5 Essential Tips To Get Out Of Bad Debt

April 3, 2024

Bad debt is scary. It can tie you to an endless debt spiral. Many people believe that debt is bad and you should keep it at arm’s length, but that is a myth. Life without debt is not always feasible as sometimes you are caught unawares by unexpected expenditure when you are cash-strapped.

Borrowing money is not plain sailing as it is vital to pass affordability checks, which involve a perusal of your credit score and your repaying capacity. A credit rating, a three-digit number that determines your past payment behaviour, must be good to qualify for lower interest rates.  You can keep your credit report in a good condition when stick to payments.

As long as you repay the debt on time, your debt should be considered good. Your debt should be addressed as bad when you face any of the following problems:

• You owe more than your income.
• You are struggling to clear your dues.
• You more often than not rely on debts t cover your emergency expenses.
• You are turning to loans to get by.

It should raise a red flag if you are facing any of these aforementioned problems. There is no right time to act, so you should immediately talk to your lender and discuss what options you have to avoid being buried deeper into debt.

Essential tips to get out of bad debt

Here are the tips to help you get rid of bad debt as soon as possible:

1.  Acceptance

Denial will worsen your financial problems. It is important to acknowledge that you have fallen into debt to deal with it. Once you accept that a problem exists, you will be prompted to find a solution without further ado.

Many people bury their heads in the sand, but unfortunately this will keep pushing you deeper and deeper into debt.

2. Talk to your lenders

Before it is too late, you should inform your creditors of your financial struggles to seek any support from them. A problem well-stated is a problem half-solved, so make sure you do not hide anything from them. Be honest about your financial struggles, so the solutions they offer you work in your favour.

• Your lender may revise your repayment plan that suits your current financial circumstances.
• They may be willing to accept minimum payments.
• They may temporarily halt payments.

Understand the consequences of solutions they offer you. For instance, you cannot escape accrued interest on unpaid balances despite making a minimum payment every month. Difficult though it can be when you are struggling with your debt payments, try to pay down more than the bare minimum.

You can also consider consolidation loans. They are personal loans that you use to pay off your outstanding debts once and for all. So, you will have only one large loan, which is a personal loan, to be paid down over a period of months. However, your credit score should be good to qualify for consolidation loans.

3. Create a budget

Budgeting is monotonous, yet vital. Of course, your priority should be debt settlement, but with the help of budgeting you can keep a tight rein on your expenses. Do not forget to salt away some money, if possible, so you have savings to fall back on when emergency expenses pop up.

If you are up to your neck in debt, no lender will sign off on a new loan application. There are chances that you get approval for loans in 15 minutes, but they are similar to payday loans. These loans carry very high interest rates. You should be wary of using small loans to fund your expenses.

4. Hold your long-term savings goals unless debt settlement

The sooner you settle your debts, the better it is. Little bit savings for unexpected expenses is recommended so you do not have to borrow more money, but do not set aside money for you long-term savings goals such as a deposit for buying a car and a house. Otherwise, you will end up facing difficulty paying off your debt.

5. Switch to better credit card deals

Some credit card companies provide introductory period to attract new customers. Try out these credit cards as you can avoid paying interest on your credit card balance if paid within the introductory period.

0% balance transfer credit cards are aimed at those who want to consolidate their credit card balances. It is not easy to get the nod for them, but you can avoid paying interest if you settle the whole credit card balance within a 0% interest-free period.

What to do if you are still struggling with bad debt?

It is likely that these efforts are not sufficient to help you get out of bad debt. Consider the following measures then.

• You should talk to a financial advisor. They will assess your financial condition and propose some tips for managing money. Those tips can help you create a budget and reduce your debt.
• A debt management plan comes in handy when you are deep in debt. A debt management company will negotiate with your creditors on reduced payments. However, you will have to pay fees to the debt management company.
• Bankruptcy is also an alternative, but it should be a last resort. The bankruptcy will remain on your credit report for 7 to 10 years, ruining your all chances to borrow money down the line.

The final word

It requires a lot of planning to get out of bad debt. You will have to assess how much you owe and how much you can pay off smoothly. Create a budget to create a wiggle room to pay off your debt faster. Set aside little money, if possible, for a rainy day. However, if you still need some money, you can take out tenant guarantor loans from a direct lender. Be patient while you are paying off your debts. Improve your financial habits, so you do not fall into debt again.