Buying a new car can be an exciting experience if your finances are in order and you can take your time shopping for the vehicle you like best. On the flip side, it can be a stressful experience if you need a new car right now and aren’t sure how you’ll pay for it.

If you’re in the latter position, you may be worried about coming up with a down payment, wondering if the car you can actually afford is safe and reliable, and whether your credit will get you a good interest rate if you need to take out a loan.

On top of these considerations is also the cost of insurance, which can easily add the equivalent of an extra three, four, five or more monthly car payments each year to your overall costs. Your premiums depend on numerous factors, including where you live. For example, the average annual cost of auto insurance nationwide is $1,318, according to Insure.com, an independent consumer insurance website. But if you live in Michigan, the most expensive state for insurance, that average jumps to $2,394 per year. If you live in Maine, though, your average insurance costs will run far less at just $864.

 

How to Lower Your Insurance Costs

The good news about your insurance premiums is that you can control many of the factors that add to the costs, beyond where you choose to live.

“Insurance rates vary depending on a driver’s record, age, miles driven, whether you’ve had any accidents or traffic infractions,” Loretta Worters of the Insurance Information Institute said. “The fewer claims you have, the better your prices will be.”

That’s because your insurance premiums are based on risk. So, If you take part in risky behaviors and get caught – such as having a DUI, having been involved in an accident or had traffic tickets for speeding, your insurance will be higher.

“The best way to reduce your insurance costs includes driving safely, taking driver training courses and improving your credit by paying your bills on time,” Worters said.

Here are more details on the four things that affect your insurance premiums the most, and how you can minimize their impact.

 

  1. Your Driving Record

Avoiding accidents and traffic tickets are perhaps the most important things you can do to keep your insurance costs in check. And if you get a speeding ticket, for example, take advantage of any driver safety classes you can take that will get the ticket dismissed from your record.

 

  1. Buy Practical Vehicles

The general rule is, the more expensive your vehicle, the more your insurance premiums will be. That’s not always true, but you can typically expect high-end luxury cars to be more expensive to insure.

 

  1. Drive Less

This is a tough one for a lot of people who commute long distances for work. But the fact remains that you’re probably going to pay more for insurance if you commute 60 miles one way than if you commute five miles. If you can, live closer to your work or talk to your boss about working remotely a couple of days a week to help reduce your costs. Bonus for your boss: That drive time could be used working.

 

  1. Consider Your Credit

In most states, your credit is an important factor in determining your insurance premiums, so keeping your credit in good standing (unless you live in California, Hawaii or Massachusetts, where credit scores are not used in determining insurance premiums) can have a tremendous impact on your annual insurance costs and how you budget for them.

 

Finding the Right Coverage

Whatever your financial situation, keeping your insurance premiums low while still getting quality coverage and service requires doing some comparison shopping.

“The best way to know if an insurance quote is a good deal is to compare different companies,” Worters said. “You don’t just want to go by price alone, however. While that’s important, you also want to make sure the insurance company is financially healthy to pay your claims.

“You can compare insurance quotes online to get an idea of what the costs are,” Worters continued. “You can also speak with an insurance professional if you have specific questions.”

By doing all you can to keep your risk factors at a minimum and find the best possible rates, you’ll spend less to insure your vehicle. That means you can put that money toward paying off your auto loan faster (here’s an explainer on how to pay down your debt faster for virtually any kind of debt), or putting extra money into your retirement or other savings. Either way, it helps to ensure your continued financial health.

 

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]

Read More

Whether your debt has three, four or even five zeroes attached to it, you’re going to need to follow some simple basics in order to successfully pay it off. That’s because paying off debt requires planning, endurance, safety precautions and taking it one day or one step at a time.

To successfully pay off your debt also requires lifestyle changes that you can maintain for years or even a lifetime. It’s really the only way to keep your debt in check and your financial life on the right trajectory.

Here are six debt management basics that can help you establish good money habits, get out of debt and stay that way.

 

1. Budget

Yes, the B word. Budgets are about as boring as watching paint dry for a lot of us, but they’re an absolute necessity if you want to be in control of your finances. It doesn’t have to be anything elaborate. It can literally be a piece of paper with two columns showing your income and outgo each month.

