Recent findings completed across the United States show that most Americans – around 80 percent of the adult population – have some sort of debt.
While there are people who can ask for a raise or take on a second job, most of the population does not have these options available to them, as they are already working more than 40 hours per week. In these dire situations, people will find clever ways to pay off their debt in order to shorten the length of time it takes to pay it off and, consequently, paying off the total loan in the end.
The financial situation you are in and the type of debt you have will be factors in determining how you can start paying off your debt. However, there are basic rules to repaying your debts for every occasion.
Paying off Debt in 4 Steps
Persistence and hard work are key to ultimately paying off your debt. If you are seeking to reduce your debt, then the steps below can provide a clear route for reaching your financial goals:
1. Have thorough understanding of your debt.
Make sure you know the amounts you owe for all debts such as your credit cards, mortgage, student loans and so forth. It is important to know which ones are costing you the most and which ones the least.
Ask very specific questions regarding your debts in order to thoroughly understand it. For instance, take note of the interest rate for each debt, the length of time with which you should pay your debt and any other information pertaining to your debt that you will find useful.
2. Set up your financial goals.
Setting up financial goals are an important step to removing debt, as they set the standards for why you want to remove it. Without the proper goals, it will be more challenging to see a possible way of having a debt-free life.
The steps between the final goal – living a debt-free life – and the current situation must be practical and provide the grounding necessary to committing to these goals. One way to do this is to observe your money spending habits. Another is discovering other ways to prevent having to take out loans in the future.
3. Develop a method to paying off the debt.
The financial goals of every individual are unique to each of them, just as their economic situation is individually unique. The debt payoff strategy should be just as unique and relative to the previously mentioned two factors.
While it is ideal to remove all debt as soon as possible, dedicating most of one’s income to debt reduction is not conducive to living decently. Having a payoff strategy can help you align with the realistic goals for paying your debt while being able to pay attention to other financial priorities.
4. Keep track of your progress and remain with your strategy and goals.
The most challenging part about having a new budget and debt repayment plan is staying consistent with it. In a similar fashion, keeping track of your progress with your debt repayment plan can also get tricky when you become busy.
If you want to completely remove your debt, it is vital to remain consistent to making your predetermined payments and keep track of them. Keeping track of them can show you how you can adjust your strategy to your current circumstances.
Debt Consolidation Resources
- National Foundation for Credit Counseling
- Federal Counseling Association of America
- Student debt consolidation information
How to Create an Effective Debt Payoff Strategy
How efficient you are budgeting for your debt repayment will determine your success at reducing your debt. The following will be 6 tips on developing the repayment strategies necessary to completely eradicate your debt.
1. Reduce Your Credit Card Usage
Paying high sums of credit card debt while still using credit cards is not an effective way to pay off debt. In order to do so, you must reduce your credit card usage until you have been able to pay off at least most of the credit card debt on all accounts. It can seem challenging to pay off debt that has been simultaneously accruing over time. If this is your circumstance, be mindful of the purchases you are making and whether they are useful or not.
2. Utilizing Low-Interest Offers to Pay High-Interest Debt
One interesting way to reduce debt is to use a new credit card with a low introductory debt transfer rate to pay off a high interest credit card. What this method can do is provide about one to two years of interest free time to carve out your debt. It is important to use this method with caution, however, as it can be easy to open a new credit card account and max out the new card just as the first one.
Some credit cards with promotional periods of zero interest:
- Wells Fargo Platinum card
- Capital One SavorOne Cash Rewards Credit Card
- BankAmericard credit card
- American Express Cash Magnet Card
- Citi Simplicity Card
- Discover it Balance Transfer
- Chase Freedom Unlimited
- Discover it Student chrome
3. Begin with the Most Expensive Debt
Most Americans have a variety of debts but an important detail to note is the interest rate on that debt. The debt with the highest interest rate should be the debt with the highest priority to pay off. Loans, for instance, have compounded interest and can have subsidized or unsubsidized interest and many other ways to manage the interest on the loan. Loans with unsubsidized compound interest typically cost the most long-term. This is the type of loan that should be paid off as soon as possible.
4. Do Not Pay Just the Minimum or Make Irregular Payments
Paying the minimum required amount for credit card debt and certain types of loan will only have the borrower paying for the accumulated interest on the loan instead of the principal balance that needs to get paid off. Because of this, the principal balance of the loan will stay the same even if payments are being made.
Below is an example of the difference between payment amounts on a $1,000 credit card with a 20 percent interest rate:
- Minimum payment of $50 means 25 payments and $226.63 in interest fees
- Additional $25 ($75 total) means 16 payments and $140.40 in interest fees
- Additional $50 ($100 total) means 12 payments and only $103.06 in interst fees
Another issue is if the borrower is not making regular payments. For those who do not make consistent payments to their debt, this needs to be resolved immediately. Irregular payments cause fees and interests to increase, erasing any progress that already has been made.
5. Add More Cash Towards Your Debt
Any extra cash earned should be put towards the debt, rather than a summer vacation to a tropical destination. Although it is tempting to spend extra money towards something fun, the money would be of much greater value if it was spent to remove existing debt.
6. Change Your Spending Habits
The most important tip to completely eradicate debt is to alter your spending habits. Integrating these financial savvy tips will alter your approach to money in general and will prevent you from accumulating any more debt in the future.