Strategies to Pay Down Debt
If you are in debt, you probably know you need to pay it off, but aren't quite sure how
There are a number of strategies to make paying off your debts easier so you can get out of debt more quickly. But it's important to keep in mind that no matter which strategy you choose, you'll eventually need to address the issues that got you into debt in the first place.
We looked at some of the top debt payoff strategies out there and compiled the four best ones.
Get on a Budget
One of the first things you need to do is to set up a solid budget that you can (realistically) follow each month. This is key because it will stop you from going further into debt.
Your budget is your biggest t tool in helping you get control of your finances. Once you have set up your budget, you'll be able to earmark funds specifically for paying off debt. This will help you get out of debt much more quickly than if you were just paying the minimum payments.
Your budget will help you find more money to put toward debt, can keep you from going further into debt each month, and gives you control over your money.
Set up a Debt Payment Plan
Next, you'll need to come to grips with how much you actually owe. You can set up a debt payment plan by listing the amount you owe, the creditor, the interest rate and the minimum payment for each debt. Then list the debts in the order you want to pay them off.
There are several ways to do this: You can do this from the highest interest rate to the lowest or from the smallest debt to the largest. You can use a debt calculator online or a service like SavvyMoney that will help you see how quickly you can pay down the debt by increasing the amount you pay towards debt each month. The more you can apply to the debt, the more quickly you will be able to pay it off.
Lower Your Interest Rates
Lowering your interest rates means that more of your payment goes directly to the principle of the loan rather than to paying for interest.
There are a few options here. First, you can transfer credit card balances to one that is offering a temporary 0% interest rate. This will help you save a lot of money over the year, as long as you are focused on paying off the debt, and as long as you pay off that debt within a year before the interest rate goes back up.
Another option is to take out a consolidation loan, but be wary of using your home's equity to do so. If you do a consolidation loan, you want an interest rate that is lower than the rate you are currently paying and one that is set. If you choose either of these options, you need to stop using your credit cards immediately so you do not add to your debt and end up in a situation where you owe even more than you do now.
- Be sure to read the fine print when applying for a consolidation loan, since interest rates might change.
Credit Counseling and Debt Settlement Services
If you are really having a difficult time making your payments then you may want to consider a credit counseling or debt settlement service. These services do show up on your credit report and should be a last resort before bankruptcy.
You need to be careful about the company you choose to deal with since many can be predatory of charge exorbitant fees. You can negotiate debt settlement yourself if you are already behind on your payments. If you do settle your debts, it may affect your taxes, and you need to be prepared to pay taxes on the amount that is forgiven.
Staying Out of Debt
Once you have worked hard to pay off your debts, you need to work hard to stay out of debt. This means you should continue to budget, and that you need to plan for the future. Setting up emergency funds and sinking funds should help you to deal with unexpected expenses and for car repairs.
You will also need to create a solid financial plan that plans for expenses like purchasing your first home and retirement. Although you may not want to continue sticking to a budget and closely monitoring your spending, you will have to make it a part of daily life if you truly want to pay off debt and be financially secure.
Updated by Rachel Morgan Cautero.
Capital One. "Credit Card Minimum Payments Explained." Accessed Jan. 30, 2020.
Calculators.org. "Debt Calculator." Accessed Jan. 30, 2020.
Evisors. "Understanding Interest Rates." Accessed Jan. 30, 2020.
National Debt Relief. "1099-C Cancellation of Debt Form And Tax Consequences." Accessed Jan. 30, 2020.