Setting Reasonable Goals to Pay off Debt
Tags: Financial Independence, Pay Off Debt, Prioritizing Debt, Understand Your Credit Score, Unrealistic Expectations
In order to pay off debt, you need to decide what kind you want to pay off first. This can be an overwhelming task if you have high balances, lots of different types of debt, or both. If you’re dealing with student loans as well as credit card debt, for example, trying to figure out where to start can end up being so overwhelming that you just give up altogether. This is why setting reasonable goals that will make sense and allow you to achieve financial independence is essential. Here are four tips for how to pay down your debt in an informed manner.
Establishing Goals Based on Your Credit Score
The first move you want to make is to check your credit score. Your credit score is a summary of how your financial standing is. Different items on your credit report impact your score either positively or negatively. Your first order of business when deciding what kind of debt to pay down should be to remove any negative items you see. This will often be debt that’s currently in collections or payments that are past due. These are the things that will dramatically pull down your credit score, and make it even more difficult to recover once you manage to eliminate the bad debt. Your credit score should be the cornerstone of how you approach your debt.
Once you have your credit score, you need to more carefully review your credit report itself. There are many tools available online that not only allow you to analyze what your different debt means and how it impacts your score, but also to project what will impact your score the most. Many credit card companies and financial institutions offer these tools free of charge, and you can input different scenarios to weigh what the best course of action is. For example, factors such as cancelling credit cards versus paying off certain cards will have different effects on your credit score.
Once you explore your options and how paying off different types of debt will impact your score, you can make the final decision about what you want to tackle first. Bad debt should always take priority, but the next thing to prioritize is debt with high-interest rates. Depending on high the balance on a particular line of credit is, you’ll want to address the one that’s costing you the most interest per month. Focus on this one goal, to begin with, since it’s only the second step in your quest to become debt-free. Don’t try to make sweeping changes all at once, and instead just concentrate on one balance.
Once you identify the line of credit you want to tackle, try funnelling as much money as possible into that debt to pay it down. Another thing you might want to consider is not spreading your payments too thin. It might be tempting to attempt to pay all your credit cards down at once, for example, but in reality, your payments are getting eaten up by interest. It can be better to focus on just one credit card or loan and then go from there.
The Pitfalls of Unrealistic Expectations
When you set up unrealistic expectations for yourself, it’s inevitable that you’ll fail. Debt is a difficult and complex monster to conquer, and if you try to approach it as one giant mass, you’ll become overwhelmed very quickly. One of the major parts of paying off debt that’s always essential to remember is that it takes time. You’re not going to eliminate all your outstanding debt in one night, or even in one year, depending on how much you’re carrying. Take your financial goals one day at a time, and focus on each step individually. This is the type of approach where you will actually make strides in paying off your debt. You’ll also feel a sense of accomplishment with each goal you meet.