What Can I Do If My Monthly Contributions are Not Making a Dent on My Debt?
The best thing that could be said about debt is that it is something that most people would eventually encounter in their lifetime. For credit holders, it’s near inescapable as every transaction you make gives rise to every form of financial obligation.
Also, it could be said that debt has the appeal of dry rot. The faster you can deal with it, the less it is going to stink up everything for you. However, there are instances that debt seemingly does not go away even if you try your hardest to reduce it.
So is there a way for you to really cut down on your debt to the point that it disappears? There is but, to understand how that works, it’s best that we go over a few basic things first.
Why Won’t Your Debt Decrease?
One of the most frustrating things in dealing with debt is that every payment you make seemingly makes little to no effect as time goes by. There are four plausible reasons why this is so.
1. Your Payments Don’t Really Cover the Interest
Interest is one of several costs you have for borrowing money. As such, each of your monthly payments for your debt will cover a certain amount of interest as well as principle. If you pay on the interest more, you’ll find out that your balance really only goes down by a fraction of what you expected.
For example, you have a credit card balance of £2,000 and your interest rate is at 18%, your monthly interest will be at £26. So if you pay £60 each month, your balance will actually just go down to £1,966.
In Practice
So, to put it simply, a portion of whatever you pay goes to something else that does not really cut down on your balance to something that ensures that that lender earns money from you for every payment that you make on your debt. There are two ways to attack this problem: First, you can increase the amount that you pay every month so that more goes to reducing your balance.
Another option is to have the interest rate lowered. However, this will require extra effort on your part. This might even include re-negotiating terms with your lender.
2. More of Your Payment Goes Towards Penalties
Just like interest can impede your payment’s ability to reduce your balance. Depending on the terms that you have signed up with that lender, they may reserve the right to include additional financial obligations on your account if you meet certain conditions such as failing to pay your dues on time.
To eliminate this, it’s best to go back on the contract you have signed up for. Find out what fees you are obligated to pay in instances when you default on your payments. Since late fees often activate if you miss the due date, then the most sensible thing to do is to make your payments on time. This way, a portion of your payment will actually go towards the balance.
Alternatives
Another thing that could activate penalties on your account is if you constantly max out on your credit card balance, incurring over limit fees. You can avoid this by staying within your limit every month or paying your charges more than once per month.
Lastly, there are transactional fees. These you incur whenever you transfer your balances or make cash advances. The latter is quite problematic as interest immediately starts accruing upon approval of your application. Of course, the best way to avoid these fees is if you can avoid making the transactions where they are tied to, if not necessary.
3. You Create New Debt
In most cases, the simplest reason why your debt doesn’t go down is the fact that you constantly stacking new ones on top of the original balance. For instance, you have a balance of £3,000 and you’ve paid £600 of it. However, for some reason, you loan another £2,000. That means that you still have £4,400 to go.
And then there is the fact that you compound interest. That £2,000 in the example will have it’s own interest since it’s a separate transaction. This means that less of the money you have allotted for that month actually goes to paying the original balances.
The easiest way you can avoid this is to try your best to not make debt while you are still clearing out the old one. This means that you avoid using your credit card whenever possible. Better yet, you should avoid looking at it or even think about it so you won’t be tempted to use it.
4. You’re Paying the Minimum Only
Don’t get the wrong idea. Paying the minimum is actually a good idea. It’s what the contract requires of you, after all, and any on-time payment you make on that debt is still going to be reported as a favorable entry on your credit report.
However, paying the minimum has one major drawback: you are actually extending the effect that the interest that debt has on your account. What if you take 24 months to pay off a debt of £5,000 with a 20% finance charge every month? The result is that you will virtually deal with that 20% charge every month.
That also means that the lender has basically allowed their loan to you to grow by more than 100% in the 2 years that it took you to pay it all.
Obviously, the solution here is to pay more than what is required of you every month. The faster you can clear your debts, the less you’d have to deal with interest.
Dealing with Debt for Good
Regardless of what caused that slow-down in the reduction of your balance, the consensus is that speed and precision are the keys to making yourself debt-free. If you can remove the pressure of having to deal with fines, penalties, and interest, more of your money can be put into more productive ventures.
This is where having a debt management plan can become important. That plan doesn’t have to be difficult or needlessly elaborate. In fact, you should have a semblance of a plan if you answer three questions:
1. What Is Your Strategy to Deal with Debt?
2. What Should You Do to Reduce Your Interest While Still Paying for the Principal?
3. What Mistakes Should You Avoid Committing?
Phase 1: Debt Management
It’s easy to say that you need to pay more to deal with debt less. But how do you do that? As of now, there are two strategies that you can use.
A. The Snowball
The key phrase here is “building momentum”. To use this strategy, you must come up with your list of balances and arrange them in ascending order. The trick here is to work your way up until you get to the biggest debt you have.
For example, you have three credit cards with debts of £400 – £1,500 and £5,000 each. Using the snowball effect, you arrange the cards according to the amount you owe from smallest to largest.
For people owing debt to multiple lenders, this strategy can work the best. It’s not the one that yields the fastest results but each small victory you can make will eventually add up until you have cleared all of those debts.
