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- Many in the US have had their work hours reduced or lost their jobs entirely since the start of the coronavirus pandemic, and may have needed to take on debt to cover expenses.
- If you're in this situation and want to get out of debt, consider using the debt snowball or debt avalanche method to pay off multiple balances.
- You could also transfer your credit card debt to a balance-transfer card to avoid interest charges, or speak to your creditors to work out a payment plan.
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As if the fear of contracting COVID-19 wasn't enough, a lot of individuals have also had to deal with the stress of reduced work hours or a total loss of income. If you've been financially impacted by the pandemic and had to use credit cards or other personal loans to bridge the gap in income, you're not alone.
What to do if you now have debt
First, don't panic. Using credit cards or personal loans doesn't make you a bad or irresponsible person. Many of us have struggled financially during the pandemic to one extent or another, and if you lost income and didn't have an ample amount of emergency funds to cover you, there likely weren't a lot of other choices than to take on debt. With some strategy, you can and will pay it off.
Second, if you don't already have one, create a budget so you know what you are working with, and then analyze your income and spending. After you subtract your expenses (both fixed and variable) from your income, are you breaking even each month? Do you have money left over? Are you spending more than you make?
By understanding how much money is coming in and going out, you'll be better able to cut expenses to free up cash to put towards debt or know what amount you can pay towards your debt.
Try the debt snowball or debt avalanche method
If you've racked up enough debt that you won't be able to pay it off with your first one or two paychecks after you regain stable income, then it's time to consider a debt payoff method.
The snowball and avalanche methods are two strategies to help you pay off debt.
With the snowball method, you pay off the smallest balance first, paying just the minimum on every other debt and pouring as much as you can into the smallest debt. Once you've paid off the smallest balance, you transfer that payment amount to the second-smallest debt (snowballing your payment amount) and keep working your way up while continuing to pay the minimum on your other debts.
The avalanche method is similar, but instead of focusing on the lowest balance, you focus on the debt with the highest interest rate while only paying the minimums on every other debt. Once the highest-interest debt is paid off, you move that payment amount to the next-highest interest rate until you've completely paid everything off.
There are cases for which method makes the most sense — the debt avalanche method typically will save you interest in the long run, but the debt snowball method helps you to feel accomplished with small wins and thus encourages you to keep going. It just depends on what feels right for you. Whatever method you choose, stick to it so you can pay off that debt as quickly as possible.
Use a balance-transfer credit card to buy yourself time
If you have credit card debt that you know you can't make significant payments on or you don't have enough cash flow to follow a system like the debt snowball or avalanche method, then it may be time to consider a balance-transfer credit card.
Mason Miranda, credit industry specialist from CreditCardInsider.com, had this to say about balance-transfer cards: "A balance-transfer card could help in paying off credit card debt. Oftentimes, you can find a lower interest rate with balance-transfer cards and bring all of your balances into one location. This can save you money and lower the stress of managing multiple accounts while saving money on interest charges."
One of my favorite balance-transfer cards is the Chase Slate as it does not charge a balance-transfer fee for the first 60 days after opening the account. It also has 0% APR for 15 months as well as a $0 annual fee.
There are lots of balance-transfer cards out there that typically charge 3 to 5% for a balance-transfer fee. That being said, paying the fee to transfer your balance may still make sense if you are going to pay more than that amount in interest on your other card before you can pay it off.
Work with your creditors
If you've got debt, one of the best things you can do right now is contact your creditors to see what type of options they have for you.
A lot of companies will (or are now required to, thanks to the CARES Act) give options such as reduced payments, interest rate reductions, payment extensions, and making partial payments. By contacting your creditors and getting your options, it will give you a better idea of what debt you need to focus on and how quickly you need to take care of it.
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