Are you a single mom who wants to pay off debt for GOOD?
If you live with consumer debt, you are not alone. According to U.S. Federal Reserve data U.S. households have on average $15,863 in credit card debt and $33,090 in student loans, while the Consumer Financial Protection Bureau reports that a full 52 percent of credit bureau filings are for medical debt.
On one hand, if you find yourself drowning in debt, rest assured you are not a weirdo. But don’t use this fact as an excuse not to work like crazy to pay off your debt. If you live month-to-month owing others money, then the money you earn is not really yours. You are enslaved to your debt.
This affects your relationships, mental health, career choices. Scraping by to may loan payments prevents many families from ever building wealth. That is a stressful, exhausting way to live. I know – there have been times in my life when I had as much as $10,000 in credit card debt, and I left college with $20,000 in loans (in 1998 — $29,300 in today’s dollars).
The upside to the personal debt crisis is that there are tried and true methods for getting rid of it – and plenty of analog and tech resources to help.
A step-by-step guide to getting out of debt for single moms
Be honest with yourself.
If you are stressing about your debt and credit, likely you are avoiding the facts of your financial situation.
The first step is to get real with. That means facing the reality of your situation, no matter how ugly it is. Collect statements for each and every one of your debts: credit cards, medical bills, student loans, car note, mortgage, home equity line, personal loans from your parents or cousin.
If you are married or live with your partner, get them involved. Lay these out on the kitchen table. In paper. Feel them in your hands. Look the in the eye. I’m talking 100 percent transparency.
Get your free credit score
Create a list of all your debt, including interest rates, monthly minimum payments and any deadlines. Personal Capital's monthly goals feature is a good place to start.
Create a monthly budget, and figure out how much you can afford to pay towards your debt. A favorite budgeting tool is Tiller.
Learn more about Tiller in my review. It is time to get serious, cut out any extra spending, and lower your overhead. Remember: Overspending is how you got in this pickle in the first place. Imagine how AMAZING it will feel to be debt-free!
Research lower credit card and loan rates
Depending on your credit score, you may qualify for credit cards with lower rates.
First, see if you qualify for a 0% balance transfer. This post on MagnifyMoney is a good place to start. This is a great way to pay off debt, and save a lot of money on interest along the way.
It only works if you are very organized, read all the fine print, and make sure you pay the premiums on time, and either pay off the balance or transfer the balance before the end of the promotion period. But be honest with yourself: If you are not good with this kind of bookkeeping, this might not be a good option for you.
Negotiate a better credit card rate
Another way to get a better rate on your card is to call your current credit card company and simply ask for a better rate. Here is a script:
“Hi, as you can see I am a longtime cardholder, and I love using your product. I am committed to paying off my debt and improving my credit history, and I'd love to stay with you. However, I need a better rate on my balance. Based on my research I can get a [insert honest quote you received from another card] rate. Can you match it or do better?”
Negotiate medical and other debt
Call the holder of any outstanding medical bills and negotiate.
This article from About.com offers great tips for negotiating medical bills.
Decide: Debt Avalanche or Debt Snowball?
These terms are lingo for the two main methods for paying off debt.
- Debt Snowball: Pay off credit cards or loans with the lowest balances first. The advantage is that you get the psychological and emotional thrill of paying off accounts quickly.
- Debt Avalanche: Pay off accounts with the highest interest rates first. The big perk of this method is that you save more money by depleting high-interest debt sooner.
Consider debt consolidation
Consider combining your debt into a single, lower-interest loan. Private banks offer debt consolidation and refinancing. If you have a solid credit score, it can make it a lot easier, and you can save thousands of dollars, by consolidating your debt into a single, lower-interest payment. One of the easiest approval processes is Purefy, by PenFed credit union online. with rates as low as 2.69%!
