Debt often has a negative connotation, but there are plenty of good reasons to have it—for example, using student loans to increase your earning potential, funding an entrepreneurial venture with a small-business loan, or going to the “Bank of Mom & Dad” to pay for a move across the country for a great job.
But even when you have debt for good reasons, actually being in debt doesn’t feel great—especially if high-interest rate credit cards are monopolizing your monthly paycheck.
So how do you use debt to your advantage without letting it get you down? The key is to be proactive about paying it off. Luckily, there are plenty of great resources and techniques to help you create your debt payoff plan—but only you will know what’s best for your unique financial situation.
While none of this is meant to be financial advice, which you should always seek out from a professional, here are a few tips to consider:
Customizing Your Debt Payoff Plan Approach
The words “snowflake,” “snowball” and “avalanche” might sound like an increasingly alarming day on the mountain, but they also apply to three popular debt payoff methods, one of which may be just right for you.
As Melissa Batai from Money Crashers explains, “Snowflaking is the process of using extra money gained here and there to pay down your debt above and beyond your planned monthly payment.” You can acquire this extra cash through things like side gigs, selling the stuff you no longer need, and renting out a room in your house.
The Snowball Method entails paying off your debts in order from smallest to largest–regardless of their respective interest rates. “The benefit … comes from seeing one of your debts paid off sooner,” says Darren Wu from Wisebread. “This, in turn, can provide an emotional boost.”
It is important to remember with this method that you shouldn’t ignore your other debt while you focus on your smallest one. And, of course, it’s crucial to continue making at least the minimum payment on all of the debt you owe.
But people using the debt snowball method, beware: Ignoring interest rates usually means paying more money in the long run. If savings is your main priority, you’ll probably want to look at the Avalanche Method, which has you putting more money toward your higher-interest rate debt first. Not only does this approach save you money, it can also help you get debt-free sooner.
Trying a Debt Detox
People often compare getting fiscally fit with getting physically fit, and with good reason. Whether you’re trying to achieve financial goals or health and fitness goals, you’re more likely to succeed if you have a good plan in place, a fair amount of willpower, and a desire to change your habits.
That was the approach Anna Newell Jones of And Then We Saved took when she decided to embark on a Spending Fast®. It entailed “spending money on necessities only to see what happens, how much debt I can get out of, and how much I can get into savings.”
Fifteen months later, she’d eliminated nearly $24,000 in debt and inspired her readers to save over $320,000 by doing the Spending Fast® (and its less austere cousin, the Spending Diet) right along with her.
Upping the Minimum
Another approach for a debt payoff plan is to pay more than the minimum balance each month. Whether you have student loans or credit card debt, paying more than the minimum can help accelerate your debt payoff journey.
It can be tempting to just stick with paying the minimum balance due rather than adding to it. But paying as much as you can each month (without stretching yourself too thin) can add up. In order to make this happen, however, you may have to make a few sacrifices.
Making coffee at home, cooking for yourself, or exercising outside instead of paying for a pricey gym membership are all small changes that can help save extra money each month to put toward your debt.
By increasing how much is allocated toward monthly payments, you could pay off your debt faster and therefore save on interest. And who wouldn’t want to be out of debt sooner?
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Trying a Balance Transfer
Balance transfer credit cards sometimes offer low or even 0% introductory annual percentage rate, or APR, periods for high-interest credit card debt transfers. Some credit cards offer up to 21 months of 0% interest, which can help keep you from accumulating even more debt via interest.
Reasons people apply for a balance transfer credit card include:
• Having high-interest credit card debt
• A desire to simplify payments on one card, rather than managing payments on multiple credit cards
• Wanting to take advantage of a good promotional deal (for example, 21 months of 0% interest)
But it is important to remember that this debt payoff strategy is optimal if you know you can pay off your entire debt by the time the low- or no-interest period ends. Otherwise, you will go back to accruing interest on your debt after the introductory period ends.
Our Credit Card Interest Calculator can help you discover how much you are paying in interest alone on your credit card debt.
Recalibrating Your Rate
High-interest rate debt is not only expensive, it can also take forever to pay off. But just because your loan or credit card came with a high rate doesn’t necessarily mean you’re stuck with it forever.
For one thing, if you have student loans, new options for student loan refinancing have become available in the past few years. When you refinance your student loans with a private lender, you are taking out a completely new loan with a new interest rate.
You can refinance both private and federal student loans with a private lender, but understand that if you refinance federal loans you will lose access to all federal benefits like deferment, income-driven repayment plans, and public service loan forgiveness programs.
If you have an improved financial profile from when you took out your original loan, however, you may be able to qualify for a lower interest rate. By obtaining a lower interest rate, you could save money over the life of the loan. Or you may be able to select a shorter term with higher payments but a quicker payoff—and save money on interest payments.
And if you have high-interest rate credit cards, you can look into consolidating them with a low-interest rate unsecured personal loan. One plus of taking out a personal loan to consolidate your debt is that personal loans are typically installment loans, which means they have a fixed repayment period. That means you’ll know exactly when your loan will be paid off.
In contrast, credit card debt is “revolving debt,” which means you can continuously add to the debt even while paying it off. That’s not an option with a personal loan. By consolidating your credit card debt with a personal loan, you could also potentially qualify for a lower interest rate, which can make your debt easier to manage.
On the flip side, a personal loan may not be right for everyone. Some personal loans come with origination fees, late fees, or prepayment penalties, which could potentially drive up the cost of your loan. When shopping around for debt payoff solutions, you may want to consider any hidden fees that could come with a personal loan.
No matter what debt payoff plan you choose, the key is to take control of your debt rather than letting it control you. Ultimately, executing a successful debt payoff strategy might help you focus on the positive outcomes that happened as a result of your debt, rather than the frustration of having to pay it back.
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