Are There Different Methods to Paying Down Debt?

Methods to Pay Down Debt

Recent data from the U.S. Census Bureau and the Federal Reserve, shows that American households carry an average of $16,425 in credit card debt. That’s a 10-percent increase since 2013. The average interest rate of that collective debt is 18.76 percent, costing households about $1,292 per year.

If you’re among the group of Americans that is carrying credit card and other debt, you may be wondering if there are different methods for making a dent in those balances — the answer is yes. There isn’t just one single “right” way to pay down debt, and there are several approaches that can yield results when it comes to bringing those balances down.

It’s important to remember that you’re helping your credit score by paying down your debt balances. Credit utilization accounts for 30 percent of your credit score, and ideally, your credit utilization rate shouldn’t exceed 25 percent.

Let’s take a look at 7 different ways you can start paying down your debt.

  1. Stop spending on credit. While this is easier said than done, it’s obviously the best way to ensure that your credit balances don’t continue to increase. If you have to, take your credit cards out of your wallet and avoid taking out any new loans until your balances get down to a reasonable level.
  2. Create a budget. This is a step that makes good financial sense even if you’re not overwhelmed with debt. Creating a budget is the best way to get an accurate picture of exactly what you’re spending each month. Then you can set spending limits for various things and identify where you might be able to eke out some extra to put towards paying down
  3. Use balance transfer options. If high interest rates are keeping you from making any real progress on principal card balances, consider taking advantage of balance transfer options. These typically offer a zero or low interest rate for up to a year when you transfer a large enough balance. Once you transfer balances to a no or low-interest card pay as much as you can each month in order to make progress on the balance before the introductory rate expires. Read the fine print and choose cards that don’t skyrocket to 15 percent or 20 percent once that year is up.
  4. Refinance loans. Just like with your credit card balances, if your home mortgage, car loans, or lines of credit have high interest rates, consider refinancing. Just make sure that you look into the costs of the loan to see if you’re actually saving money in the long run. You’ll also have to make sure your credit is up to snuff in order to qualify for the best refinancing terms and options. If it isn’t, you may want to look into how to repair your credit in order to qualify for better card and loan interest rates and terms. This will be hugely beneficial in the long run, saving you money and helping you to pay down all of your credit account balances.
  5. Pay off the debt that costs you the most first. List out your debts and interest rates from highest to lowest and start working on paying off the higher interest debts first. Even if a balance is smaller on one of your high-interest credit cards you will likely end up paying more for it in the long run if you keep that balance over a long period of time. Allot extra to the high-interest debts while continuing to make the minimum payment on your lower interest balances. Then, when you get the highest interest debt paid down, move onto the next highest and repeat the process.
  6. Pay extra each month. By paying only the minimum balance on on your credit card debts you can extend a balance indefinitely. While the payments for loans — like home mortgages and car loans — are calculated over specific terms with a final payment date set, credit cards are not. Paying more than the minimum payment each month offers the best chance for making a dent in the balance, and ideally paying it off.
  7. Put bonuses or tax refunds towards your debt balances. Instead of taking that vacation, consider using your next work bonus or tax refund to make a real difference in your debt. It may seem like a big sacrifice, but it will be worth it in order to make a big difference in the balances you carry. Remember, those balances are affecting your credit. If your credit score is already suffering, this can be a small sacrifice that will yield big results in helping you fix your credit and get out of debt.

By applying one or all of these methods, you will begin to see your credit balances decline. But remember, they won’t go away overnight. You didn’t rack up all of your debt overnight, and likewise, it will take some time to see progress when it comes to paying those debts down.

If high credit balances are making a negative impact on your credit score, contact us today at 866-518-3388. With a free, personalized credit consultation we can help you get back on the right track.

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