When interest rates are low, people jump on the opportunity to take out a personal or business loan. For example, after the 2008 financial crisis, interest rates were next to nothing and were not significantly increased until 2015. This extended period of time has given people a long time to pay off their existing debts at a more affordable rate. However, now that interest rates are on the rise again, paying off new debt can be an overwhelming burden.
Toward the end of 2016, American households owed $747 billion in credit card debt, according to NerdWallet, and that number is expected to rise for many reasons. One of those reasons is that people who have high medical expenses or live in expensive cities will need to take on more debt just to meet their everyday needs. That’s a stressful situation, and with interest rates on the rise, it may seem nearly impossible to catch up.
If you’re one of many people struggling to pay off your debt, you’re not alone, and you do have options that can help you generate extra income to pay those debts; there are also ways you can work with your debt to gain a significant advantage in getting things paid off quickly. Here are some tips to make that happen:
- Rent out a room in your home
One of the easiest ways to generate cash flow to pay your debts is to rent out a room in your home. It may not be the first thing you want to do, but it does help and can provide you with enough income to pay down your debts to a more manageable level.
- Change the way you pay your debts
Most people get their credit card bill in the mail and either send in the minimum payment required, or they pay more than the minimum required – but they send in one check only when the payment is due. This seems to make sense, and yet there is another way to pay your credit card bill that can significantly reduce the amount of interest you pay if done consistently over time.
First, you need to understand that your interest rate is charged on a daily basis. So, for example, if your APR is 15%, if you divide that by a year (365 days), then that means you’re getting charged a total of 0.041% interest on your unpaid balance every day. In this sense, the amount of interest you owe will compound and increase on a daily basis unless you pay the balance down.
You get charged interest on your interest
Ever wonder why your credit card bills seem to increase exponentially? It’s not just you – that’s how it’s designed. The most important thing to understand is that the interest the bank charges you gets added to your balance. Your balance and interest are not kept separate. Your interest becomes part of your balance. And then each next day you’re charged interest on your new balance that includes the interest.
With a $2,000 balance today, you’re getting charged $0.82 in interest today, which doesn’t seem like much. But that means tomorrow your balance is going to be $2,000.82 and you’ll be charged interest on that new balance. It doesn’t take long for this compounding effect to exponentially skyrocket your debt.
The interest you pay on your debt is compounding which means you will always end up paying a higher percentage of interest than your stated APR. This is perhaps one of the biggest reasons debt can become such a huge burden.
Pay down your balance at every opportunity
You may not think it does any good to pay down your balance between statements, but because interest is charged daily and compounds, it actually makes a huge difference. If your unpaid balance is $2,000 today, and you pay off $200 tomorrow, then starting tomorrow, you’ll accrue less interest because your balance will be lower.
Interest isn’t added until the end of the billing cycle, but it is calculated on a daily basis. The best thing to do is to keep enough cash on reserve to always meet your minimum payments so that you don’t default on your debt, but anytime you can make an additional payment – even if it’s just $50 – do it, no matter when your bill is due. The longer you wait to pay your debt, the more interest you will accrue.
- Pay your small debts first
It’s easy to look at a $300 debt and put it aside, but those are the easiest debts to repay, even if they’re in collections. Sometimes it can be difficult and stressful to work with a collection agency but for the smaller debts, it’s actually not that hard.
If you have a small debt that you know you legitimately owe, if you wait long enough, the collections agency will likely send you a letter offering a settlement for a 30-40 percent savings on the total. If that happens, accept the offer because it will cost you more in consolidation fees than it’s worth for such a small debt.
When you’ve paid off the debt, sometimes the company will delete the item from your credit report but sometimes they won’t. If you negotiate a letter of deletion in the beginning as a condition of making the payment, you will have a better chance at getting the item deleted. But sometimes collection agencies won’t remove the item or provide you with the letter of deletion unless you are working with an attorney who knows how to get them to do it.
If the company says their policy is to never provide a letter of deletion, you can request an official document that proves you have paid the debt in full. If you can’t get the item removed from your credit report, you will need this letter to provide potential lenders with proof that the debt has been paid.
- Pay one debt at a time
Rather than sending out 5 checks in small amounts to different collection agencies, trying to satisfy all of them at once, pool that money and focus on paying off one debt at a time. This will prevent the repayment process from dragging on and collecting more interest on multiple accounts. If you pay off one debt at a time, you have one less debt collecting interest while you pay off the next one.
- Take the high road
Anytime you’re dealing with a collection agency, take the high road. Be courteous, calm, and respectful. There is no need to get upset; it will just create more stress for you and reduce your chances of being offered a settlement amount to save money.
- If you’re under water, call a debt relief attorney
If you have a significant amount of debt and are considering filing for bankruptcy, contact a debt relief attorney before making any decisions. You may not need to file bankruptcy, but you won’t know unless you connect with a skilled attorney who knows the law.
Negotiating with debt collectors for small debts can be easy, but when the debt is for a higher amount, it can be a nightmare to navigate on your own. And by innocently communicating with the person who owns the debt, you may unknowingly be agreeing to pay a debt that you may not owe, or could be past the statute of limitations for collecting.
Debt collectors are trained to handle collection calls by using psychology to gain control of the conversation, and remain calm in order to extract as much information from you as they can. It’s not a situation you want to handle on your own.
If you’re hesitant to call the collection agencies, or aren’t sure what to do in your situation, contact Rowdy Williams for a free consultation to find out what action is right for you.