Pretty much nobody likes having debt and many people want to pay off loans as fast as they can. But despite that fact, Money reported that at the end of 2015, Americans held a total of $935.6 billion in credit card debt, according to data from the Federal Reserve. The total amount of student loan debt in the US is over 1.3 trillion and climbing, as this chart from MarketWatch shows. When it comes to mortgage debt, the total amount owed is more than $13 trillion, as of the end of the first quarter of 2016, according to the Federal Reserve Board.
If any portion of that debt belongs to you, you're probably trying to figure out the best way to pay off loans quickly. Paying off your debt not only brings you peace of mind. It also helps you learn to set financial goals and frees up money to allow you to reach those goals. There are several tactics you can use to pay down your debt sooner, reducing the financial and emotional cost to you.
If Nothing Else, Make More than the Minimum Payment
It's easy to look at the minimum payment due on your credit card or the monthly payment you're expected to make student loans or your mortgage and assume that it's totally fine to pay only that amount. But, here's the thing. The minimum payment is exactly that --the minimum, bare-bones amount you need to pay if you want to get out of debt eventually.
Instead of paying only the minimum, pay more towards your debt each month. How much extra you can put towards debt depends on a few things, mainly your income and the amount of your other expenses. Creating a budget, so that you can see what you're earning and spending and how much money you have left for debt payment, is a must.
Depending on the interest rate on your mortgage or student loans, refinancing your loans to get a lower rate might make sense. If you have years to go on your mortgage and don't plan on selling your home during that time, and the interest rate you can get today is considerably lower than your current rate, refinancing the loan can help you save money, even though you will need to pay closing costs and other fees.
In the case of credit card debt, transferring your balance from a card with a high-interest rate to a card with a lower or no interest rate can help you pay off your debt more quickly and save you money. Just make sure to read the fine print carefully, so that you know when or if the interest rate on the new card will increase and what, if any, fees the card charges for a balance transfer.
Try the Debt Snowball Method
Once you've decided to start seriously tackling your debt, it's time to figure out which debts to focus on first. There are really two ways you can go about paying down your debt. The first option, often called the debt snowball option, won't save you money, but will help you reduce the number of debts you have.
Using the snowball method, you focus on paying off the debt with the lowest balance first. While you're focusing on that debt, you make the minimum payment on your other loans. Once you've paid off the first debt, you put the monthly amount you were spending on it towards the debt with the next smallest balance. You continue the process until all of your debts are gone.
Tackle the Highest Interest Rate First
The other option when paying off your loans is to target the debt with the highest interest rate first. While it might take you longer to pay off a bigger, more expensive loan than it would a smaller loan, doing so saves you money in the long run. Once you've paid off the big loan, you use the money that went to that loan each month to pay down your remaining debts.
Stop Taking on Debt
There's one thing that's worth remembering when you're paying off loans. Don't take on more debt while you're working to get rid of what you already owe. Stop using your credit cards to make purchases. Instead, try to pay for everything in cash or with your debit card. If you are struggling to make ends meet, take a look at your budget to find places where you can cut back. You might have to cut back on getting coffee every day or find a less expensive place to live.
Depending on the amount you owe, getting out of debt can seem like a long road ahead. But you have options for reducing the amount you need to pay over time, from refinancing to paying more each month. To learn more about your options for refinancing or about other loan programs that can help you get out of debt more quickly, contact Coosa Valley Credit Union today.