- 6 min read
Find the Right Way to Pay Down Your Debt Faster
When it comes to paying off debt, there is no one-size-fits-all strategy. You are going to have different options if you are currently paying more than your required minimum payments, only making minimum payments, or not even able to make your monthly payments. Are you struggling to stay afloat? Don't panic; you can still pay off your debt faster!
In order to pay off your debt you will need to make sure that you:
- Take the proper preliminary steps
- Choose the appropriate debt reduction tactics for your financial situation
Avoid the minimum payment trap. Making only minimum payments feeds your creditors. It keeps you from saving money and accomplishing long-term goals, like buying a home or saving for retirement.
Preliminary Steps to Paying Off Debt Faster
There are three preliminary steps you should take to help you determine what route is the smartest and fastest way to pay off your debt.
- Budget- The first step to paying down your debt is to make a budget. Analyze your cash flow so you can figure out the amount of money you can afford to use for paying down your debt each month. This is true whether you're in strong financial position or struggling each month. Create a realistic monthly budget that takes into account all your income and expenses. Cut expenses where you can and look for ways to pay less for fixed expenses you can't do without. You should be able to make a quick determination whether you have money you can use to pay off your debts faster or if you don't.
- Credit Check- Find out your credit score and review your credit history. If you have a strong credit score and clean credit history, you'll have more options than if you have bad credit. Check for the presence of derogatory account like collection accounts, judgments, or liens, as any of those could affect your options for paying off your debt.
- Asset Analysis- Review all the assets you own, such as a home or 401(k) account. The value of your assets may hold the key to the best solution for paying your debts off faster and at a lower cost.
Quick tip #1
Get a free credit report and credit score with a free trial from a Bills.com partner.
Pay off Your Debt Fast Using the Appropriate Tactic
There are different debt solutions depending on your current financial situation. Here a few tips that are based on the options available for people in different financial circumstances.
Positive Cash Flow
If you can increase the amount you currently pay on your bills, then choose one of the following strategies for paying down your debt.
- Snowball- Snowball targets your credit card with the smallest balance first.
- Avalanche- Avalanche targets your card with the highest interest.
The key to both approaches is to take the total amount you were using to pay off the targeted card and add that amount to your payment on the next card you target. Of course, continue to make your required monthly payments on all your other debts, too. Either strategy, if used properly, will shorten the time to paying off your debts and save you money. This is a great solution, if you can afford it, because it will also help you improve your credit score.
If you own substantial assets, using the value of your assets may offer you the lowest costs and fastest way to get out of debt.
- Cash-out refinance- Mortgage interest rates are low. If you have equity in a home, consider a cash-out refinance to pay off your debts. This is a double-win, if you are lowering your current mortgage rate.
- 401(k) loan- Borrowing from you retirement account may be a good solution, if you have high interest debt. You have to pay interest on the loan, but you pay the interest back into your own 401(k) account and the interest rate on 401(k) loans is usually low. Make sure you can afford the payment that is usually spread out over a few years. If you don't pay back the loan as agreed, you'll pay a 10% penalty and also pay income taxes on the amount remaining on the loan.
Strong credit opens doors to some solutions for paying down faster, even when you don't own any valuable assets.
- Debt Consolidation Loan- With no annual fees and no collateral needed, an unsecured debt consolidation loan is worth examining. Even with strong credit, you are unlikely to find a rate lower than 6.5%-9%. Be sure to review the terms of debt consolidation loan contract before signing, to understand the size of your monthly payment and how long the loan payments last.
- Balance Transfer- 0% balance transfer offers still exist, but only if you have excellent credit. Make sure you understand how long the 0% (or low rate) stays in effect and what the rate will be once it adjusts. If you can pay down your debt during the low rate, you can save a lot of money. Banks charge a balance transfer fee, either a flat fee or a percentage of the balance you transfer. Factor in the fees to see if the transfer will save you money.
Struggling Financially? You can still pay off your debt faster!
When you're having a tough time paying your debts, none of the strategies above are going to work for you. The simple fact is that you can't pay off your debts if you don't have the money. You may have cut all your expenses to the bone and can't squeeze out another dollar to use to pay down your debt. Making more money would help, but for most of us, that is not a realistic solution. If you feel that your trapped by your debts, it is time to seek professional help. The fact is that some people need to get professional debt help to get control of their debt and to put a solution in place. Here are the three professional debt solutions available.
Quick tip #2
If you are struggling with your debt, get a free debt relief consultation from a Bills.com approved debt specialist.
- Credit Counseling- A credit counseling program's debt management plan may be able to lower your interest rates, so more of your payment goes to paying down your principal balances. You still pay back 100% of what you owe, some interest, and a small fee, but it could lower your costs and cut your time to debt freedom.
- Debt Settlement- Consider a debt settlement program if you're unable to make your monthly payments or about to be unable to do so. Debt settlement works by having a firm negotiate reduced balances on your accounts, so you pay back less than you owe. The biggest downsides to debt settlement is that it harms your credit and you could face collection efforts from your creditors. Only hire a reputable debt settlement firm that does not charge any up-front fees.
- Bankruptcy- Bankruptcy is an option of last resort, but it is the best solution for some people. Only a bankruptcy attorney can advise you whether you qualify, what kind of result to expect, and whether you'll have to liquidate any assets you own.
Bills Action Plan
If debt problems are getting you down, it is easy to feel defeated. Don't give up. No matter where you are on the financial spectrum, you can figure the best way for paying down your debt faster. Start by:
- Avoiding minimum payments.
- Keeping a budget.
- Avoiding taking on new debt.
- Seeking professional debt assistance, if you can't resolve the problem on your own.
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2022 was $16.15 trillion. Student loan debt was $1.59 trillion and credit card debt was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1.739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in New Jersey, 16% have student loan debt. Of those holding student loan debt, 7% are in default. Auto/retail loan delinquency rate is 3%.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.