Strategies for Paying Off Debt

Deal with Debt - Find the Best Debt Payoff Strategy

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How many people juggle their finances? There are a lot of people who don't have sufficient savings to make a $400 emergency payments. There are also a lot of people who make their payments late. In fact, according to the New York Federal Reserve's Q4-2016 Household Credit Report:

  • 11.2% of aggregate student loan debt was 90+ days delinquent or in default in 2016Q4
  • Auto loan delinquency rates deteriorated again, with 3.8% of auto loan balances 90 or more days delinquent on December 31, 0.2% above last quarter.
  • Credit card balances increased by $32 billion, to $779 billion, while 90+ credit card delinquency rates were unchanged at 7.1%

It is important to use the best debt management practices such as budgeting, saving, optimizing payments, and shopping around for the best interest rates. However, it is also important to deal with your debt in a timely manner. Choose the best debt payoff strategy that meets your financial goals and situation.

Preliminary Steps to Find a Debt Payoff Strategy

Your first step toward dealing with debt and implementing a debt payoff strategy is to know exactly how much money you have coming in, and how much is going out. There are a lot of good budgeting tools. If you need some preliminary help, check out bills.com budget guide. Do you have an excess of money each month? Are you saving money? Can you cut down expenses? T

The second step is to count your major assets and major liabilities. This should include very liquid assets such as savings accounts and investment accounts, as well as retirement accounts, and real estate. In order to know your net worth, make a list of your loans, including mortgage, student loans, credit card debt, and personal loans.

The third step is to look at your credit report and credit score. If you see any inaccurate negative items make sure that you dispute them and get them off the report.

Choosing a Debt Payoff Strategy

Dealing with your debt greatly depends on your financial situation. If you finished the preliminary steps, then you should have a good idea of your financial capabilities. You can compare the different debt management alternatives by looking at the monthly Payment, total cost, time to debt freedom, and impact on your credit score.

Here are some of the major debt payoff strategies, listed by order of financial strength needed:

Optimize your Payment schedule: This is for anyone that has excess payments. The first thing to avoid is the minimum payment cycle. First of all, keep at least a fixed amount of money each month to your credit card debt. Then, add each month a sum to either the smallest debt (snowball technique), or the highest interest rate (avalanche). Check out Bills.c0m minimum payment calculator to see how much you can save by using a fixed payment.

Debt Consolidation Loan: If you have good to excellent credit, then you can most likely save money by taking out a personal debt consolidation loan. This is a good way to deal with your debt if you get a better interest rate than your current credit cards or loans, cut the time down to as short as possible, and don't run up new debt.

Cash-out Mortgage or Home Equity Loan: (HEL) If you have equity in your home and a good to excellent credit score, then you can consider refinancing your mortgage (at a lower interest rate) and taking out cash to pay off your debt. If you have a good interest rate and equity in your home, then consider an HEL. The major reason to choose this debt payoff strategy is to lower your monthly payments. In general, you should get a much lower interest rate because you are switching between unsecured debt to secured debt. However, because a mortgage is a long-term loan, that means you will be stretching out the time to debt freedom and your overall cost of debt.

Credit Counseling and a Debt Management Plan (DMP): If you have high interest rates and need help getting your budget in shape, this can be an excellent solution. The DMP will consolidate your payments. You can benefit by getting lower interest rates and a fixed payment on your debt. However, the DMP will have a negative impact on your credit score.

Debt Settlement: If you are struggling with debt and either falling behind or ready to be delinquent, then you can consider dealing with your debt through a debt settlement plan. In effect, you stop paying off your debt, and build up an escrow type account that can be used as a source for lump-sum payments on a negotiated settlement. This debt payoff strategy is aimed to help people who are in a financial hardship. The main advantages are that the program lasts about 2-4 years and can substantially reduce the amount your payoff. However, during the period of the program your credit will be hurt and you might face collection calls.

Which Debt Payoff Strategy to Use?

For some the answer to finding the best debt payoff strategy is simple. The better your financial situation, the more options you have. Simply adding more money might be the easiest strategy. However, if you need some help and want to compare your options, based on your financial situation, credit, and goals, then Bills.com has an easy and free innovative tool, the Debt Navigator. 

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