Wise choice of bread
Obtaining and avoiding debt is difficult. Many people try and fail, or succeed only to be trapped in a vicious circle over and over again. Eliminating debt takes a lot of courage and determination, and attacking your debt strategically will save you time, energy, and money.
Before you get started, you should know that each type of debt requires a slightly different strategy. Here’s how to deal with different types of debt and get rid of it once and for all.
Credit card debt
The best way to pay off credit card debt is to use a debt snowball. With this method, you start with the least debt, paying the least for everything else. After paying off one debt, you take all the money you paid on the first card and apply it to the second largest balance. Rinse and repeat.
You might be tempted to attack them based on the interest rate, which is also known as a debt avalanche. And it will work. However, you must keep in mind that debt is more mental than logical. You probably didn’t use a lot of logic to get into debt. And logic will not inspire you to get out of debt. The debt snowball approach allows you to get quick wins by tackling smaller debts before taking on larger ones that require more time and patience. Winning becomes an infectious habit that helps you gain momentum.
You can also contact credit card companies and ask them to lower your interest rate. Some will and some won’t, but it doesn’t hurt to ask. (See also: Two Minute Guide: How to Use Balance Transfers to Pay off Credit Card Debt)
Auto and personal loans
Auto and personal loans are slightly different from credit card debt. However, they follow the same repayment principle. First, make sure you understand the repayment terms and then contact the lender and ask them to lower your interest rate.
In addition to using a debt snowball, a great repayment strategy for this type of debt is to call a credit agency and set up bi-weekly rather than monthly payments. The minimum payment does not change, you just make 26 payments per year instead of 12. This reduces the total interest you will pay over the life of the loan. When you pay more than the minimum payment, you will shorten your total repayment time by months or even years.
student loans
Despite how it may seem, paying off student loans is possible. You just need a little discipline, patience and a plan. For most people, student loan debt is one of the most significant debts, second only to mortgages.
The first thing you need to do is determine the total debt. You can do this by visiting the National Student Loan Data System or by contacting your lender. From there, visit the Federal Student Loan website to see if your loans can be consolidated, if your interest rate can be reduced, and if you qualify for any loan forgiveness programs. The Department of Education offers eight different repayment plans that can help you if you are considered low income or have special circumstances. They also provide repayment calculators and a host of other information and resources that can help you pay off your loans faster.
Once you know your total debt and find a repayment plan that’s right for you, it’s time to get down to business. You want to throw the extra dollar you have on that debt and make multiple payments a month if possible.
Mortgage
The term “mortgage” in translation from Old French literally means “death pledge”. How appropriate. There are several opinions about whether you should pay your house off ahead of schedule. Some people benefit from early payment, while others do not. If you really want to cross your mortgage off your debt list, there are a few things you can do to speed up repayment.
Make biweekly payments
By simply dividing your monthly mortgage payment into equal parts, where it is paid every two weeks, you can cut years of payments on a 30-year mortgage. If you pay more than the minimum amount, you speed up the process even more. You will need to arrange with the lending institution to set up a two-week payment plan and make sure the extra money is applied directly to the principal.
Making one additional mortgage payment per year
This affects the mortgage in the same way that biweekly payments do. This is done all at once, not over the course of a year. When you make an additional payment, you must indicate that you want it to be applied directly to the principal.
Make regular lump sum payments
If you feel like you don’t have the ability to make biweekly payments or make one big extra mortgage payment, you can still pay off your mortgage whenever possible. Paying out additional hundreds of dollars a few times a year will greatly speed up the repayment process. Every little thing helps.
Refinance from 30-year fixed to 15-year fixed
This may not make sense to everyone, but it’s worth considering. By the time you’re ready to start aggressively paying off your house, you’ll have paid off all your other debts. You can afford to pay more. And your credit score will improve and allow you to refinance at a much lower interest rate. This strategy can cut the repayment time by more than half.
But first create an emergency fund
The fastest way to derail your debt repayment efforts is through unexpected expenses. And you will have a lot. Building an emergency fund before you start paying down debt is one of the keys to success. Having a few thousand dollars set aside for emergencies will keep you on track, keep you out of more debt, and do wonders for your psyche.
If you have an emergency and need to use some of the money, you simply put your debt repayment plan on hold to recoup what you have spent. Use the extra funds you have applied to your debt to replenish your reserve fund. Once it’s topped up, you’ll be back to attacking the debt. (See also: Where to find emergency funds if you don’t have an emergency fund)
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