How to Smartly Pay Off Debt
Unfortunately, there is no one-size-fits-all plan to get rid of old debt. However, here are some smart tips to help get you on your way to being debt free.
Pay off high-interest rates first. Some financial advisors consider any interest rate 10% and above in the high range and one of the biggest culprits are credit cards. Credit cards average between 13% to a whopping 25% APR! That doesn’t mean credit cards are all bad, it just means, you generally don’t want to carry a balance on them or at least not very long. They can have great benefits like cashback promotions, travel rewards and can even help build your credit. However, those benefits start to diminish if you carry a balance every month.
Try the “Debt Snowball” method. If you have different loans with similar interest rates, pay the smallest loans off first while making minimum payments on your other loans. Once the smallest loan gets paid off, use all your resources to pay off the next smallest one and so on until you are debt free. This works great if you are the type of person that needs to tackle smaller milestones rather than tackling the biggest mountain first.
Pay off the stressful debt first. Some debt comes with baggage instead of a high interest rate. Baggage then can cause emotional or financial stress. For example, if you borrowed money from a friend or family member and feel stressed about paying it back, pay that debt off first. Your physical well-being is just as important, or more so, than your financial well-being.
Make Bi-Monthly Payments. Bi-monthly payments work great for auto loans, mortgages and even student loans if you get paid bi-monthly and can afford it. Splitting up a monthly payment into a payment every two weeks, can help you pay down debt a little faster. One full payment per year faster to be exact. Since two months of the year have an extra pay period, you can squeeze in 13 monthly payments into 12 months without really realizing it.
If you can’t pay it off, move it! If you have high interest debt and know you can’t pay it off easily, consolidate it or refinance it. This especially works if you have numerous credit cards with high interest rates. Stretching yourself trying to make all the minimum payments, plus extra to pay it off, can be avoided by consolidating them all into one lower interest loan.
Whichever way you choose to pay off your debt, just make sure you don’t miss payments on one debt while trying to pay off another. Missing payments can result in high penalties, higher interest rates and a lower credit score.