3 Powerful Ways to Pay Off Debt
When it comes to improving financial health, eliminating debt is a logical starting point. After all, as a popular radio ad suggests, getting into debt is easy. Getting out of debt? Not so much. The circumstances that lead to debt can be quite personal, even emotional. Regardless of your financial goals, it is best to confront the elephant in the room head on.
With that in mind, here are three powerful ways to reduce and even eliminate debt.
HIGHEST INTEREST RATE FIRST
Any debt reduction process needs to begin with a list of your obligations; for our purposes here, we want to look at loans and credit cards, as well as the associated interest rates. One method you commonly find suggests that you attack the option with the highest interest rate. Over the course of your debt payoff process, you’ll pay less interest than these other plans, but its incremental nature makes it feel slower.
HIGHEST PAYMENT FIRST
Another approach that some experts will advocate for is focusing on the obligation with the highest payment, the idea being that once paid off, a larger chunk of your budget becomes available to put towards debt with smaller payments. It’s worth noting that, due to long-term nature and typically lower rates associated, mortgages would not be a part of this consideration. However, paying off a vehicle in two years, as opposed to 4 or 5, could make a big impact in your overall debt elimination process.
SMALLEST BALANCE FIRST
Sometimes called the “snowball” method, paying off the smallest balance first carries with it the psychological element of feeling like you’re making progress. When you pay off that first balance, you simply add regular payment amount to next smallest and so on and so forth. This is particularly powerful if you’re ‘starting small’ and would really benefit from the motivational boost of getting on a roll and crossing these debts off your list.
Regardless of where you start in your debt elimination journey, consistently reducing the amount you owe your creditors will in turn gradually increase your credit score. At a certain point, you may become eligible for a consolidation loan or receive an offer to transfer your balance to a card with a lower interest rate. While being careful not to incur large fees, the option to cut interest rates or reduce the number of payments you have to make could give you a nice boost when it comes to eliminating debt.
As mentioned at the top, we know that debt can be a particularly sensitive topic for many people and there’s no “one-size-fits-all” solution to getting out of debt. It’s important to consider how your personal goals and budget line up with the methods described above. We think you’ll find that being organized and disciplined will be keys to your success!
If you would like assistance in putting together a spending plan that focuses on paying off debt or improving your financial health in some other ways, our team of Certified Credit Union Financial Counselors are ready and willing to help. Just send us an email at [email protected] to start the conversation. If you know anyone else who could benefit from this information, be sure to share it with them via email or your favorite social media channels.
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