4 Strategies to Pay off Your Debt Quickly
The average American has over $15,000 in credit card debt and 40 million people in the United States also have student loans. If you combine individuals’ credit card and student loan balances, their debt often outpaces their income, sometimes dramatically. College graduates have an average salary of $48,707 right out of school, meaning that their debt payments eat up a big chunk of their monthly income; many end up using 20 percent or more of their paycheck for debt payments. That leaves little money left over to pay for other essentials, like rent, transportation or groceries.
That hefty debt burden can really limit you, holding you back from building an emergency fund, moving to another city, buying a car or purchasing your first home. Carrying a large balance can weigh you down and make you feel stuck in a job you do not enjoy or in an apartment that is overpriced. It’s also very risky; one emergency, like an unexpected car repair or medical bill, and your cash reserve is wiped out. Taking charge of your debt and getting rid of the balance can give you an enormous sense of freedom and give you financial security.
If you feel like you are drowning in debt and have no idea how to pay it off, use these strategies to get a handle on your debt and minimize how much you pay in interest:
- Pay the highest interest debt first: While it might be tempting to tackle your lowest balance first to get it out of the way, that approach can end up costing you a lot of money in unnecessary interest costs. Instead, order your debt by interest rate, and tackle the highest interest rate first. Pay as much as you can above the minimum payment towards the high-interest debt and keep up minimum payments on the lower interest account. For instance, let’s say you have a student loan at 6.8 percent and a credit card with 12.99 percent interest. Regardless of the balance on either account, you should focus on the credit card first because of its high interest By doing so, you’ll pay off the debt more quickly, but also save yourself hundreds or even thousands of dollars in interest.
- Use balance transfers: If you have a high-interest credit card—some can be as high as 30 percent—and you are confident you can pay off your balance in a few months, transferring the card balance to a new card with a zero interest promotional offer can be a smart move. Then, all of your payments go towards the principal instead of interest, helping you pay it off faster and saving you money.
- Automatically use windfalls: If you have any unexpected windfalls, such as a work bonus, a raise or a present from a loved one, skip blowing it on rewards or more stuff. Instead, consider all extra money you get as money that immediately goes towards debt. As soon as any unexpected cash comes your way, automatically make a payment on your credit cards or student loans. Over time, these small extra payments add up, knocking months or even years off your repayment term and saving you money in interest as a result.
- Refinance student loans: Depending on what kind of loans you took out, your student loans could have interest rates as high as eight percent. However, that does not mean you are stuck paying that rate for the next ten years. Instead, you can go through a private company and refinance your student loans, getting you a much lower interest rate and a lower monthly payment. By refinancing, you can get an interest rate as low as 2.15 percent, saving thousands over the term of your loan. And by bringing down the interest rate, you will have more money each month to put towards your high-interest debt, such as your credit card balance. This strategy is an excellent way to bring down the total you pay back over time while accelerating paying down your debt.
Coping with a mountain of student loan and credit card debt can be emotionally and mentally exhausting. It can make you feel hopeless, overwhelmed and like you’ll never get free of your debt. However, there are ways to manage your balances, bring down your interest rates and save money. By following these tips, you can start making real progress on paying down your debt and begin freeing yourself from huge balances. With careful planning, strategically using balance transfers and refinancing your loans to a lower interest rate, you can save thousands of dollars and become debt-free.