As much as we try not to acquire debt, using credit cards and other unsecured debt can help cover expenses while your family works through a recession. But should you reduce the amount you pay toward unsecured debts? Or should you look into saving more money in hopes of covering the additional costs of a recession?
The answer can be complicated, but continuing to chip away at debt is often the best option.
Here are some strategies to manage your debt wisely and help with the recession’s emergency costs.
Use Your Credit Card For Necessities
A recession isn’t the best time to rack up credit card charges for any of the extra fun items you might want around the house. To survive a recession, instead of using credit cards, use them as tools. Cover the occasional emergency expense with them and try to limit your spending to necessities.
Pay Down Your Most Expensive Debt First
How to pay down your debts during a recession? Take the time to look into which credit cards are costing you the most interest. Manage outstanding debt by concentrating on repaying accounts with the highest interest rate first.
Knocking out high-interest rate debt cuts down on the amount of interest you pay over time, which could mean paying off your balances sooner and help cut down on costly interest charges.
If any of your cards are close to 25% interest, this could cost you thousands each year in interest alone.
Once the account with the highest interest is paid off, move on to the next most expensive debt, and so on.
Look Into Debt Consolidation
Borrowers with high-interest debt may be able to consolidate their balances into a lower-interest alternative. Not only will that save money on interest fees and charges each month, but it’s typically easier to pay one bill with a single due date than manage several due dates a month.
One way to consolidate high-interest credit card bills is to leverage a personal loan as a debt consolidation loan. With a good to great credit score, you may find personal loans offer lower interest rates to help you save more.
Another benefit of personal loans is the fixed monthly payments they offer. With a consistent payment each month, you have a better idea of the funds you can allocate to savings.
You can also receive the funds in a lump sum. This allows you to pay multiple types of existing debts and reduce the debt amount faster.
It’s always a good idea to crunch some numbers before taking out a loan: compare the interest rate to your current debt and consider the repayment term – if a personal loan’s repayment term is longer than you think you’d need to pay off the debt, the loan may not be worth it, as you could end up spending more in interest over the longer time.
A balance transfer may also be a good option for saving on the cost of higher interest rates. Balance transfer credit cards allow you to move debt from credit cards with high interest to a new one with 0% interest for a set amount of time.
It’s a good idea to compare balance transfer card offers from several lenders to determine which is the right option for you. The longer the 0% period, the more time you’ll have to pay down your debt before interest kicks in.
It’s also important to note that some cards may have a balance transfer fee, which is typically 3% to 5% of the transfer amount. You may be able to waive this fee if you make the transfer within a certain period of time.
While balance transfer cards and personal loans can provide alternative ways to pay multiple high-interest debts, creditors may need to pull your credit report to determine your eligibility, which could temporarily lower your credit score. Keep in mind this credit score drop is temporary, and your score will eventually recover.
Build Up Your Savings Accounts
While it may be tempting to set aside your savings goals and pay down debt instead, this may not be the best idea, especially when the economy and job market are uncertain in a recession.
If your financial situation suddenly changes with a job loss or other hardship, keeping cash around to cover basic costs like rent and utilities can ease the stress of uncertainty.
It’s common wisdom to keep at least three to six months of living expenses in an emergency fund. If yours could use a little extra padding, consider committing more funds to your savings account but continue to use some toward paying off debt.
Saving for retirement is also an important goal, even during difficult times. If you’re able to, continue your 401k contributions as well, especially if your employer offers a match program.
Over time, the power of compounding in these investment accounts can help your money grow.
Prioritize Your Spending
As you’re thinking about your budget and updated spending habits, it’s worth doing an audit of your expenses to see if there’s any extra cash you could be putting toward debt.
The next step would be to consider other trade-offs that could shift more money toward savings and debt. Instead of dozens of steaming TV services, switch from meal-delivery kits to grocery shopping and cooking at home.
Every dollar you save by paring down non-essential items could be used to pay down your debts even faster.
Tackling Debt With a Debt Relief Company
There’s another option for reducing credit card debt: debt settlement through a debt relief expert. Consulting with debt settlement companies in your state can help provide a solution to overcoming expensive credit card debt.
A trusted debt settlement company like Alleviate Financial can provide assistance to ease all your financial burdens.
And while there are a variety of debt relief programs and debt relief services out there, Alleviate Financial can help with strategizing around credit card debt before it becomes a more serious problem.
To learn more about our debt settlement services and financial advice, schedule your debt relief consultation with Alleviate Financial’s professionals today.