5 Methods To Pay off Consumer Debt
According to an article on CNBC in 2016, 157 million Americans held outstanding credit card debt, and 44 million held student loans, a number that seemingly had no end in sight. With the rising cost of living, increased standard of living and cost of education, debt can easily become a terrifying norm for many people. Although it may be a norm, the thought of having debt causes an extreme amount of anxiety and, unfortunately, leads towards feeling of there being no way out.
What does do you do when the debt you owe feels like your drowning with no edge in sight. What do you do when the “Oh, I’ll just put it on my credit card and pay it off later” becomes a mountain with no visible trail to hike. What do you do when those student loans for a degree in a field you never found a job in, won’t stop growing. You are not alone. These are real questions that many American struggle with everyday. Fortunately, for many Americans, with hard work and discipline there is actually a way out. The steps below have been created to provide different techniques that can be used to assist in finding the trail on the hike to becoming debt free.
First Things First:
Create a list of debts
As always, in order to tackle any financial plan, it is important to know what you are working with. For this task, write down all of your debts. Include personal debts, credit card debts, and auto debt. For simplicity, we will not include mortgage loans at this point. For each debt include the current balance, interest rate and minimum payment amounts
|Debt Name||Interest||Current Balance||Minimum Payment|
|B of A||25%||$5000||$80|
Using the budgeting techniques from the previous “Budgeting For Beginners” article, identify how much money has been allocated for paying of debts. Remember, no less than the minimum payment can be paid on all credit in order to prevent debt from going into collections.
1. Pay off smallest debt first
Paying off the smallest debt first will allow you to say “Hey, I can do this” and create motivation to continue paying off other debts. If you just began hiking, you wouldn’t start off with Mt Everest. The same logic works when working towards paying off debt.
In the example above, Chase will receive higher payments while B of A will only receives the minimum. Once chase is paid off, higher payments will be made to B of A.
2. Pay of highest interest
Paying off the highest interest debt first will decrease the chances over of over paying for credit. Interest can accumulate more and more debt every month. $600 can easily become $1400 in a few years if only paying the minimum. If you are paying $100/month to one card, but another debt is accumulating $150/month. It defeats the purpose of paying the hundred due to accumulating more in interest than in payments.
For Illustration Purposes Only: In this example, the debt is accumulating more $105 more in debt due to the interest being 25%.
|Debt||Interest||Starting Balance||Payment Amount||Ending Balance|
Another technique is the Snowball Effect. This technique involves, paying one debt off first. Then, take the money you were adding to the previous debt and add it to the next debt. Continue these steps until all debts are paid in full.
4. Pay and Re-Evaluate
Sometimes it can be overwhelming to stay consistent with the snowball method and a breather may be needed to keep the momentum going, At one point, paying all of our debt this way was going to take 3 years. While, I’m a great budgeter, 3 years of dropping loads of money at a time was just too much for us to handle. So instead of going 3 years straight, we take a 2 pay period break in between each large payoff.
During this time, we take a break from paying off debt and do whatever we choose to do with that money. Whether it’s going shopping, doing some well needed self-care, taking a mini-vacay, or even just putting some money into savings- everything’s fare game. Just be ready when its time to start paying those debts off again.
5. Large lump sum
After a debt is in collections, it has already affected your credit. Unless you have the money to pay it right off, there is no point in making payment plans. That is where lump-sum payment prove beneficial. Collection companies are usually willing to take less than the debt owed if they receive a sizeable payment. In this case, it may be wise save money in an interest bearing online savings account and attempt to settle to delete once you have saved at least 33% of the total debt owed. It is it important to remember that a lot of collection companies will not take less than what is owed, but it doesn’t hurt to ask. The goal is to prevent debts from going into collections.
There you have it. 5 steps to paying of your debt. I hope you have learned something helpful from this article. Share, Like, Comment, Subscribe for more articles like this one.