Also, this strategy is great for forming good financial habits. By forcing you to always earn more to pay more of your debts, this strategy programs your mind to become more critical in your spending. The less impulsive you are in your investments and expenses, the fewer debts you have to deal with.
B. The Avalanche
As the name implies, this strategy is conceptually inverse to the Snowball method. It begins the same: you come up with a list of your debts and arrange them in an order. However, this time, you will be arranging your debts in descending order.
So, the biggest amount in your list of debts will be prioritized first and you work your way down to the smallest ones. So, if you had the same three credit cards before, you are now going to attack the £5,000 one first, the £1,500 next, and the £400 one last.
One drawback to this strategy is that you are not quickly removing entries in your list. It might even take a while before the first target on your list gets removed.
However, the avalanche strategy trades the psychological satisfaction of taking off multiple entries quickly in the snowball strategy for the chance to attack your interest rates. In fact, the success of this entire strategy rests on your ability to pay as little interest as possible until you remove that item from your list.
So Which One Works?
To be honest, either strategy works perfectly well. However, they only work to your benefit if you can do these things:
- Find More Sources of Income
- Minimise Your Expenses
- Avoid Adding New Entries to your List of Debts
If you can do all of these three, you’ll find that either strategy is actually quite sustainable. Once you get the hang of it, you’ll be marking off multiple items from your list until you’re all clear.
Phase 2: Interest Reduction
Always keep in mind that either strategy takes years to complete depending on how much you actually owe to each of your creditors. The easiest option here is to stick to your credit cards for your loans but find a way to get those interest rates removed.
The way you can do this is to apply for a transfer to a 0% Interest Rate card. For an introductory period spanning a year to two years, these cards allow you to pay your debts minus any interest. This means that more of your money can be used to pay back the principal amounts, allowing you to clear a lot of entries on your list quickly.
Other Considerations
There are also non-card alternatives that you can use to secure important funding while you are still paying down your debts. This include peer to peer loans, online market places, and even some savings societies. These should allow you to secure money for any of your important expenditures without having to pledge something valuable and important to you.
Lastly, there is the option to consolidate all your debts. By loaning from a debt consolidation service, you are given an amount equal to your total balance so you can clear off all your debts in one go. The consolidation part comes from the fact that you are basically replacing all those multiple creditors in your list for one, larger creditor.
Also, since you’ve cleared off all your debts, all interest rates will be effectively removed. An added benefit with debt consolidation loans is that the interest rates being provided there are generally lower than other types of debt.
This strategy has it’s drawbacks, however. First, since the amount has been consolidated, the amount you will pay every month will be higher. Next, failing to pay even the minimum for a single instance is going to hurt your credit score. Lastly, racking up debt while still clearing this bigger debt will make the process harder on your part.
Phase 3: Avoiding Mistakes
Aside from not incurring further debt, there are certain actions that you must (or must not) commit while in the middle of your debt management strategy.
1. Not Changing Your Spending Habits
What you have to understand is that most of your expenses are born out of habit, not exactly necessity. If you change your spending habits, you can funnel more money into your fund and use that to pay more of your debt. In time, you should be able to clear multiple entries on your list.
Also, changing your spending habits will help you open you become creative with your problem solving. You might just be surprised how many problems and emergencies out there can be solved without resorting to spending money on it.
2. Hiding from Creditors
Fear and denial will be the two emotions that you will have to constantly deal with when managing your debt. The worst thing that you can do is suddenly close all communications with your creditors. You have to keep in mind that these people have the ability to influence your credit reputation. All it takes is for them to report you to your credit referencing agency and you’ll be experiencing difficulties applying for new credit in the future.
The only solution here is to maintain communications with your creditors. You have to inform them why you are finding it difficult to pay them on time and that you have no intentions on bailing on your obligations. Sure, you will come across a few annoyed creditors but it’s better that you let them know of your current situation.
Also, keeping your line of communication open with your creditors gives you the opportunity to negotiate with them. Options like holding off on reporting you to the agency as well as changing the terms of your payment are possible. There’s no assurance that that creditor will agree to your terms but it doesn’t hurt to try.
3. Falling for a Scam
It’s not recommended that you tackle your debt on your own. There are companies out there that can help you create a strategy that will help you gradually clear off every debt you have. However, it is also at that point when you seek out help that you are the most vulnerable to a number of companies who scam.
To avoid this, always ask for credentials. Legitimate companies always have links to several regulatory boards in the UK as they are mandated by law to operate within certain guidelines. Also, be mindful of whatever services they have to offer. When their work revolves around using “loopholes”, and “tricks” to clear off a lot of debt for a fee, then you’d best turn the other way around.
In a Nutshell
Settling your debts properly will require more than just constantly paying the required amount every month. This will require a plan that involves several major changes in your lifestyle.
From spending less to earning more and even being more discerning with where you invest and the kind of help you avail of, your debt management strategy should help you slowly pay off every item in your list of debts until you are practically free of them. All it takes now is for you to avoid stumbling into the same pit you’ve fallen in a few years ago.
What other reasons do you think why your payments are not doing much to clear off your balances? Are there other strategies out there that can help clear off a lot of debt within a short period of time? The comments section below is open for all sorts of discussions.