4 Proven Strategies For Paying Off Debt
September 28, 2020
By Rahul Iyer
Whether it's from medical bills, emergencies, or shopping sprees, being in debt can cause significant emotional stress and even harm your physical health. If you're in this position, then the good news is that you're not alone. Collectively, Americans owe $1 trillion in credit card debt, and this is just one slice of the pie. The total US consumer debt now stands at $13.86 trillion. This figure includes card cards, mortgages, student loans, and auto loans. Many people report feeling overwhelmed by their debt and are unsure how to start reducing it to a more manageable level or eliminating it entirely. That's why we've compiled a list of 4 strategies for paying off debt.
Let's take a look.
1. The Avalanche Method
This is a type of debt repayment plan where you prioritize paying off debts with the highest interest rate first. When using this method, you should continue to make the minimum repayments across all of your debt sources, but any extra money should go into paying off the high-interest debts. Typically, people start by ordering debts from highest to lowest in interest rate. Then, all extra money goes into paying off the one at the top of the list first. Once this one has been paid off, you move onto the second highest in interest rate, and so on, until you have eliminated your debts.
2. The Snowball Method
The snowball method was popularized by Dave Ramsey, author of "The Total Money Makeover." With this method, you prioritize your smallest debts first, regardless of the interest rate. Again, you should always pay the minimum balance on your other debts, but for your smallest debt, you contribute extra. The idea behind this method is that you gain momentum as you start knocking off your debt. Achievements, no matter how small, can be a powerful motivator. This is also the reason that productivity experts tell you to write To-do lists that include basic tasks, some of which you would do out of habit anyway like "Shower" or "eat breakfast." Put simply, small successes give you the confidence for the big stuff.
3. Balance Transfers
If you have credit card debt on a credit card with high interest, you could benefit from a balance transfer to a credit card with low interest or no interest. Many credit card issuers offer 0% APR for balance transfers for a fixed amount of time, usually 12 months. You can pair this method with the avalanche method, bringing your interest rate down to buy you so more time to focus on other debt sources. It's important to note that most cards do have a one-time balance transfer fee, which is usually around 3%.
4. Ask For a Lower Interest Rate
Many people overlook this option, but you shouldn't. You likely have more power than you realize. According to report from CompareCards.com, 8 in 10 credit cardholders who asked for a lower interest rate between 2018 and 2019 were successful. Reducing your interest rate can have a huge impact on how quickly you can pay off your debt.