The economy ebbs and flows like most of our financial lives, but through it all, one thing is always there: debt.
Debt is close to a universal issue in the US. In fact, the average American household has $38,000 in debt, not including mortgages. Ouch.
Whether your debt is in the form of credit card balances, student loans, or vehicle loans, it’s hard to stop yourself from thinking about everything else you could do with that money. You can stop dreaming and start acting with these debt reduction strategies.
Consider a Balance Transfer
Credit card debt is one of the hardest types of debt to control. Along with how easy it is to keep spending on those high-balance cards, credit cards have often have higher interest rates than other types of debt.
If the interest is making it hard for you to make a dent, try a balance transfer. You apply for and receive a credit card that has a lower interest rate than your current cards. Then you transfer your debt to that low-interest card.
Some cards even offer an introductory rate of 0% for a certain period of time. If you can pay off the debt in that time, you’ve hit the jackpot.
This method is a gamble, though. It works best if you’re sure your credit is good enough to receive that low-interest card you’re applying for.
If you apply and are denied, you’ll log a hard inquiry on your credit report. If you have more than two hard inquiries in a year, it lowers your credit score which makes you more likely to be denied again in the future.
Request a Lower Interest Rate
Let’s say you don’t think you have the credit to get a new low-interest card or you like your current card and don’t want to do a balance transfer.
You may be able to get a lower rate from your current credit card company. Contact them and explain that you’re finding the interest rate too high. Tell them that you will need to transfer the balance to a different company’s card if they can’t offer you a lower rate.
If you have a history of paying your bills consistently with your credit card company, they’re likely to negotiate. After all, they’d rather get less interest from you than none at all.
Lie to Yourself
It’s a well-known principle in finances that whatever you have is what you’ll spend. It may feel like you’re maxing out your budget every month, but chances are that you could put more money toward your debt if you forced yourself to.
So force yourself. Start paying more and tell yourself that is the new minimum payment.
You can also use the increasing payment strategy. Increase your payment amount by $10 more each month. You won’t notice a difference of $10 from one month to the next.
Keep increasing the payment until you feel the purse strings getting tight and maintain that payment.
Set a Priority Order
Not all debt is equal. $100 will go further if you pay it toward some debts compared to others.
Take a look at your debts and identify the one that charges the most interest. Pay the minimum on your other debts or pay enough to pay off the interest each month, and put all the extra money you can into that prioritized debt.
When that debt is gone, find the next one with the highest interest charges. Work your way down until you pay off each debt.
Get a Loan for Debt Consolidation
Most of us have debt from multiple sources: several credit cards, auto loans, and student loans to name a few.
This can lead to a high total for your minimum monthly payments. It also makes it easy to miss a payment because there are so many to keep track of. Late payment charges won’t help you pay down that debt any faster.
Some people opt for debt consolidation loans. In essence, you get one loan to pay off all your debts. You now need to pay off that loan, but it’s one payment and it may be at a lower interest rate than your previous debts.
Change Your Payment Schedule
In the same way, you can lie to yourself about how much you need to pay, you can lie to yourself about when your payments are due.
Instead of paying your debts every month, pay them every four weeks. It will feel similar to your wallet but you’ll wind up making 13 payments each year instead of 12.
If you’re more ambitious you can pay every three weeks instead. This gives you 17 payments every year, paying off about 50% more every year than you would with 12 payments.
You might say, “Why don’t I make my regular monthly payments and then a larger payment at the end of the year?”
Your payments might equal the same amount of money, but you’ll pay off more if you pay more often throughout the year. Each time your interest compounds, it adds the interest to the principle on the loan. In other words, you’re paying interest on the interest.
The faster you pay down your debt, the less interest you’ll pay interest on throughout the year.
Choosing Your Debt Reduction Strategies
There’s a reason this list includes six different debt reduction strategies: because there is no one-size-fits-all solution. Choosing the best way to pay off your debt requires you to understand the types of debt you have, your budget and its limitations, and more.
When it comes down to it, the first step is getting conscious of your debt and your financial situation. Take a few hours to sit down with your banking records, your debt statements, and a cup of coffee to get a grasp on your situation.
For more tips on managing your finances and your household, check out more articles right here on our lifestyle blog.