By writing everything down, you can assess whether there are things you can live without, cut them from your budget and apply that money elsewhere, like your credit card payments, student loan payments or even establishing an emergency fund.

 

2. Resources

At the end of the day, you can be the most frugal person you know and, if you aren’t bringing in enough money to make ends meet, you’re never going to get out of debt and get ahead financially.

This can be tough for many people, but really assessing how you can bring in more money each month is genuinely helpful. Should you ask for a raise at work? Do you have any skills that would let you earn extra income through a side hustle? What about additional education? Is it financially worthwhile to seek a degree in your chosen field, or to get additional certifications or training? (Here’s how one financial blogger brought in more money and paid off her debt quickly.)

Consider your options and your available time and get to work on your own personal plan to earn more income.

 

3. Safety Net

Sure you can put all your money toward paying off any existing debt you may have, but if you don’t have a safety net like an emergency fund or at least a savings account, chances are good that one unforeseen major expense will put you right back in debt. So, before you start paying off all your debts, make sure you can build your future self a nice little cushion, because that rainy day will come along and you’ll be happy you were prepared when it does.

 

4. Plan of Attack

Once you’ve put all the previous basics in place, you can focus on knocking out that debt. To do so, you’ll need a plan of attack. There are any number of ways to do this, but two tried-and-true methods are the debt snowball and the debt avalanche approaches. Here’s a handy primer on how to pay off debt.

 

5. Outside Help

If you’ve tried repeatedly to pay down your debt and haven’t been completely successful, you may need to ask for help. Fortunately, there are plenty of resources available, including tools that can help you automate your debt payments. If you’re seriously in debt and are considering serious action like bankruptcy, you may wish to seek the advice of a credit counselor. As with any financial advice, it’s important to do your research and ensure the person you’re speaking with is qualified, licensed and isn’t going to charge you an exorbitant amount of money.

 

6. Perseverance

Finally, to get rid of your debt once and for all — and to stay out of debt in the future — you’re going to need to be diligent. Just like losing weight and then gaining it all back again, going back into debt can be frustrating. But by establishing good spending and savings habits by applying these debt management basics, you’ll be putting yourself on a path to a debt-free life.

 

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]

Read More

Earlier this year, the amount that Americans owe in auto loans hit a record high of $1.19 trillion, according to data from the Federal Reserve Bank of New York and Equifax. Meanwhile, the average new-car loan hit $30,621 with car buyers paying an average of $506 per month.

On top of that, more borrowers are choosing to finance their vehicles for longer periods of time, up from 48- or 60-month terms to 73- or even 84-months, according to financial services company Experian. Now, if you’re following the math, you know that equates to just over $42,500 at 84 months. And that doesn’t even include gasoline, insurance and maintenance. All said, the average American is likely spending somewhere around $750 a month to have and operate a car.

If $9,000 a year seems like a lot to spend to for an asset that just depreciates in value, well, you’re not wrong. The average American has a household income of $51,000 a year, so $9,000 quickly cuts into that. Still, a lot of people see their vehicle as a prestige symbol rather than a tool for getting from one point to another, so they’re willing to sacrifice saving for things like retirement, an emergency fund or even paying off a mortgage faster in order to have a nicer car.

So how much is too much to spend on an automobile? Well, that answer really depends on the driver and their finances. If you use your vehicle for your work (not just getting to and from your job), you’ll want something newer and probably under warranty so you’re covered in the event something goes wrong with your car. In that case, spending a larger portion of your monthly income may make sense, especially since you can likely use your vehicle as a business write-off.

But if a big car payment is going to keep you from doing things like paying down debt or increasing your savings, you may want to consider whether your future self would prefer to have some retirement savings in place or memories of a flashy ride (we suggest the former if you’re having a tough time choosing).

Establishing and sticking to a monthly budget can help you better understand just how much you can afford to spend on a new car. Once you know that, there are tricks you can use to end up with a reliable, nice automobile that doesn’t come with gargantuan car payments. Let’s take a look at some of them.

 

Buy Used

It’s easy these days to find used cars that are just a few years old and far less expensive than buying new. The average new car depreciates around 15-20% in the year after it is purchased. Why not let someone else pay for that?

