Debt is one of the realities of life. Very few people can afford to pay cash for a home or a vehicle. Instead, most of them borrow the money and take on the purchase debt. Other people find themselves saddled with medical balances or credit card debt that seems to get larger and larger. Here are six ways you can attack your debt and get it paid off fast.
1. Stop the Bleeding
The weather can't get warmer until it stops getting colder, and your debt can't get smaller until it stops getting bigger. Take a step back and determine where you're still adding debt. Lines of credit and revolving balances on credit cards need to freeze right where they are. Remember that every dollar you add to your balance is an extra dollar you must pay at the very end of the loan, and it will build interest for years and years until then. Quit adding to the debt so that you can start subtracting from it!
2. See What a Difference a Dollar Makes
Paying even a few extra dollars on debt each month can really add up, especially at the beginning of a payment term. Check with your bank or other lenders for help. They may have loan servicing software that can provide you with illustrations of how much faster you can retire your debt with some extra payments towards the principal each month, or with the occasional windfall like your tax refund. Seeing those hard figures in front of you can be very encouraging when it seems like those extra dollars aren't doing you any good.
3. Feed Your Credit Score
Many people mistakenly assume that their credit score can't improve until they pay off debts. That's not accurate. There are many other factors involved in your credit score, and it's quite easy for you to improve in those areas even if your overall debt isn't decreasing all that much. A simple step is to pay your bills on time, and that doesn't just mean mortgages and credit cards. Late payments on medical bills, utilities, and student loan payments can all be reported on your credit, so do whatever you can to stay current on all your debts.
4. Be Alert for Better Options
When you owe money, you have basically "bought" a loan. The price you pay for it is the interest rate, and the lower the interest rate, the better bargain you got. Fortunately, you are not permanently locked in with an interest rate! You should always be on the lookout for opportunities to get a better rate somewhere else. Just like with extra payments, lower rates can accelerate your payoff and save you a bundle. Talk to your lender about running your amortisation schedule with different interest rates to see the impact.
5. Create a Snowball
When you're making payments on multiple debts simultaneously, it may be tempting to ratchet up the payment on each one. However, in terms of reducing the complexity of your financial situation, it's not the best option. Decide how much money you have each month for your debt payments, then subtract the total of all your minimum payments from that. What you have left should then be added to the minimum payment on your smallest balance. Continue that until your smallest debt is paid off, then roll that money over onto the new smallest one, and continue the process from there.
6. Be Realistic
Some financial advisors and consumers believe in a scorched-earth policy. They think you should pay every dollar possible toward your debt and never eat at a restaurant or take a modest vacation. While it's true that being in debt is a good reason to cut back, you also have to be fair to yourself and your family. Make cuts wherever you can, but don't punish yourself so brutally that you get discouraged and take up bad habits again. A modest but sustained payoff plan is far better than an aggressive one that falls apart.
Closing Thoughts
Paying off any debt is a great move for your financial security. The more you understand about increasing the speed at which you make that payoff, the better off your finances will be.
