Debt. Your financial four-letter word. Whether you’re carrying student loans, credit card debt or car loans, you’re not alone. You may be feeling overwhelmed (or face it, in denial – I’ve been there) about your debt, but addressing it now will lead you to freedom sooner.
Debt. Your financial four-letter word. Whether you’re carrying student loans, credit card debt or car loans, you’re not alone. A recent release from the Federal Reserve shows the national household debt totals $14.27 trillion. So, a lot. You may be feeling overwhelmed (or face it, in denial- I’ve been there) about your debt, but addressing it now will lead you to freedom sooner.
There are a couple of different ways to pay off debt. Both require consistency, which is key in getting rid of debt, and both require making the minimum payments each month. First, the Snowball Method. This method pays off the smallest debt first. After paying the minimum amount on each account every month, you put any extra funds towards the smallest debt. Once that’s paid off, you move to the next smallest debt and so forth. By tackling the smallest debts first, the little victories will help keep you motivated to continue paying until all your debts are paid off.
The other method is the Avalanche Method. As with the Snowball Method, you make minimum payments on all your accounts. However, this method has you tackle the highest interest debt first, no matter how big the balance is. Once that debt is paid off, you move to the balance with the next highest interest rate. This method will help save on interest costs and may help you get out of debt more quickly depending on your situation and you have the satisfaction of seeing the high interest rates disappear.
Which method is right for you depends on your personality. Whichever method you can stick to consistently is the right one.
Other methods to help you pay off debt include refinancing and consolidation. Refinancing debt involves going through another lender to get better terms or conditions. For student loans, this could involve changing lenders to get a lower interest rate. Or for credit cards, it is transferring balances to another card with a lower interest rate (usually for a set amount of time). Remember that you are just replacing debt with new debt, but this can be a good idea if you are getting a lower interest rate and will make your payments consistently. Make sure you’re aware of any fees involved with this option.
Consolidation is combining multiple debts (most often credit cards) into one personal loan at a fixed interest rate and time period. In the case of credit cards, this is more effective than refinancing debt consolidation because the loan is paid off at the end of the term, while credit card refinancing keeps you in a revolving payment arrangement, in which there is potentially no end. As with refinancing, make sure you know the terms of the loan (rates, prepayment, etc.) so you don’t get stuck with any unexpected charges.
Taking control of your debt will serve you well in the future. Examine your outstanding amounts and decide which of the payoff options is right for you. You’ll be on your way to financial freedom before you know it.