Many used cars have low miles, are in excellent condition and are even under manufacturer warranty in some cases (or have extended warranties available). Look for reputable dealers and check the car’s history using CARFAX to ensure you’re getting a fair deal.

 

Wait to Buy Your Dream Car

If you can’t afford to pay cash right now, buy a practical car that will allow you to save money, both on car payments and fuel. There are plenty of cars that are cheap to buy and operate, so you can put more money toward our down payment for your dream car.

 

Consider a Lease

Leasing an automobile can be an economical way to get more car for a lower monthly payment, and you have the option to finance the remaining value of the vehicle once your lease term is up. Keep in mind you can save quite a bit of money on interest if you have cash on hand by putting a larger security deposit on your lease or paying all or a portion of your lease payments up front.

 

Repair & Recondition Your Current Car

If you have a vehicle that is getting a little older and you’re considering trading it in for something new (or new to you) but are worried about car payments, it could be worth taking it to your favorite mechanic for a thorough inspection.

For around $100, your mechanic will take a look at your vehicle’s systems and let you know what, if anything, needs repair or replacement now or may need it soon. It may be cheaper to do some repairs and keep your existing car up and running for another year while you save even more for a down payment on a new car.

If you’re worried about debt in general, it’s possible to construct a debt elimination plan that helps you to wipe out your personal debt once and for all. Check out our explainer on the debt avalanche and debt snowball methods for getting out from under crushing debt.

 

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]

Read More

Debt Snowball

The Meaning: A debt reduction strategy where you commit to paying off your balances from smallest to largest.

The Method: Paying the minimum on each of your credit accounts except the smallest balance, which you try to pay off as fast as your monthly budget allows.

The Benefits: The ability to experience positive psychological effects of paying off debt.

 

Debt Avalanche

The Meaning: A debt reduction strategy where you focus on paying off your balances with the highest interest rates first.

The Method: Pay the minimum due on each of your balances except the one with the highest interest rate, which you try to pay off as quickly as your monthly budget allows.

The Benefits: You’ll reduce the amount of interest you pay on your debts.

 

Methods for Paying Down Your Debt

If you’re in debt, you’re not alone. Credit card debt in America has reached an all-time high. In June, Americans hit $1.21 trillion in revolving debt, surpassing the previous high of $1.20 trillion reached in April 2008 before the Great Recession. With all the issues we’ve faced since then, it would be reasonable to wonder how we could have found ourselves in this position again.

So why are consumers are spending so much today? It could be due to a major financial hardship. It could be because interest rate hikes are causing less to be paid on principal balances. Some people are spending more simply because they can.

However, Sean Fox, co-president of Freedom Financial Network thinks the cause could be due to necessity. “Since 2003, household incomes have increased by 28%; the cost of living has climbed by 30%. While the gap does not seem large, some speculate that it is a driving force for people to turn to credit cards to cover the gap.” Fox went on to say, “While more people are employed, with the unemployment rate hitting its lowest point in years, they are not earning more.”

Increased spending doesn’t end with plastic either. Americans also had $1.17 trillion dollars in auto loan debt during the first quarter of 2017. This is an increase of over 82% from 2003. Let’s face it, Americans have a debt problem with credit cards, automobile, and even rising student loan debt.

Now is the time to reverse the trend.

While most people understand what has caused them to get into debt, many don’t know how to construct a debt elimination plan, helping them wipe out debt for good. That is where the debt avalanche and debt snowball methods come into play. While these debt payoff methods are fairly similar, there is a major difference. Let’s explore further.

 

What is the Debt Snowball Method?

The idea behind both the debt snowball and debt avalanche methods is that you work on small goals to achieve your larger goal of paying off all of your debt. Your first goal with both methods is to ensure you have two things in place:

  • You’ve established a basic monthly budget
  • You are current on all of your bills, and
  • You have an emergency fund in place

Next, you’ll write down all of your debts, from smallest to largest, then begin paying the minimum required payment on each balance except the one with the lowest balance. (You can use our handy, printable debt snowball worksheet to help you do this.) With that one, you’ll put as much of your monthly budget as possible toward paying it off as quickly as possible. The goal is to pay off this smallest balance first, giving you a sense of accomplishment you can carry forward to your next goal. (Pro tip: It can help to put away the credit card you’re working on paying down until you’ve eliminated that debt. Not having it in your wallet will keep you from using it.)

