Debt freedom can bring many individuals a great sense of liberation. While the journey may appear daunting at first, becoming debt-free may actually be simpler than you realize.
To identify your debts, take steps such as consulting your credit reports, sorting through old bills and reaching out to creditors. Next, use your budget as a tool for creating a repayment plan for these obligations.
Get a copy of your credit report
Credit reports are summaries of your financial history prepared by one of three nationwide consumer reporting agencies: Equifax, Experian or TransUnion. They contain your personal details as well as public records like foreclosures or bankruptcies that have been recorded against you, plus any entities who requested copies.
Lenders use your credit report when considering lending you money, which can have a dramatic effect on how and when lenders approve loans for you. Your report can affect your ability to qualify for credit cards, mortgage loans or auto loans at competitive interest rates; errors on it could even disqualify you for certain products such as insurance policies. Under federal law you are permitted one free report annually from each of three nationwide consumer reporting agencies (CRA). Some financial advisors suggest staggered requests while others recommend taking care in ordering all three at once – either way your reports come sooner!
Check your credit score
Equifax, Experian and TransUnion provide consumers with credit scores. Their scores range from 300 to 850 and are used by creditors when reviewing credit applications. A higher credit score may help you qualify for loans or credit cards with lower interest rates.
Your credit score can be easily verified for free by obtaining your reports from all three major agencies. In addition, some credit card, financial institution, and loan companies now provide their customers with credit scores on a regular basis through statements or by logging in online accounts.
As part of your credit report review, make a list of all debts owed and then compare this against collection agency statements. It’s common for lenders to sell off one debt to multiple collection agencies so it may take time before you find out who owes money from you.
Call your creditors
Some creditors may contact you by phone to collect on a debt, offering their understanding and sympathy if necessary; other may not. They could refer the account to a debt collection agency, or start legal action if payments are missed.
When dealing with debt collectors, it is vital that every interaction be documented. List all of the debts claimed against you by creditors as well as documentation or voicemail messages they leave (including dates and times of each call), so any inaccurate debts can be easily challenged later.
Contacting your creditors as soon as you are having difficulty paying your debts can help you find a solution. Ask for reduced payments, lower interest rates, temporary forbearance/deferment arrangements or waived late fees depending on your financial circumstances. However, remain calm and be respectful; creditors are in business to make money, but are legally obliged to treat you fairly.
Make a budget
Budgets can help you reach your financial goals more easily. They don’t have to be restrictive and aren’t just meant for people who are broke; budgeting involves setting both short-term savings goals as well as tracking income and spending patterns.
To create a budget, begin by gathering all your financial paperwork or electronic bill information and sorting your expenses into categories, such as fixed expenses (rent/mortgage payments/cell phone/waste disposal bills etc) and variable expenses such as groceries/dining out/gifts/gas.
Prioritize your debts according to type and interest rate, with expensive debt being addressed first and paid off quickly in order to reduce monthly payments and save more money. Establish an appropriate timeframe for yourself so as to remain motivated while on track toward financial health.