How to reduce bad debts
How to reduce debt and save money
Many Australian families struggle with bad debts. Dealing with bad debts often has a significant impact on everyday life. Whether it’s mortgage debt, credit card debt, personal loan, car loan; it can place enormous financial pressure on people. Resulting in a feeling of despair and uncertainty on how to reduce bad debts and save money.
Debt reduction strategy
There are several ways to reduce bad debts and take back control of your finances. Every situation and debt is different, so the best strategy depends on your case. Debt consolidation or transferring credit card debt to get a lower interest rate are popular debt reduction strategies. However, often the most successful strategy is a mix of financial planning, budgeting and creditor negotiations.
Reduce Debt Plan
Our experts focus on money management and budgeting to reduce bad debts. We go through your household expenses and family needs, fine-tune and implement a strict weekly cash-based budget for daily living needs such as groceries, travel expenses, etc. Combine smart budgeting with negotiating with your bank, and you will be able to reduce your debt and save money.
01 Don’t get into more debt
While you are working hard on lowering your current debt, don’t get into more debt in the meantime. You would think this makes sense, but some people are in debt due to irresponsible spending and easily tempted in getting in more debt. That’s why the easiest way to prevent this from happening is to cut up your credit cards.
02 Increase Monthly Payments
Most people only pay the minimum required payments on their debts. This way it will take the longest time to get out of debt. Besides it taking too long, you will pay double or more due to the interest of what you were initially charged. Making minimum payments should only be ok when you have a plan in place to regularly pay a lump sum to speed up the process.
03 Have an Emergency Fund in Place
Building an energy fund may sound counterintuitive since you are saving money to pay of your debt. However, having an emergency fund in place supplies you with a safety net when an emergency comes up. This keeps you from returning to your credit card and getting into more debt.
04 Focus on Paying Off One Debt As Soon As Possible
If you have multiple debts, choose one debt to eliminate first. Instead of increasing all minimum payments a little bit, make a big payment towards one debt until it is completely paid off. Meanwhile, pay the minimum payments on your other debts. After paying off one debt, do the same to another debt and repeat. Until you eliminate all debts.
05 Ask for a Lower Interest Rate
Higher interest rates keep people in debt longer because a significant part of payments goes toward the monthly interest charge and not toward the actual balance. Just ask your credit card issuers if they can give you a lower interest rate. If you have a good payment history, you have a good chance to negotiate a lower interest rate. If you use a balance transfer to obtain a lower rate, pay attention to the end date of the offer. Pay off the debt balance prior to the promotional rate expiring. After expiration, your balance will be subject to the higher interest rate.
06 Save Money to Put More Money Towards Your Debt
The best way to save money to put toward your debt is by having a budget in place. Go through your spendings and determine areas to save money. Have a weekly budget in place to stick to and put the saved money towards your debt. Be honest with your spendings and be realistic with your budget. We help our clients with budgeting. Last year our experts were able to have a debt reduction of $96,271 within 12 months for a client with a young family.
07 offer to settle a debt with a reduced lump sum payment
If your debts are past due or you owe more money than you can repay over the years, debt settlement may be worth looking into. With debt settlement, you ask your creditor to accept a one-time, lump sum payment towards the debt. When accepting the offer, the creditor also agrees to cancel the rest of the debt. Most of the times, creditors will agree to a settlement offer if the account is in default or at risk of defaulting.
How to negotiate with credit card companies to settle debt
With a ‘full and final settlement,’ you ask your creditor to accept your lump sum payment instead of the full balance you owe on the debt. In return, the creditor fully clears your debt.
You may be able to pay a lump sum because you have some savings in place. A friend or family member offers to pay a lump sum to help you. In either case, you need to convince the creditor to accept the offer by using a sense of urgency. If it is unlikely that your financial circumstances will change for the better in the future, you should explain why this is. Additionally, you need to tell the creditors that the money will not be available forever and the friend or family member is not paying this money unless the settlement offer is accepted.
Make a full and final settlement offer
Prepare or use a sample letter for a full and final statement offer to present to your creditors.