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10 Steps to Be Debt-Free in Less Than a Year

Take this advice and pay back what you owe

Pencil erasing debt, Steps to becoming debt-free (Istockphoto)

Using your tax refund can help quickly erase your debt. — iStockPhoto

En español | When getting out of debt is a priority, there are several things you can do to eliminate that debt entirely — or at least pay off most of it — in 12 months or less.

Here are 10 tips and strategies to get you started on a debt-free life:

1. Bump up your debt repayment percentage

Putting at least 15 percent of your paycheck — or income from Social Security or pensions — toward credit card debt and loans will help you pay down those obligations much more quickly because most credit card companies only ask you to pay about 2 percent of the outstanding balance each month. Making small, minimum payments means that your debt balances are collecting interest as each month or each year goes by. Paying off large chunks of your debt within a few months could save you a significant amount of money on interest payments alone.

2. Use savings to pay down larger debts

Don't be afraid to use a portion of your savings to pay down high-interest rate debts. Using cash reserves for debt repayment is a smart decision because you will stop accruing interest on those large balances. Although it may feel comforting to have some extra cash sitting in your bank account, the truth is that those funds aren't really working for you — not with today's record low interest rates. Don't deplete your savings entirely. If you're sitting on a pile of cash, do use some of those funds to eliminate your bills.

3. Negotiate for a lower interest rate

Call your creditors to negotiate a lower interest rate. You'll be surprised how many creditors will be willing to reduce your interest rate based on your payment history and account standing.

If you have maintained a good relationship for a few years, you may be in a much better position to qualify for a lower interest rate. This can help you save some money on interest payments as you pay down that debt over the course of the year.

4. Use your tax refund check to pay down debt

While it's tempting to splurge on a high-ticket item or go on vacation with that tax refund check, a smarter money move would be to pay down some, or all, of your debt. Consider the value of reducing your monthly payments with a single lump sum debt payoff strategy. You'll enjoy the benefits of a lighter debt load over the entire year and for years to come, instead of enjoying the short-term satisfaction of a purchase.

5. Sell items for cash

Put together a list of items that you could sell on eBay, Craigslist, or at a garage sale. Drumming up some extra cash by selling items you no longer need or are ready to part with — and using the proceeds to pay down debt — can help you rapidly lighten your debt load.

6. Consider cashing in your life insurance

Cashing in your life insurance may be a viable debt payoff strategy because it will give you a chance to pay down larger amounts of debt quickly. If you feel like you are drowning in debt and don't have beneficiaries that need to benefit from your life insurance policy — for example a spouse or children — then it might make sense to use those funds to pay off debt.

This strategy doesn't apply if you own a term life insurance policy. It only works for those with whole life policies that have built up cash value. It's also important to note that even if you do have beneficiaries, you may be able to tap into part of the cash value of your whole life policy, getting cash for debt reduction and still leaving some life insurance proceeds to your loved ones.

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Video Extra

PAYING OFF DEBT: Are you on the hook for your spouse's credit card or medical bills if you divorce? AARP Pay Down Your Debt Challenge host Lynnette Khalfani-Cox says it depends on whose name is on the loan or where you live.

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