As an example, let’s say that you have a $3,468 credit card balance, another $673 credit card balance, and $16,847 in student loan debt. When using the debt snowball method, this is how you will attack your debt.

  • Focus on the credit card with a balance of $673. You are going to put everything left over in your monthly budget toward this, until it’s gone.
  • Pay the minimum payment on the $3,468 credit card bill until the first credit card is paid off; plus
  • Pay the minimum on the $16,847 student loan until both credit cards are paid off.

Once the entire balance of the $673 credit card bill is paid off, you will then move your focus to the next smallest balance, the $3,468 credit card. You will keep doing this until all of your debts have been paid off completely.

Debt snowball is a popular method for many people because it helps provide quick victories. There are a couple of downsides to attacking your debt this way, however. In most cases, it will take longer to complete your overall objective and it could also cost you more in interest.

“Money is emotional! It’s the reason why we’re in debt in the first place. The debt snowball harnesses our positive emotions and uses them to propel us towards success,” says Christine Luken, certified financial coach at christineluken.com. “When we attack our smallest debt with a vengeance, we achieve a quick victory, and it keeps us pumped up. Our monthly pile of bills starts to shrink and we feel encouraged to stick with the process.”

Of course, not letting your credit card balances grow once you’ve completed this process is important in remaining debt free. That’s where that emergency fund comes in. Once you’ve save that up, you won’t have to overspend on your credit cards because of emergencies. You’ll be able to pull directly from this savings account to cover any unexpected expenses.

 

What is the Debt Avalanche Method?

While the Debt snowball method focuses on paying off the smaller balances first, the debt avalanche is all about the numbers. Instead of prioritizing your debts by their balance, you are going to prioritize them by their interest rate.

Think of it this way: A snowball rolling downhill will gradually grow, picking up momentum as it makes it’s way down the mountain.The same goes for the debt avalanche method. You will start by focusing on paying off your balance that has the highest interest rate, paying the minimum payment on the rest. This will lead to paying off the most costly debt as fast as possible.

As an example let’s assume the $3,468 credit card bill has an interest rate of 12.99%, the $673 credit card bill is 7.99%, and the $16,847 student loan is at 6.49%. With the debt avalanche method, you would prioritize your bills like this:

  • Focus on paying off the credit card bill with a balance of $3,468, because it has the highest interest rate,
  • Pay the minimum balance due on the $673 credit card bill until the other credit card is paid off, then prioritize paying off this balance, and
  • Pay the minimum balance due on the $16,847 student loan until both credit card balances are paid off

While the debt avalanche approach won’t get you the quick, motivating victories that the debt snowball method does, the debt avalanche will help you save money by eliminating your debts with the  highest interest rates first. That means you’ll end up paying less total interest.

“The debt snowball method provides gratification, and it’s exciting to see a loan paid off,” says Sharon Weaver, President of Mission Financial Planning. “But when we run debt avalanche numbers compared with debt snowball, we see the significant savings when clients tackle the high interest rates first. That’s some pretty exciting gratification too.”

The debt avalanche method can also be advantageous during a period of rising interest rates. Each time the federal reserve raises rates, variable rate loans, including credit cards, can rise. This makes borrowing costs more expensive.

 

Debt Snowball vs Debt Avalanche: What’s Right for Me?

If you want to free yourself from debt, whether it’s from credit cards, auto loans, or something else, both the debt avalanche and debt snowball methods will help you pay down your debt. It really boils down to your personality traits and spending habits as to which will work best for you.

The debt snowball is going to provide you with quick wins to keep you motivated, whereas the debt avalanche is going to help you save more money in the long run. If you are the type of person that needs motivators, then the debt snowball might be the way to go. If keeping more money in your pocket is all the motivation you need, then the debt avalanche might be best for you.

In the end, there is no right or wrong way to pay off debt. Pick the method that works for you and stick with it. By doing so, you will find yourself living a debt free life before you know it.

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]

Read More

If you’re looking to pay down your debt as quickly as possible, you’re probably trying to figure out ways you can trim your expenses. Do you really need to pay for cable? Is there a cheaper cell phone plan available? Should you consider some extreme couponing?

While all of these options can help you reduce your monthly expenses, you may see only small, incremental reductions to your debt.

