How to Pay off Debt When you Have No Clue How.
Growing up, I believed I’d never own a credit card. I always wanted to pay for everything up front and not have any debt to my name (yes, that dream included my house and car). Then I got into college and started missing Wing Wednesday’s and Spring formals because I was broke. I’m not sure if it’s a blessing or a curse that I didn’t have a credit card at that time in my life. But, to this day, debt is still something that bothers me. I have a few credit cards now, and have pretty consistent anxiety every time I use one.
You think you’re gonna be super frugal and “only use your visa for gas, that you’ll immediately pay off, cause you’re only using this to build credit” and then it turns into spending $85 dollars on Amazon and having to use your credit card the second half of the month because you didn’t stick to your budget. I get it. I’ve found a budget plan that works for me, yet sometimes it still happens. Still learning the hard way that you can’t be perfect or always financially responsible…because honestly what is the fun in that?
So, you have debt in your life. You have bills and all other expenses on top of that and at this point in your life you can’t see the light at the end of the debt tunnel. Sound familiar? I’ve put together a few steps that can be used to face all the debt in your life and start reaching your repayment goals…all while not sacrificing your credit score. I am by no means a financial planner, accountant, etc. But, I’m hoping that if this process worked for me, it can work for you too!
Before I get into the steps to facing your debt, I’ve listed below a crash course on common terms you see along debt. It could be from your credit card statement, home loan, or even student loan. But half of the battle of facing this, is understanding it.
- Credit/ Credit Score : Credit is money that you apply for and receive, before having to pay for it. Credit scores are the scores you receive based on multiple credit factors. These scores can affect your ability to rent/own a home, amount of interest on a credit card, your monthly payment on a new car, etc. It is also important to notes that NO credit isn’t good credit. I thought having no credit my whole life would be a good thing, turns out, credit is actually a positive thing as long as your use it wisely. It’s taken over two years for my credit score to reach almost good and I’ve never missed a payment. Start building your credit today!
- Interest/ APR : This is how much your remaining balance will increase assuming you pay something. Some credit cards have really high interest rates (those with no credit or those with bad credit). As you increase your credit score, it’s always a good idea to have them look over your account and see if you’re eligible for a lower interest rate! When I got my first Visa, like I said, i vowed to pay it all off right after I used it. However, that didn’t happen and usually doesn’t from month to month. That’s ok, just be away that higher interest rates mean that more money is going to be applied each time according to how much you have left as a remaining balance.
- Minimum payment : This is the amount the credit card requires you to pay at a minimum for each bill cycle. I have one with a minimum payment of $27. Depending on your interest, the credit limit, and payment history, yours could be more or less than this. The minimum payment is a suggestion, but the more above the minimum you pay, the less your interest will be. ALWAYS PAY ABOVE THE MINIMUM. Seriously, I pay $35 a month for my bill that has a minimum of $37. It doesn’t have to be a crazy amount, just something that you think may cover the interest. It could be easy for you to round-up!
- Credit Factors: Factors that affect your credit score (It’s more than just payment history!)
- Payment History: The percentage of payments you’ve made on time over total payments. This may be an obvious one, but you should try to keep this as close to 100% as possible! Although its only one factor, everything counts when it comes to credit scores!
- Age of Credit: The average length of time you’ve had your credit accounts open. The age of credit can have some what of an impact for you. According to credit karma, the best way to get a green (good) rating for age of credit is 9+ years. This is a perfect example of why it is good to start building your credit as soon as possible!
- Total Accounts: The total number of accounts you have open and closed. Total accounts hardly affects credit, but until you 11 total credit accounts, you’re considered to have a lower grade for this factor. This does also include open and closed accounts as well!
- Inquiries: The number of ‘hard pulls’ on your credit score for things like credit card applications, rental applications, and home loans.
- Utilization: The amount of credit you are currently using out of the total for a card. Of all the credit factors, I feel like this one is the most sneaky and honestly one of the most important. Most people think that as long as they have a credit card and they make payments on it every month, they can have perfect credit. Unfortunately, that isn’t true 🙁 to have your best credit score, your utilization needs to be low. If you’re getting ready to buy a car or take out a loan, I’d say it’d be good to check and make sure your utilization is as low as you can get it (pay off as much of your debt as you can).
One of the most important things about debt, is that everyone has it at some point in their lives. You aren’t alone and there are ways to successfully start paying it off!
Step 1: Make a debt list
This is probably the scariest process of the entire post. A large part of starting over when it comes to conquering debt, is to start it in the face and accept it. It’s hard, it makes people uncomfortable, and its really discouraging. But, it is so necessary if you want to make a good lifestyle habit about paying off debt. I’ve included a debt worksheet here with my debt repayment printable. Take a sec, head over to the printables page, and get that bad boy printed out or, fill out the form below to get it straight to your inbox!
The debt list really just comprises of a table where you write all the credit cards, loans, etc that you have along with APR, amount owed as of today, and how much you are paying monthly. It also gives a link to this debt calculator, that will tell you how long it will take for you to pay everything back.
Add all of these together and get your grand total. Now you’re ready for the next step, you got this!
Step 2: Prioritize your debt
These next steps are where your plan could be polar opposite of mine. This are the questions to ask yourself to figure out how you want to repay your debt that will make you happiest.
- Which credit factors are most important to you? Some would suggest prioritizing by which have the smallest minimum payment, or others who think those who have the highest interest! I go with the ones that have the highest APR. High interest = more money you’ll end up paying later. But, the one thing with my process, is that I would choose paying a little over minimum on all of my payments instead of dumping all of my money into one!
Number your debt list or decide your plan on paying back and fill in the blank with how long it will take to pay it off.
Step 3: Determine payment amounts
There are a couple of ways you could decide payment amount. First, add up all the minimum payment amounts so you have a baseline of the least amount you can pay. Next, if you are able to pay more, this is where step 2 become important. Are you going to apply $2 more to each, or $10 on a specific debt you are prioritizing first.
Step 4: Utilize Debt Repayment Worksheet
Use the debt worksheet to keep track of payments and reuse each worksheet for each type of debt! Questions? Contact me here comment on the post below!
Head over to the printables page to get your worksheet!