A car loan, a mortgage, student loans, credit cards. It might feel like a dark debt cloud is looming over you sometimes. If you carry some debt on your personal balance sheet, you’re not alone.
The Federal Reserve’s most recent report shows that total household debt in the U.S. has reached more than $14 trillion . That includes everything from mortgages to credit cards to student loans. We’re a heavily indebted nation, and for some, it may take a psychological toll. If that’s you, here’s the comforting news: There are some tried-and-true strategies for paying back outstanding debt.
What is Considered Outstanding Debt?
What is outstanding debt? Outstanding debt refers to any balance on a debt that has yet to be paid in full. It is money that is owed to a bank or other creditor.
This balance may include both the loan’s principal and accrued interest.
On a credit card, outstanding debt may be referred to as a loan’s outstanding balance or revolving debt. A credit card is a kind of revolving debt. Generally, credit cards offer a line of credit that you can borrow against, up to a limit. If that balance is paid down, it is possible to reuse the credit limit.
On loans, like a student loan or mortgage loan, outstanding debt is sometimes called a loan’s balance. These are installment loans and are generally made as one lump sum, with the terms agreed to upfront.
Repayment happens in installments—usually, equal payments made each month.
When calculating your own personal debt that’s outstanding, add all debt balances together. This could include credit cards, student loans, mortgage loans, payday loans, personal loans, home equity lines of credit, auto loans, and so on. You should be able to find balance information on your statements.
Here are some ways to find outstanding debt, manage outstanding debt, and how to make a plan to pay it off.
How to Find Outstanding Debt
When tackling outstanding debt, you first might want to track it all down.
As you move throughout the debt payoff journey, you may find it helpful to start a file to keep your statements and correspondence. Also, you could create a list or input information into a spreadsheet. Organizing your information is necessary for building a debt payoff strategy.
Build a list of all debts with the most useful information, such as the outstanding balance, the interest rate, the monthly payment, the type of debt, and the creditor. This will come in handy later.
What if I Can’t Find All My Outstanding Debts?
If you feel as though you’ve lost track of some debts, you may want to start by requesting a credit report from at least one of the three major reporting agencies, Experian®, TransUnion®, or Equifax®. You are legally entitled to one free copy of your credit report from each of the three agencies per year. It’s easy to request a credit report from annualcreditreport.com .
A credit report includes information about each account that has been reported to that particular agency, including the name on the account and the outstanding debt balance.
It is possible that some outstanding debts have been sold to a collection agency. The name of the original account may be included. If that is not the case, you may need to investigate further. Some debt may also be outside of the statute of limitations.
Now, this strategy might not be perfect: It is possible to have outstanding debts that don’t appear on a credit report. Creditors are not required to report to the agencies, but most major ones do. That said, a creditor could choose to report to none, one, two, or all three of the agencies. If you’re in information-collecting mode, you may want to consider requesting reports from more than one agency, or all three.
Should I Pay Down Outstanding Debt?
Barring extenuating circumstances, it’s a good idea to make regular, consistent payments on your debt. Whether or not you decide to pay the debt back on an expedited schedule is up to you.
Some may not feel the need to aggressively tackle their outstanding debt. They may be just fine to pay off a balance over a designated period. This may apply to people with manageable debt payments, those who have debts with lower interest rates, or those focusing on other financial goals.
For example, someone with a low interest rate mortgage loan may not feel the need to pay it down faster than the agreed-upon schedule. So they continue to make regular, scheduled payments that make up a manageable percentage of their monthly budget. Therefore, they are able to work on other financial goals in tandem, such as saving for retirement or starting a fund for a kid’s college.
Other scenarios may call for a more aggressive strategy to pay back debt. Some reasons to consider an expedited plan: Debt levels, and therefore monthly payments, feel unmanageable. Carrying debts with higher interest rates, like credit cards. Missed payments and added fees. It could also be as simple as this: Debt makes you feel crummy, and you’re over it.
Also, carrying a large debt load could negatively affect your FICO® Score. Credit scores may look at the ratio between the outstanding balance and your available credit on revolving debt, like a credit card. This is called a “utilization rate.” When a debt load is high, it could cause variable interest rates—like those on your credit card—to rise.