To see rapid results, you may want to consider Lauren Bowling’s approach, which helped her get rid of more than $8,000 in credit card debt in just 90 days.

 

Increase Your Income

“The only real way to pay off debt quickly,” she wrote on her blog, FinancialBestLife.com, is to bring in more money. “Sure, saving money is good sense, but spending hours and hours of your precious time to bargain hunt to only slightly lower your bottom line? Ridiculous.” She realized she could make more money working than she’d ever save bargain hunting or coupon clipping.

Bowling, an Atlanta-based blogger and former content marketing strategist, trimmed her budget as much as possible, and then focused on ways she could start earning more.  She started freelancing, did voice-over work, sold things on Ebay, and rented out her home to generate extra income.

She even opened two new checking accounts so she could get the sign-up bonuses, she wrote on her blog. “Basically, anything I could do to bring in extra dollars, I did,” she wrote.

Within just three months, Bowling was able to pay off all of her credit cards, and she parlayed her freelance blogging into a full-time job that allows her to now work for herself.

If you’re serious about getting out of debt and doing it as quickly as possible, you may want to take a page from Bowling’s playbook and use your skills to earn extra income. Of course, you’ll also need to trim your budget.

 

Reduce Your Expenses

Sure, you can cancel your Netflix and Hulu accounts, cut the cord on your cable or even stop eating out as you try to reduce your expenses, but not everything you do has to be a major life change. You can save as much as $50 a week depending on your personal habits by making your own coffee at home, packing your lunch, carpooling with a neighbor, riding your bike or taking the bus to work. You can choose cheaper cuts of meat or no meat at all at the grocery store. The trick is to set a specific savings goal each week, figure out what changes you can make to save that money, then use those savings to pay off some of your debt.

 

Create a Plan of Attack

Perhaps most importantly, though, you’ll need an action plan for paying down your debt in the most efficient way possible. If you have credit card debt, for example, and you have more than one credit card, which should you pay down first? You may want to start with the one with the highest annual percentage rate so you can reduce the amount of interest you pay. Or you could start with the one with the lowest balance if you’re the type of person who needs to see quick progress. You can also consider getting a new credit card with a low or 0% interest rate and transfer your existing balances.

 

Learn more about reducing your expenses, increasing income and different debt-payoff strategies in our post, How to Pay Off Debt.

 

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]

Read More

Are you struggling with how to pay off your debt and can’t figure out what to do? You’re not alone. Millions of other Americans also struggle with credit card, mortgage, student loan and other forms of debt every day, and in this article we’re going to take a close look at the different ways you can work to pay off your debt as quickly as possible. It doesn’t have to be difficult or complicated. In fact, getting started can be pretty simple.

How to Pay Off Debt Faster: A Checklist

  1. Set up or reassess your household budget. Sit down and make a list that really looks at where your money is going each month. Be realistic and honest with yourself. You’re not doing anyone any favors by making things look better than they really are.
  2. Find places where you can make cuts. Figure out the difference between must-haves and nice-to-haves, and start eliminating the things you can live without.
  3. Look for extra income. Find things that you enjoy and see if there is a way to monetize these hobbies. For example, if you like interacting with people and enjoy being on the road, then you could become an Uber or Lyft driver in your spare time. Or, if you are handy around the house then you could offer up handyman services to others in the area.
  4. Use extra money to pay off debt. Once you have found extra cash – either by cutting your budget or earning extra money – make sure that you put it toward paying off your different debts.

If all of this seems intuitive and simple, it absolutely is. Many people, however, don’t make much progress paying down their debt because they never take these concrete steps. It’s important to go through the process of writing down this information if you want to make progress paying down your debt. It’s often the difference between success and failure.

Being stuck in debt can feel like a very solitary and embarrassing predicament. It’s hard to appreciate just how many of us are dealing with it. Let’s consider the big picture.

Debt In America

It’s no secret that Americans have a problem with debt. Many thought that things would change after The Great Recession. They didn’t. In fact, the average U.S. household now holds more debt than they did when the financial crisis hit. The New York Fed recently reported that debt hit $12.73 trillion in March 2017, surpassing the $12.68 trillion mark in 2008.

