Have debt?
You're
not alone.
The average U.S. household has over $15,000 in credit card debt,
and that doesn't take into account mortgages and student loans. However, just
because you owe money now doesn't mean you'll never be debt-free.
First and
foremost, always pay more than the minimum balance every month (even if it's
only by a few dollars), and pay on time. Second, create a monthly
budget so you know how much you can afford to put toward paying off debt. After
that, there are several strategies you can use to pay off your debt in
manageable increments.
Here's a look at three of the most effective options:
- Tackle the Highest
Interest Rate First One strategy is to
identify the debt that has the highest interest rate and work to pay that off
first. This strategy is effective because it gives you the most bang for your
buck. The higher the interest rate, the more expensive the debt is and the
more it will cost you in the long run. For example, if you owe $5,000 on a
20% interest credit card and $10,000 on a 6% car loan, this strategy advises
paying off the credit card debt first because it will have a bigger long-term
impact than paying the car loan.
- Sort Debts by
Principle Size Another possible strategy is to sort your debt by the principle size (the
amount you still owe, not including interest). One school of thought says to
pay off the largest principle first, because it typically has the largest
monthly payment. Therefore, once that debt is paid off, you'll have more
money left each month to apply to other debts. On the other hand, some think
that paying off the smallest principal first works better. That strategy is
most effective if you've experienced a financial windfall and are able to
completely eliminate one of your debts. For example, if you've been carrying
$2,500 on a credit card that you don't use anymore, using your tax return to
completely pay off the card and then cancel it will be more beneficial than
spreading that money around to all of your debts and then continuing to make
just the minimum payment on that credit card.
- Consolidate Another strategy that works very well for some people is to consolidate your
debts. Sometimes done by taking out a home equity loan or a personal loan,
consolidation is an effective way to combine all of your individual debts
into one loan with one payment, ideally at a better interest rate than what
you were paying. This is a common tactic for student loan debt and credit
card debt held on multiple cards with similar interest rates. If you are able
to consolidate, it may feel like you've just eliminated a lot of debt, but be
sure to control your spending to avoid piling more debt on top of what you
already owe.
Finally, if none of these strategies seem to be working, or you feel that you
need help selecting the best plan for your circumstances, speak to a
professional. Your banker will be able to assess your situation and recommend
a plan of action that you can achieve successfully.
Have a strategy that worked for you? Let us know in the comments below!
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