Clearing Debt the Sensible Way

The economic crisis by now has impacted everyone and the majority of people have way too much debt. While it will take some time to clear all this debt, there are ways to reduce what the debt is costing you.

If you are really interested to clear debt as soon as possible then you may just want to follow these tips to reduce the costs. You may be on your way to that perfect credit score rating sooner than you think.

First you must assess all of your debt to see which is costing you the most. It would seem obvious that the debts incurring the highest rate of interest are the ones you should try to reduce the fastest. Often this is credit card debt, which is usually closely followed by debt on that new flat screen TV or nice lounge suite. Analyze your credit card bill and your other loans.  Ascertain which one is costing the most in monthly interest and work at trying to pay that off quicker.

If you are not in a position to make additional payments on any debts, there are ways to still reduce what you owe. Instead of a lot of small debts you should look to consolidate them into one debt. It may seem obvious, but in their desperation to clear their debt, many people look past the obvious; ensure that the cost of the consolidated debt is not more than the total of all the small individual ones. If it is then consolidate only the ones at a higher rate into the debt consolidation loan and leave the others.

Although it is nice to think of the lower payment each month, this should not be the only factor to consider. Take into account the remaining period on your individual debts. Even if a debt is at a higher interest rate, it makes little sense to reduce the interest by 2% into a 36 month consolidated loan when there is only 6 months left on it right now. Rather leave that out of the debt consolidation and use the money saved on the other debts to try settling that one even quicker.

Remember that there is a cost involved in consolidating your debt – there are fees involved in the new loan and there are often penalty fees for settling existing loans early without giving 90 days notice. Take this into  account when calculating any potential savings. The cost of the debt is not only in the payment, although that will be the major factor in terms of affordability – a loan at 12% over 12 months will cost you more in interest than a similar loan at 10% over 36 months, for example. Always look at the total interest you are paying, not just the nominal rate.

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