9 Tips to Perform a New Year Debt Cleanse
New Year, New Money Resolutions
At the beginning of every year, it’s not uncommon to make New Year’s resolutions – of which, most will feature weight loss, diets and exercise. But while these annual goals take care of your physical health, a resolution to reduce debt can aid your financial wellbeing!
Here are 9 ways to get started on a debt cleanse for a fiscally-fit New Year:
1. Check your credit report
Get started by glimpsing a copy of your credit report and find out if all is well with your personal credit status. As you might know, your credit report holds information about your credit history and activities such as loans undertaken, credit card dues and the like.
It’s important to look for discrepancies or disputes in your credit report (e.g. if unpaid bills which you have already cleared appears) and to resolve them as soon as possible. This is because; late payments and other overdue bills reflected on your credit report could adversely affect your loan approvals and interest rates.
2. Take stock of ALL debt
Your CCRIS report lists bank-related debts and but there may be other borrowings not contained in the report (or CTOS reports), that still need to be paid off. This could include friendly-loans and items purchased on instalments (not on credit cards).
The reason why you need to note all debt is so you’ll have a clear picture of how much income you have left once all necessary repayments and expenses have been deducted. From here you can adjust repayments, so that you have enough to live off and still make good on your borrowings.
3. Start clearing off credit card bills
If you’ve only made the minimum payment for your credit card bills, it’s time to start paying down more each month, if possible. This way you can reduce mounting debt and avoid paying more in interests.
While you’re at it, be sure to prioritise paying off credit card bills promptly. It’s not a good idea to waste money on late fees and have overdue payments show up on your credit report. These actions could keep you from enjoying lower interest rates as well as an interest-free grace period.
This is also a good time to practice using your card when necessary or only when it benefits you i.e. if there’s a specific offer you can take advantage of. Whipping out your credit card for every small payment and not paying your bills on time can lead to unnecessary debt.
4. Budget and cut the bloat
To pay down debt, you’ll need to use your money as efficiently as possible and budgeting can certainly help. Now when you budget, you’re essentially letting go of spending unnecessarily and slimming down your expenses in order to channel your funds toward reducing current debt.
To do this, you’ll need to see where your money is going. Start by listing out all expenses and trim where you can. For instance, look to downgrading cable or satellite plans, manage your meal expenses to avoid eating out too often and keep entertainment costs low for the time being.
5. Start an emergency fund
An emergency fund can be a helpful defence against future debt as it gives you access to fast cash without having to borrow or incur other costs. Thus, it’s a good idea to start putting money aside (if you haven’t already) or increase the amount of your savings contributions. To be on the safe side, aim to grow your emergency fund to at least 3 times your monthly earnings.
Bear in mind though, it still might make sense to borrow instead of dipping into your reserve, that is, whenever you can borrow at a rate that is lower than what your savings would earn.
Still, having emergency money handy, will allow you to borrow on your own terms and limit the risk of unmanageable debt. You will not have to desperately hunt for cash and be subjected to heavy interest rates or unfavourable terms.
6. Consider a balance transfer for credit card debt
If you have racked up credit card bills and are having difficulty making repayments due to high interest rates, you could consider a balance transfer to pay them off. While it might not seem logical to take one credit card to pay off another; with a balance transfer, you could significantly save money on the interests owed.
How it works is if you can repay the instalments of the transferred debt as agreed, you’ll enjoy the low-interest rate offer (sometimes its 0%). However, if you miss a payment, your rate could return to the prevailing one and this could be higher than what you were paying previously. Thus, if you can make repayments as promised, a balance transfer could move you toward clearing off your debt!
7. Consolidate debt with a personal loan
A personal loan can help you pay off credit card and other debt at a lower cost. This would make sense if personal loan interest rates are lower than you what you are currently paying.
This is often the case as credit card rates average 15% to 18% per annum while personal loan rates typically fall between 7% and 8% - sometimes even lower during promo periods. For instance, the Alliance Bank CashFirst Personal Loan is offering a super low interest rate of only 4.99% p.a. (to eligible applicants), when borrowing with tenures of up to two years.
8. Review credit cards
It’s a good time to take note of your credit cards in terms of interest rates and rewards like cashbacks, to ensure that you are getting the best possible deal. When used properly, a credit card can help you save money and earn you valuable benefits. For these reasons and more, be sure to run an annual review of the cards you hold.
You should first check if your current bank is willing to offer card upgrades with better terms like waived annual fees, revised interest rates, etc., before you cancel your cards and switch providers.
This is because; cancelling credit cards and applying for new ones might show up on your credit report if you have yet to the settle bills on your other credit cards first. It could temporarily affect your credit utilisation ratio (how much credit you have available vs. how much you have used up).
Also, if a card is not costing you anything, you may hold on to it to help build a better credit score and still apply for another (if there are no restrictions).
9. Get help when you need it
The best thing you can do for your debt woes in the New Year, or anytime for that matter, is to seek help if your situation becomes overwhelming.
Now you know how to improve your money prospects for 2018! Here’s wishing you a Happy New (B)ear!