Slashing Debt During a Recession

The key thing to understand is that during a recession, consumers have more power and leverage than they would otherwise. When there is economic uncertainty lenders are more open to negotiations. They would rather receive some form of repayment even if it’s less than the balance because things could get worse, because in that scenario it might mean they receive nothing. Creditors and lenders are much more likely to act faster and be eager to try and be the first in line to get repaid as well.

What Does This Mean for Consumers?

It means you should reach out to your credit card companies directly and negotiate better repayment terms and better interest rates. Since the odds of default are likely to increase during the recession, credit card companies are much more willing to work with you.

Which Debts Should Be Prioritized?

People should always prioritize secured debts first, above anything else. So first make sure you are taking care of your mortgage and auto loans. These debt obligations are secured by assets and are always the most important. Next you should prioritize unsecured debts based on their respective interest rates. A good rule of thumb is to get rid of higher APR debt first, as these are most likely costing you the most to maintain.

Best Strategies for Debt Elimination

The most common techniques for eliminating debt are the debt snowball method, the debt avalanche method and the strategic default method. The debt snowball method entails getting rid of all your smaller debts first (regardless of interest rates) and is the best option to make managing your debt more convenient. This option will help declutter your monthly payments quickly and have a substantial positive reinforcement mechanism for when you $0 out some of your balances. The debt avalanche method is also a great way to quickly pay off debts. With this method you indiscriminately payoff all accounts that have the highest interest rate first. Although this doesn’t have the same positive psychological impact as a snowball, this is a great and aggressive way to get rid of your high APR debts. Lastly, there is the strategic default method. If you are already behind on payments this may be your best bet to get rid of any outstanding unsecured debts. If you are behind reach out to your credit card companies to reach a settlement and you should be able to reach a deal in which you pay back less than what you owe. Please be aware, this route will however have a negative impact to your credit worthiness!

It’s important to eliminate debt as we head into a recession because these are times of economic uncertainty. The last thing you want is to deal with is the stress of debt during a recession. The more you can prepare yourself for periods of economic decline the better you will be. If you can eliminate debt and have a cushion you will be that much better for it and won’t have to worry about the effects of a recessions like many other consumers.