After years of providing Financial Planning services to clients, it is overwhelmingly apparent that the careful use of debt is one of the most important financial decisions that people make in determining the health of their current financial picture and their future comfort level in retirement. These 10 ideas are good places to start but we caution against bringing on new debt to retire old debt. Many times this just shifts the debt into a longer payoff period and makes our current situation look better, but unless we change the behaviors that added the debt, this strategy just ends up fooling ourselves. It is usually better to just bite the bullet and pay off the debt as quickly as possible.
As a general principle we believe that the use of debt for an asset purchase ( home or car ) is a wise use of debt while using debt to make consumable purchases ( movie tickets, groceries, utility bills ) should always be avoided. Also keep in more and more businesses check your credit score to determine if and how they will do business with you. Examples of this include what rate insurance carriers charge you for car insurance and what interest rate to charge you when you borrow money.
Debt can also wreak havoc on your finances and on your ability to borrow. Having a lot of debt can create stress and sometimes be hard to get under control. The good news is, is that there are ways you can aggressively pay down your debt, helping you to get in a better financial position quicker and alleviate the stress that debt can bring.
1. Always Pay More Than the Minimum
Not only will paying the minimum only cost you a significant amount in terms of interest, but it will also typically take ten years or longer to repay the debt without even without additional charges. Look at your budget and find areas you can cut that can allow you to pay at least double the minimum each month.
2. Consider the Avalanche Repayment Structure to Reduce Debt
Start with your highest interest rate card or loan and pay as much as you can each month while paying the monthly minimums on the rest. Once that first debt is paid, take the amount that you were paying on it each month and begin paying that in addition to the minimum payment on the next highest interest debt. Continue this method until each debt is paid off.
3. Snowball Down Your Debt
A snowball repayment plan is similar to the avalanche repayment except instead of targeting your highest interest rate debt first, you will start with debt with the lowest balance. This may be the best method if you have multiple cards with low balances as it will free up funds more quickly.
4. Look at Balance Transfer Offers
You may receive credit card offers with a zero percent balance transfer interest rate if you repay the debt in a certain period. Consider these to transfer high-interest credit card debt. Without interest accruing, you will be able to pay the balance down much quicker.
5. Apply for a Home Equity Loan
If you have accrued a large amount of equity in your home, you can secure a home equity loan to pay off your debt. If you have a lot of equity and a fairly good credit score, you will be able to get a much better interest rate than most credit card interest rates. Also in many tax situations, you will be able to deduct the interest from your loan on your personal tax return.
6. Look at a Debt Consolidation Loan
Debt consolidation loans are personal loans that are used to pay off high-interest rate credit cards. You will typically need good credit and a strong income for this option to result in significant savings. The other benefit of a consolidation loan is that it will be for a set term. This means if it is a three-year loan, you know at the end of three years you will be debt free.
7. Trim Your Budget to the Bare Minimum
Part of paying your debt down aggressively involves finding more money to put towards your debt. This means taking a hard look at your income and budget and finding areas where spending can be cut, and that money can be put towards paying down debt.
8. Raise Additional Income
If you have trimmed down your budget and realize you need more money coming in to put towards debt repayment, consider taking on a side gig to bring in some extra money used solely to put towards debt.
9. Consider Loans From Friends and Family
If you have family and friends that have the means to loan you money, you might want to consider borrowing money to pay down your debt. Odds are your family and friends will give you a more favorable interest rate, but always make sure to honor your repayment so the relationship can stay strong.
10. Try to Renegotiate With Your Creditors
When you are way in over your head with debt, it may be time to talk to your creditors to see if they would be open to renegotiating the terms of your debt. Sometimes creditors will offer settlement amounts to save you on fees and interest, but this can have a negative effect on your credit, so it should be done with caution.
When following the tips above to aggressively pay down your debt, it is also critical to take the time to identify what caused the debt in the first place. You will need to get a plan to make sure that once you have paid your debt down, you prevent yourself from getting into that situation again. This can include cutting back on spending or setting up emergency funds. Remember one of the most essential parts of paying off debt is putting systems in place to ensure it won't happen again.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.