The biggest difference between now and then is how people are spending their money. Housing-related debt, which includes first mortgages and home equity loans, has actually decreased by nearly $1 trillion. Today, more of our debt is tied to student loans and auto loans. The increase in student-loan debt helps to explain the decrease in mortgage debt. As millennials graduate from college, large student loan payments are making it harder and harder to save for a down payment on a home.

 

Debt and Your Credit Reports and Credit Scores

The story isn’t all bad, though. Even with the sharp increase in household debt, credit scores have taken a turn for the better. For the first time since 2005, when FICO started tracking data, the average credit score reached 700. Plus, the number of borrowers with a credit score under 600 has decreased to 40 million individuals.

As we move toward the 10-year anniversary of the economic downturn, many people may start noticing changes to their credit reports and credit scores. For many people, bankruptcies and defaults will start dropping off credit reports, which should allow credit scores to rise even further. However, that could also mean more debt as people gain access to more credit. Anyone who has been turned down for a mortgage over the past decade will likely be looking to try again soon.

 

Using Debt Snowball vs. Debt Avalanche Methods

So, you realize that your debt is a problem, but where do you start trying to fix it? That is where many people struggle. Reversing debt requires two things: First, you need to effectively pay down what you currently owe and you need to make lifestyle changes, and second, the goal is to pay off your current debt, and keep it away for good.

What is the best way to eliminate the debt you have accumulated? Two very popular approaches are the debt snowball and debt avalanche methods. Each has advantages and disadvantages you should consider.

The debt snowball method is a great way to keep yourself in a positive mindset throughout the process. Here’s how it works:

  1. List out all of your debts from the smallest amount to the largest amount.
  2. You’ll pay the minimum payment on each and then put the remaining amount you’ve budgeted each month toward the lowest balance.
  3. Once you have paid off the lowest balance, take whatever that payment may have been and allocate it toward the next lowest balance.
  4. Do this until all of your debt is paid off.

The idea here is that by focusing on the lowest balances first, you will stay motivated, as you watch all your debts disappear.

However, some people will tell you that they would rather knock out the debts that have the highest interest rate first. This is where the debt avalanche method comes into play. Instead of focusing on the account balances, you will focus on the interest rates that you are paying. Here’s how the debt avalanche method works:

  1. List out all your debts like we mentioned for the debt snowball method.
  2. Instead of arranging them by their balance, arrange them from highest interest rate to the lowest.
  3. Pay the minimum balance on each and then put everything else toward the debt that has the highest annual percentage rate, or APR.
  4. Do this until all of your debt is paid off.

This method is likely to save you the most money, because you will be paying off your most expensive debt first.

“It is important for consumers to use the strategy that work best for them – there’s no one size fits all,” says Julie Pukas, Head of US Bankcard and Merchant Services at TD Bank. “If someone feels a real sense of accomplishment by eliminating smaller balances and that provides the motivation to focus on paying down higher-rate debt, then they should use that strategy. It’s really about what will allow a customer to set a strategy, see progress and feel accomplished as they reduce the amount of debt they have.”

When you use the debt avalanche method, you’re not going to get the little wins like you do with debt snowball, but you are going to pay down your most costly debts first, and if you stick to it, you’ll likely save more money. No matter which method you choose, you are going to be able to tackle your debt head on.

 

How to Pay Off Credit Card Debt

When it comes to debt, many experts frame it in two ways: good debt and bad debt. Mortgage debt is often considered a good debt because real estate often appreciates in value over time, helping to grow wealth. Student loans also can be thought of as a good debt because they can help you earn more income. However, credit card debt is not generally considered “good” debt and in fact, most people try to avoid it altogether. With the average credit card interest rate hovering around 16.6 percent as of July 12, 2017, the overall cost of an item can drastically increase when the balance isn’t paid in full each month.

Credit card debt is a major issue in America. In fact, the average U.S. household has an average of $8,733 worth of credit card debt, up 6 percent from 2015. If you do find yourself in credit card debt, then you need a solid plan of attack to pay it off as quickly as possible.

