Debt can be overwhelming… to say the least. Whether it’s credit card debt or student loan debt, if you are struggling with paying any kind of debt, getting organized and creating a repayment plan that works for your financial situation, is the first step in managing it. Start by creating a detailed list of all your debts – credit cards, auto loans, personal loans, medical bills, etc… Make sure to note the total amount owed for each debt, the minimum payment due each month, and the interest rate.
Lowering Your Interest Rate
Interest rates can make a big difference in how much you’re actually paying, and in your overall debt repayment plan. If you haven’t already, take a look at options for reducing your interest rate for any of your debts. For instance, you may qualify for a balance transfer or be able to refinance a loan to lower your interest rate and save money.
Here’s how they work:
- Balance Transfer: A balance transfer moves your outstanding debts from an old credit card to a new one with a lower interest rate. The key is to find a lower interest rate or an introductory 0% interest rate on a balance transfer credit card since it can help you pay down your debt with little to no interest. This way, you’re saving money in the long run. It may sound simple but there are several factors to watch out for. Make sure to pay attention to the transfer fee and how long the introductory period is to determine if a balance transfer is actually worthwhile for you. Ideally, you would want to pay off a majority if not your entire debt in the introductory period so you can maximize the benefits of a lower interest rate.
- Refinancing: The other option is refinancing. You may often hear this in the context of refinancing your mortgage but you can refinance student loans or auto loans as well. Refinancing is essentially an opportunity to get more favorable terms for your loans such as a better interest rate or lower monthly payments. If your credit score has improved, you may want to look into securing a lower interest rate. On the other hand, if you’re having trouble paying your current monthly payment, you can refinance to switch your plan to a longer-term with lower monthly payments.
Questions To Ask Yourself
Each person’s debt repayment plan will look different since it needs to be personalized to fit your needs and abilities. Before you decide your plan of attack, consider these two important questions about your debt repayment plan:
- How much extra money (in addition to minimum payments) can you set aside each month to pay off your debts? You need to keep paying the minimum payments on your debts to maintain a good credit score. But in order to really make substantial progress toward becoming debt-free, take some time to evaluate how much extra money you can actually start contributing toward paying off your debt.
- How are you prioritizing your debts? Is there one specific debt that you’re eager to pay off or that is extra burdensome? This may help you realize how to approach your debt repayment plan.
The Two Most Popular Strategies
You’ve likely heard of the tried and true debt snowball and debt avalanche plans. The debt snowball plan states that you should pay off your debts in order of balance, focusing on the lowest balance first, while still maintaining minimum payments on your other debts. Alternatively, the debt avalanche strategy involves paying off debts with the highest interest rate to lowest (regardless of balance). If you’re still unsure of which feels like a better fit for you, we’ve laid out the pros and cons for each:
- Pros: Since you’re starting with the lowest balance first, you’ll likely pay off your first balance in no time, giving you the momentum and motivation to keep tackling the rest! Ultimately, it’s a psychological benefit and might be suitable for you if you’re eager to see results quickly and lower the number of loans you have.
- Cons: When it comes to paying off all your debts, it may take longer than the next method and you could be paying more money in interest long term.
- Pros: You’re saving money on interest by tackling the balance with the highest interest first. This also means you may be able to pay off debts faster than the snowball method.
- Cons: However, it may take a long time until you pay off that first debt and it takes more motivation and discipline to stick with this strategy.
The main difference between the two is how you prioritize your debt, either focusing on debts with the smallest balance or the highest interest rate. Depending on your balance and interest rate, in the long run, the debt avalanche can help you save money on interests as you’re paying the most expensive loans first.
It’s important to remember that everyone’s financial situation varies and there really isn’t a one size fits all solution but rather several options and strategies to reach your goal of being debt-free. It’s important to take a look at your debts and calculate what makes sense for you. Have the #RealMoneyTalk with yourself and be honest about how much extra money you can actually devote to paying off your debt each month and what will keep you motivated long-term to continue making a dent in your balance.