Got debt? Let’s learn how to pay it down!
Sometimes going into debt is like gaining weight: so gradual that you don’t even notice. Sometimes it’s a product of life coming at you too fast: one day you have to buy new tires, and the next day, you break your arm. (Ugh.) And sometimes it’s a combination of the two.
The truth is, most people have some kind of debt, whether it’s student loans, auto loans, mortgage loans, or credit cards. And no matter how you ended up with the debt, you’ll need to make a focused effort to shed it. Here are some smart strategies to help you do just that.
Live within your budget
This really is the first thing you need to figure out. While you’re paying down debt, you’ll have to make a budget and live within it. If at all possible, stop using credit cards to pay for purchases. (This will keep further debt from adding up.) We know it’s not easy; you’ll need to pay cash as you go AND still keep up with your credit card bills and loans. (Do your best here, because it’s key.)
Know your numbers
Now take a look at your entire financial picture. How many loans and credit cards do you have? What are the balances? What are the interest rates? Make an itemized list or spreadsheet to see where you stand. Be sure to include:
- Individual loan and credit card balances, along with their interest rates
- Annual credit card fees, if your cards have them
- Your income
- Your budget, i.e., how much you can dedicate to paying off debt each month
We have a calculator that may help you see the big picture.
HOW MUCH DO YOU OWE? – Use this calculator as a starting point for your debt management plan.
Lower your interest rates
Interest rates can be all over the place! If your credit card interest rates are on the high end, you should try to lower them. Sometimes lenders and credit card companies will consider lowering your interest rate if you ask. Call customer service to see if that’s an option. Also, ask if setting up automatic payments helps reduce your rates.
If these options are a no-go, consider transferring balances to a lower interest rate credit card. But be sure to read the fine print. Some cards charge you when you transfer balances to their card. (Hint: Linn Area’s credit cards have some of the lowest rates around. We have no annual fees, and our balance transfers are free!)
Consider payoff options
It’s time to think about how you want to pay off your debt. Generally speaking, you should either make extra payments or pay more than the minimum amount due whenever you make a payment, depending upon which works best for you. We suggest throwing everything you’ve got at one credit card or loan at a time, while keeping up with the minimum payments on your other debt. (Ah, but which one do you choose to pay off?)
One popular way to approach debt payoff is the avalanche method, where you work on paying off the loan with the highest interest rate first. The avalanche method can save you quite a bit of money, because higher interest rates make debt grow faster. (If you want to pay less over time, the avalanche method is for you!)
Another way to pay down debt is by using the snowball method, paying off the smallest balance first and going up the line to the largest. The snowball method may be more psychologically rewarding because it provides more immediate gratification and a sense of accomplishment. Plus, when you get one debt paid off, you can start putting that money towards paying off the next smallest debt, which will get that paid off faster.
Here are a couple of calculators to help you strategize.
CREDIT CARD PAYOFF – Use this calculator to see what it will take to pay off your credit card balance, and what you can change to meet your repayment goals.
AUTO LOAN EARLY PAYOFF – Find out how much interest you can save by increasing your monthly auto loan payment.
Another way to tackle paying off your debt is to consolidate all that debt into one loan. Debt consolidation can lower your interest rate, and it reduces the number of places you have to send payments, making it easier for you to focus. We have a short form you can fill out to get help with this, but if you’d like to crunch the numbers first, you can use these calculators.
PERSONAL DEBT CONSOLIDATION – Should you consolidate your debt? This calculator is designed to help determine if debt consolidation is right for you.
ACCELERATED DEBT PAYOFF – Consolidating your debt is only half of the battle. You still need a plan to get your debt paid in full. This calculator can show you how to accelerate your debt payoff.
HOME EQUITY DEBT CONSOLIDATION – This calculator is designed to help determine whether using your home equity to consolidate your debt is right for you.
A few final thoughts
If you receive a chunk of money, say, a tax refund or holiday bonus, you should immediately use it to pay toward your debts. (We know it’s tempting to just go spend it, but you ARE trying to pay off your debt, right?)
Also, remember to keep making minimum payments on the loans and credit cards you aren’t paying extra on. (If you forget about them, it’ll hurt your credit score, and we don’t want that!) Take some time to learn about using credit, so that, after you get this debt paid down, you don’t wind up in debt again.
And last, but not least: You’ve got this! (And if you ever need extra help, give us a shout!)