Two of the best ways are with the Debt Snowball and Debt Avalanche methods that we described earlier. But you can take those a step further and include balance transfer credit cards in your strategy. This approach entails applying for a new credit card with a lower interest rate than your existing cards and transferring existing credit card balances to that new card. Alternatively, if you have multiple credit cards and one of them has a significantly lower interest rate than the others, you can consider transferring all of your credit card debt to that card. However, there are a couple of things to watch out for when you consider using a balance transfer card to pay down debt. First, this card is not to be used for new purchases. It is only meant to help you pay down your current balance by lowering your interest rates. It’s also important to know that a balance transfer card isn’t going to be for everyone. Many cards will only approve borrowers with a good credit score. Finally, most balance transfer offers come with a fee. Borrowers are charged a percentage of the amount they are moving. Even with that fee, however, the benefit of the interest rate reduction may outweigh those costs. It’s important to pay close attention.

No matter which method you choose, you’ll want to pay down as much as possible each month. A recent study found that 29 percent of all credit card accounts regularly pay only the minimum payment each month. Not only will this extend the length of time you are battling credit card debt, but it will cost you more in the long run.

“Interest rates on credit cards are egregious. Paying just the minimum will take forever to get out of debt. The key is that you want as much of every payment as possible to go toward your principal and not toward interest,” says Scott Stratton, CFP®, CFA is the president of Good Life Wealth Management, a Registered Investment Advisor in Dallas.

Stratton goes on to recommend calling your credit card company when your interest rate is over 20 percent. Occasionally they will work with you by lowering your rate so they can keep your business.

 

How to Pay Off Mortgage Debt

As we noted above, mortgage debt is is considered good debt. Not only can your home appreciate in price, helping to boost your net worth, but interest rates are still near record lows. Even so, some people have an end goal of becoming debt free, which includes paying off the mortgage as quickly as possible. So how can this be done? How can you eliminate your mortgage faster than you thought, adding more disposable income to your pocket?

The easiest and most obvious way to accomplish this is to pay more each month. Instead of paying the standard 12 monthly mortgage payments each year, make 13 payments. By doing this you can pay off a 30-year mortgage in just 26 years, saving thousands of dollars in interest. Just make sure that you talk to your mortgage lender to make sure the extra payments are applied to the principal balance.

Alternatively, you could take advantage of historically low interest rates and refinance your mortgage. Instead of going with a 30-year mortgage, make the change to a 15-year or a 10-year loan, depending on the time you have remaining. While this will most likely increase your monthly payments, the total interest paid will decrease and your mortgage will be paid off sooner.

Plus, if you don’t have other high-interest debt then you could put any extra money toward your mortgage. If you receive a bonus at work, get a tax refund, or come into money from a windfall, then you can apply it to your principal balance.

 

How to Pay Off Student Loan Debt

At the end of 2016 there were 44 million student loan borrowers, accounting for a total of $1.3 trillion in student-loan debt. That number increased to $1.44 trillion in the first quarter of 2017. That is just in the United States. To help make that number a little more real, the average graduate in 2016 left school with $37,172 worth of debt, up 6.05 percent over the prior year. While many would consider student-loan debt a worthwhile form of debt, paying off student loans should be a priority when trying to become debt free.

One of the best ways to approach student-loan debt is to think of it the same way you would a mortgage. You can make larger payments each month to help reduce the balance and cut down the interest you will pay over the life of the loan.

Plus, depending on the interest rate you have, some will choose to refinance their loans with a company like Sofi or LendEDU. However, if you are planning to refinance federal student loans with private loans you need to weigh the pros and cons.

“You want to be very careful about consolidating or refinancing student loans because if you have federal loans, you may be eligible for benefits such as forbearance, income-based repayment, or even the Public Service Loan Forgiveness Program, which you might lose by consolidating to a private loan,” says Stratton.

Another great way to boost your student-loan repayment progress comes when you are searching for a job. Many public service jobs now offer loan forgiveness programs. However, it’s important to keep in mind that most of these programs have guidelines that need to be followed. Some companies will want you to work for them for a certain time period before the benefit is offered. Other companies will offer loan forgiveness from day one, but will require you to pay back the money if you leave before fulfilling a certain term of employment.

Consumer debt in America is a growing problem. With millions of people making payments each month on everything from their homes to student loans, something needs to be done to change the course of action. By providing the education and insight needed to fight back against debt, we are hoping to help make a dent in the $12.73 trillion personal debt balance that continues to grow each day.

[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]

Read More