Seek professional help
If you’re totally overwhelmed with this process, or truly believe that you cannot dig out of debt on your current income, get professional advice. A credit counselor will help you create a debt repayment plan, which may include debt consolidation – in which case the credit counseling agency will consolidate all of your debt into a single payment that is at a lower interest rate than all of your debt combined. Two places to start your search for a reputable credit counselor:
- National Foundation for Credit Counseling
- Association of Independent Consumer Credit Counseling Agencies.
How to increase your credit score
If you found on Credit Sesame that your credit score is low — say, below 700 — then you likely will find it hard to qualify for a debt consolidation loan, a new credit card, or an interest rate reduction from your current bank.
Thankfully, there are some steps you can take now to improve your credit score.
Correct errors on your credit report
Legally, every person in the United States is entitled to correct errors on your credit score. It is not uncommon for your score to be hurt by old debts that have actually been paid off (but still appear on your report), debts or bankruptcies that are not yours, or legitimate debts that erroneously are reported multiple times.
Getting these red marks off your credit report is within your legal rights, but it can be a huge pain in the butt. If you are strapped for time and patience, it can be worth the investment to pay a reputable credit repair company to take over this task for you.
Try this cool service, Self Lender
One new company that I am a huge fan of is Self Lender. This company issues you a loan backed by a Certificate of Deposit, or a CD, for a modest fee. Then you set up automatic payments, which are deposited into the CD. Once the loan has been repaid, those savings are yours to keep. And since the payments have been made regularly, your credit score gets a strong boost.
As an example, Self Lender suggests the following scenario: Let’s say you want to borrow $1,000 in a credit-builder account for a duration of 12 months.
In that case, you would pay $12 upfront and $89 each month for 12 months, for a total cost of $1,080. At the end of the loan term, you would get the loan amount ($1,000) paid to you in cash plus the interest from your CD. Since the CD rate paid is currently only .10% APY, you would only earn $1.00 in interest, however. In other words: In this scenario, it cost you $88 to rebuild your credit over a year, plus you walk away with $1,000 cash savings. BAM!
Set up automatic payments. If you are going the DIY repayment route (and not using a counseling agency), set all the payments on autopilot.
Use tricks to pay down debt even faster. These include:
- Put tax refunds towards your debt.
- Allocating any job raises towards the principal.
- Sell off unused furniture, clothes, electronics, books or household items and put all proceeds towards debt.
- Start a side hustle – take on work as a virtual assistant, babysitting, freelance gigs in your industry – and commit that income to debt.
Now, celebrate! You did it! You paid off that effing debt! YOU ARE DEBT FREE!
Don’t think you’re too cute. Now is not the time to go shopping! Now is the time to focus on saving and other financial goals.
Keep that budget!
Keep monitoring your credit score. Mint.com automatically updates for free your credit score – and displays in proximately in the app. Or, use Credit Sesame's free score monitoring service, which updates monthly.
Some of the links in this and other posts generate a commission. I never recommend products that I don’t truly believe in. Seriously – I get asked to write about stuff all the time and turn down hard cash if I’m not feeling it.
Emma Johnson is a veteran money journalist, noted blogger, bestselling author and an host of the award-winning podcast, Like a Mother with Emma Johnson. A former Associated Press Financial Wire reporter and MSN Money columnist, Emma has written for the New York Times, Wall Street Journal, Forbes, Glamour, Oprah.com, U.S. News, Parenting, USA Today and others. Her #1 bestseller, The Kickass Single Mom (Penguin), was named to the New York Post's ‘Must Read” list.
Emma regularly comments on issues of modern families, gender equality, divorce, sex and motherhood for outlets like CNN, Headline News, New York Times, Wall Street Journal, Fox & Friends, CNBC, NPR, TIME, MONEY, O, The Oprah Magazine and The Doctors. She was named Parents magazine’s “Best of the Web,” “Top 15 Personal Finance Podcasts” by U.S. News, and a “Most Eligible New Yorker” by New York Observer.
A popular speaker, Emma presented at the United Nations Summit for Gender Equality. Read more about Emma here.