If you are in debt, especially credit card debt, you might be so focused on getting out of debt that you overlook one of the most important steps – reduce your cost of debt first.
The reason this is important is because if you reduce your cost of debt, you can get out of financial trouble much faster. Why? Well, if you send in the same payment and the interest cost is lower, it stands to reason that more of your payment will be applied towards the principal balance. And if you apply more dollars towards that balance, you’ll pay off the debt that much faster. 🙂
So the question remains: How do you reduce your cost of debt? There are 5 key ways:
1. Let Credit Card Companies Compete for Your Business
Credit card companies want your business – especially if you have a good credit score and/or have a good history of making payments. It used to be difficult to get competing quotes. Basically, you’d have to apply for a number of different credit cards to see who would make you the best offer. The problem with this was that every time you applied, it would ding your credit, and it also took a lot of work.
Now there is a much better way. Sign up at CreditSesame.com for free without using a credit card. They’ll not only tell you what your credit score is for free, they’ll also recommend a variety of ways to reduce your cost of debt. And they won’t ding your credit either, according to the site. That goes for credit cards of course, but it includes other debts like your mortgage. If I were in debt, the first thing I’d do would be to sign up at Credit Sesame.
2. Refinance Home Equity Line of Credit
This isn’t super unique I admit, but I’m seeing less and less of this tactic. That might of made sense when real estate was in the dumps but no longer. And that’s exactly the reason why you should consider a HELOC. You see, fewer and fewer people are requesting HELOCs, so the banks are very hungry for your business. Talk to your bank and see if they can loan you money for less than you’re paying now.
3. Credit Card Alternatives
If I was paying 8% or more on credit cards, one place I’d turn to for sure is peer-to-peer lending. This basically is a service that puts people who want to borrow money together with people who have money to lend out. If you are in debt, have a decent credit score and good payment history, this is a no-brainer. Many people report slashing 40% or more off the cost of debt when they borrow from a peer-to-peer company.
I’ll admit that I don’t loan money to friends – but you might have friends who aren’t as tight as I am. Why not hit them up? Show them exactly how you’re going to repay them and when. This will increase your chances of finding someone willing to lend you this money.
Many times employers offer staff small loans for a short period of time. I’m not in favor of borrowing against your 401k, and that’s not what I’m talking about. Even if your employer doesn’t have a plan in place, they might be willing to loan you money if you’re an important staff member. Remember to demonstrate professionalism by showing them your plan on how you’re going to pay them back. Here’s a tip – show them your plan before they ask for it.
A friend of mine who is down on his luck has been working his tail off at his new job. He’s been there for over eight months and works harder than the owner. He wanted to buy a car to get to work so he could cash in his bus ticket. The only problem was, he couldn’t get financing at any price. He talked to his employer, and she was only too happy to step up.
What unconventional methods have you used to reduce your cost of debt?