but you can make an extra payment during the month, you can certainly do that. The effect is exactly the same.

Move the Due Date

If you cannot make a payment on the due date, contact the company and ask them to move the due date to a more convenient date. Get it in writing.

Pay off One Smaller Bill

Paying off the smallest debt first (debt snowball method) can free up more money to put down on the high-interest debt (avalanche method). You can alternate this - small bill or debt snowball method, high interest (avalanche method), small bill, high interest.

Negotiate a Lower Interest Rate

If you have a good track record of paying, credit card companies might be willing to decrease your interest rate for a time. Get it in writing and pay as much as you can during the decrease.

Unexpected Money

Any extra money should go immediately toward paying down your high interest debt.

If you need more help, look at some of the following strategies.

Look for Ways to Increase Income

Increasing income is a pretty obvious solution. You need more coming in than going out. Once you have increased your income, 100% of that goes to pay credit card debt while you learn to budget.

Here are some suggestions for ways to increase your income:

• Look for a second job
• Ask for a raise at work
• Pick up gig work like Uber, mowing shoveling, etc
• Rent out a room
• Sell any unused or stored possessions
• Temporarily stop eating out, going to coffee shops, buying clothes, etc.

All of these can help you to raise extra income. Just remember, all of it is applied to your debt. Once the debt is under control, quit or add that money to a savings account to avoid credit cards in the future.

Reduce Expenses

Your budget can help reduce expenses. You have a better idea of where your money is going and where to cut costs.

Here are some ways to reduce expenses:

• Shop by the week or month for groceries, use coupons for stuff you buy
• Shop at consignment stores for clothing
• Mortgage or rent - would selling or moving to a cheaper option make sense?
• Car loan - can you sell it and get something less expensive?
• Cut streaming services to one or two
• Limit eating out/take out to once a month
• If you have access to public transportation, use that
• Look for less expensive internet, cell phone, insurance, etc

The goal is to cut your expenses for a short period of time. Once your debt is under control, you can then add luxuries as your budget allows.

Any extra money saved by cutting expenses is applied to your high interest balance.

Negotiate with Lenders

Sometimes lenders will work with you. They would rather get part of what you owe rather than send you to collections or lose it in a bankruptcy settlement.

Ask for:

• Lowered interest rate
• Better due date
• Longer terms (on personal loans)
• Debt Settlement, where they forgive some of the debt

Call or email the company. Be respectful and detail your situation. Ask for help. Just get it in writing and keep your end of the bargain.

Avoid More Taking On More Debt

You cannot get out of a hole if you keep digging at it. You must first put down the shovel. In other words, you absolutely cannot take on more debt while trying to get out of debt.

Things to stop:

• Using credit cards (save up for big purchases and set up an emergency fund)
• Stop blowing money on things you do not need

Debt Consolidation

In addition to budgeting and extra payments, there are other ways to pay down debt. Debt consolidation may be a solution.

You take out a debt consolidation loan or balance transfer credit card that will pay off all or most of your unsecured debts. For this to be successful, you must:

• have good to excellent credit
• qualify for low interest debt consolidation loans (lower than your lowest existing interest rate)
• make monthly payments on the new personal loan
• want one monthly payment
• not spend the loan money on purchases
• pay off the balance transfer credit card during the promotional period

Debt Settlement

Debt settlement involves negotiating with creditors to lower the amount due. You then pay that amount in full. Debt settlement works for people:

• considering bankruptcy
• with over $10,000 in credit card accounts
• with bad or poor credit ratings
• with trouble making minimum payments

There can be two drawbacks to debt settlement. First, it can damage your credit rating. Since most candidates already have trashed credit scores, it doesn't really matter. The second is that the IRS may consider debt settlement as a form of income and there may be a tax liability.

Debt settlement requires an immense amount of time and patience in order to deal with the creditors and paperwork. It's recommended to work with a professional debt settlement company since they have established creditor relationships and open lines of communication already in place. This will save you endless hours.

Pacific Debt Relief

If you think the debt settlement looks like a good option, contact the professionals at Pacific Debt Relief, Inc. We are a trusted debt relief company with more than 22 years in the business.

Since our debt relief program is not for everyone, we help you understand all options from credit counseling to consolidation to bankruptcy.

You can enroll in our award-winning program or we refer you to a trusted partner. We offer a FREE consultation to go over your situation.