Feeling the weight of all your debt-related bills? You’re not alone. Living with debt has become an American way of life; 80% of households hold some sort of debt. Experian’s 2019 Consumer Debt Study found that consumers’ debt totals up to $14.1 trillion, with Americans holding an average of $90,460 in debt.
Between revolving debt, such as credit cards; housing-related debt, like a mortgage; and loans, such as student loans, debt can add up quickly and easily. This is particularly true if you’ve encountered medical emergencies, job loss, or other financial hardships, such as during the COVID-19 pandemic. Debt can become a financial burden and can cost you in the long run. If one of your New Year’s resolutions is to conquer your debt once and for all, here are five ways to pay it off.
1. Stop using debt
This recommendation is both the most obvious and the most difficult to execute. If you’re accustomed to financing your lifestyle with debt, particularly in the form of credit cards, then halting spending can be difficult. However, you’re never going to pay off your debt if you keep accumulating it. To make sure you’re living within your means, budgeting is essential. So is sticking to your budget once you’ve made it.
Think about ways to remove temptation. For example, take your credit cards out of your wallet and put them somewhere inconvenient. The time you take finding them may prevent an impulse purchase. Then, remove all your credit card information from online platforms, whether that’s your Amazon account or Google forms. Don’t allow yourself to accumulate debt with one easy click.
2. Ask for reduced fees and interest rates
You may be eligible for lower rates. Some credit card companies may be willing to waive annual fees or to lower interest rates—you just have to ask. You may also be able to lower your interest rates for other types of loan by bundling services or setting up automatic payments. Explore your options with each provider.
3. Strategize your repayment plan
There are two primary approaches to debt repayment:
The Debt Snowball: Coined by personal finance guru Dave Ramsey, the debt snowball method prescribes paying off the smallest debt first. Once the smallest debt is paid off, those funds “snowball” into paying the next smallest debt until all creditors are satisfied. This approach doesn’t save you the money you’re spending on debt on high interest rates; however, some people find the strategy motivating. Researchers from Northwestern University found that consumers using this approach are likelier to eliminate their overall debt.
Debt Avalanche: In this approach, instead of focusing on the smallest balances, you’ll focus on paying off the debt with the highest interest rate first. Once the first high-interest-rate balance is paid, these monies can be rolled into the account with the second highest interest rate until you’ve paid off all your debt. This strategy may save you money in the long run; however, it may not come with the sense of accomplishment that the debt snowball approach does since it may take longer to pay off each account.
Note that in each strategy, you must maintain monthly minimums on all other sources of debt while making payments larger than the minimum on one. If you don’t maintain minimum payments, you could face late fees and your credit score could be impacted.
4. Consolidate onto a low, fixed-rate credit card that allows balance transfers
If your monthly payments are unmanageable or pay-off periods are unwieldy, you may want to consider a debt consolidation strategy. In this strategy, you combine multiple debts into a single new one, such as a credit card—preferably with a lower, fixed interest rate.
5. Take out a debt consolidation personal loan
As with a credit card, a personal loan allows you to funnel multiple sources of debt into a single source—often with a lower interest rate than a credit card. These loans are used to pay unsecured debt, which may include credit card bills, medical expenses, and/or payday loans.
State ECU offers personal loans to finance almost anything. It’s an easy application process with no processing fees, competitive rates, and affordable payments. Members enjoy extra savings off their loan rates and can find additional interest-rate discounts for automatic payments.
Keep in mind that a debt consolidation strategy requires you to do a cost-benefit analysis for your individual circumstances. You’ll likely have a smaller payment and lower interest rates, which means you’ll spend less money overall. You may also increase your credit score by lowering your credit utilization ratio. However, you’ll also likely be paying off debt for a number of years.
We hope these tips and strategies help you achieve your financial resolutions this year!