If you are the super sensible type of college grad who spent all of your time at school working hard to stay afloat, you might well have come out with your diploma as well as a nice pot of savings – or at least not too much debt.
If on the other hand you didn’t (like 99% of your peers, myself included) then congrats, you have just arrived at that point in life where you need to repair and rebuild and start your journey to financial stability.
Step 1: What Are Your Key Goals?
When you have lots of debt and little income you have 2 overriding goals; so these are what we will focus on:
- To pay off your debts, so that you can begin saving.
- To repair your credit rating, ready for when you need it.
So before we get started, your first task is to write down all your debts – this won’t be fun, but you need to know your starting point. So make a list of who you owe, how much and what it’s costing you (ie, interest rate).
Step 2: Paying It Off
You need to prioritise which debts are paid off first. In general store cards, then credit cards and overdrafts, loans etc come last.
Paying off the high cost debt will save you the most money, money which can then be used to pay off more debt. As soon as a card is paid off you can destroy it and cancel the account.
High Risk Strategy: If you can take a relatively low interest loan to pay off all of your cards this might be a good idea, it will save you money and give you a much more manageable repayment. Be careful though, if you end up taking out new cards you will just get further into debt. Only take this option if you are sure you can trust yourself and if the numbers add up. [Editor's Note: Definitely high risk and not generally suggested -- be careful!]
Use Your Credit Cards
Long term credit card debt is bad for your credit rating, so pay these off first. Once you have paid them off though, using your cards occasionally will help to improve your credit rating. Again, this is risky and should only be done if you trust yourself to pay off your balance in full every month.
If you can’t use a card responsibly just get rid of it, slip ups will cost you, and you can’t afford that right now.
For the time being you are going to be constantly close to your limit, because all of your income will be working hard to pay off debt. It is important to watch your finances closely and be careful to avoid dipping into your overdraft (or at least going past the limit). Set aside 10 minutes every other day to review your progress so that you always know where you are.
Step 3: Getting Them Paid Off
If you have multiple debts, keep an eye on the balances. Sometimes it is worth paying off a smaller debt as soon as you can, even if it is not a high interest one. This isn’t optimal financially, but being able to cross off a debt is great for your motivation.
In the long term you just need discipline; it can be very hard, but as long as you can see progress being made you should be able to stay motivated and keep at it.
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