Financial Wellness: Pay Down Debt
Consumer debt can be one of the biggest challenges to realizing good financial wellness. Unfortunately, credit card companies design their business model in a way that makes it easy to get stuck paying off debt for years.
Reaching true financial wellness and being financially independent is possible with some intentional action and commitment.
At the very least, seek to be on track for paying it off shortly.
Below, we’ve outlined how to pay down debt in five simple steps, along with three debt-paying strategies to avoid.
Organize your debt
Before you get started, determine how much debt you must pay off. List every credit card you own with an outstanding balance and jot down the amount owed to each. Next, list the interest rate of each card. Do this for any other fixed installment loan debt you have as well. These numbers will help you build a debt-payoff plan in the next two steps.
You can also add up the amounts owed on each account to reach your total outstanding debt amount
Choose your debt-crushing method.
There are two main approaches people utilize for getting rid of their debts:
- The snowball method pays off your smallest debt and then the next-smallest debt.
- The avalanche method pays off your debt with the highest interest rate first and then the debt with the next-highest rate.
Each method has advantages and drawbacks.
The snowball method provides frequent motivation. You will pay the debt off faster, but it may involve paying more overall interest on the debt.
On the other hand, the avalanche method generally saves the borrower a significant amount they pay in interest. Still, it can take a while to generate results.
Choose the method that makes the most sense for your personal and financial circumstances.
Maximize your payments
Once you’ve chosen your debt-crushing method, it’s time to find ways to maximize your monthly credit card payments. You can do this by trimming your spending in one budget category and channeling that money toward paying down your debt. You can also find ways to pad your pocket with extra cash for your payments, such as freelancing for hire or selling your creations on a platform, like Etsy, if you’re the crafty type.
Once you’ve determined how much you can afford to pay each month, you can create a debt-payoff plan using the systems you’ve reached in Step 1.
Consider a debt consolidation loan.
The most challenging part of paying down debt for some consumers is managing multiple payments across several credit card accounts. With several monthly debt payments to make, it can be complicated to remember them all. It can also feel like the monthly payments are only going toward interest.
A debt consolidation loan can change all that. When you consolidate debts to one low-interest loan, it’s much easier to manage the monthly payments. Plus, the savings on interest payments can be significant, especially if the new loan has a low-interest rate.
If this approach sounds favorable, consider taking out a personal loan. The loan will provide you with the funds you need to pay off your credit card bills and leave you with a single, low-interest monthly payment.
Negotiate with your creditors
Many credit card companies are willing to lower your interest rate once you prove you are serious about paying down debt. Therefore, after kicking off your debt payment plan, it’s worthwhile to contact each credit card company to discuss your options. At the very least, see if you can get the company behind the first debt on your list to lower your rate.
3 Debt-Crushing strategies to avoid
As you work toward paying down your debt, beware of these debt-crushing strategies, which may do more harm than good:
- Debt settlement. Debt settlement services offer to lower your interest rates and boost your credit score in a short amount of time – for a fee. Unfortunately, though, many of these companies are fronts for scammers and should be avoided. Do note that there are legitimate debt settlement companies, so do your research well if you are thinking of using one.
- 401(k) loans. It’s rarely a good idea to borrow from the future you. Withdrawing funds from your 401(k) to pay down debt can mean getting hit with all sorts of penalties, fees, and taxes.
- Home Equity Line of Credit (HELOC). Borrowing against your home means putting yourself at risk of losing your home.
Regardless of the strategy you choose or the methods you use for paying off your debt, commit to not adding more charges onto your card while paying it down. Paying off a large debt will take time and willpower, but living debt-free is key to financial wellness.
Want to learn more about strategies to pay down debt? Read Our Article
Best of luck on your debt-crushing journey!