According to Experian , one of the credit scoring agencies, it is ideal for a debtholder to only be using 30% of their available credit. So, if a person has a $5,000 credit limit on a card, they use no more than $1,500 at any given time throughout the month. Using more could result in a ding on a credit score.
Carrying debt also means paying interest. While some interest may not be avoidable, it’s generally a financially sound strategy to pay as little in interest as possible.
Credit cards are some of the worst offenders, here—the average interest rate on a credit card is currently over 15%. Penalty rates can reach 30% or higher. With high rates, it’s worth seriously considering paring back debt balances.
It is possible to pay off a credit card by making only the minimum monthly payments, but it may be a painstakingly slow process, with a lot of interest paid along the way. Depending on the balance and the card’s methodology, this process could also take several years or more.
Outstanding Debt Management Strategies
The next step is to pick a debt reduction plan.
As you can probably guess, the importance of budgeting and understanding cash flow cannot be understated. A successful debt payoff plan is going to require discipline and a killer budget.
Two popular strategies for paying off debt are called the debt snowball and the debt avalanche. Both ask that you isolate one source of debt to work on first. Once you select a debt, it’s time to go hard to make it disappear.
Simply put, you’ll make extra payments or payments larger than the minimum monthly payment until the outstanding balance is eliminated.
A debt snowball payoff plan involves working on the source of debt with the smallest balance. For example, a person with three credit cards would pick the one with the lowest outstanding balance and work on paying it down.
The idea here is that there’s a psychological boost when a card is paid off, so it makes sense to go after the smallest first. That way, when a person works up to the card with the higher balance, they can focus singularly on it, without a bunch of annoying, smaller payments getting in the way of the ultimate goal.
It’s called a snowball because the strategy starts small, gaining momentum as it goes.
Alternatively, the debt avalanche method starts with the debt with the highest interest rate. Because this source of debt costs the most to maintain, it is a natural place to focus.
The debt avalanche is the debt payoff strategy of choice for those who prefer to look at things from a purely mathematical standpoint. For example, if a person has one credit card with an 18% APR and another with 12%, they’d focus on that 18% card with any extra payments, no matter the balance.
Of course, it is also possible to modify these strategies to suit personal preferences and needs. For example, if one source of debt has a prepayment penalty, maybe it drops to the bottom of the list. If there’s a particular credit card you tend to overspend with, perhaps that’s a good one to focus on.
Now, you can rearrange your list of debts to reflect the order you’ll work on them.
Credit Card Consolidation With a Personal Loan
It may be possible to merge all credit cards together with a lower overall rate of interest and a straightforward repayment plan, using a personal or credit card consolidation loan.
In addition to one fixed monthly payment, a personal loan provides another benefit—the balance cannot easily be increased, as with a credit card. It’s far too easy to swipe a credit card for an additional purchase, potentially undoing the progress you’ve made on your debt repayment plan.
To consolidate with a personal loan, you might want to look around at different lenders to get a sense of what interest rates they might offer for you. Typically, lenders will provide a few options, including loans of different lengths.
You might want to spend some time analyzing the options. First, you could look to see if the are rates better than the one that you are currently getting on current sources of debt. Also, you might want to consider the length of the loan. It may be possible to get a longer loan with a lower monthly payment, but all else equal, you’ll pay more interest on a longer loan. And ideally, a personal loan would help speed up the loan pay-off process.
Consider the loan’s additional terms, as well. For example, investigate whether the loan has a prepayment penalty, where you’re charged extra if you want to pay off your loan faster.
Look to see if there are additional fees involved in the creation of the loan. Last, consider whether the lender has any other perks or member benefits such as hardship deferral.
The personal loan is then used to pay off credit cards and other high-interest debt.
The key here is to stay on top of the new loan, making all payments on time. You could consider supplementing this new strategy with a system of money tracking and budgeting.
Though a personal loan can offer some reprieve from high-interest rate debt, it doesn’t address the root cause of the debt.
If you decide to pursue this debt payoff strategy, an unsecured personal loan from SoFi may be an option for you. SoFi offers low-rate, no-fee, personal loans to help guide your financial journey.
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