Consumer debt in the United States has hit a record high of $4.19 trillion. Over a quarter (26%) of that money is held on credit cards. Around 73% of those funds are tied up in automotive loans, student loans, or mortgages. With numbers like these, it is no wonder over half of Americans (60%) feel burdened by their financial situation.
There are several proven ways to help pay down these debts. But most experts will note the success of any debt elimination strategy relies on two KEY factors, following a budget and a commitment to stop making purchases on credit.
Here are five (5) strategies for paying down debt:
- Snowball – One of the most popular strategies, the “debt snowball,” is designed to help motivate you by reaching goals quickly and building up to paying off larger debts. To create your “snowball” strategy, you list out all of your outstanding debts. Then, you put all but the smallest one on minimum payments to push all of your savings and effort into paying off the smallest debt quickly. Once that item is paid off, you roll that up into the next largest line item.
For instance, if my debts were:
- Mortgage $190,000 with a 3.5% interest rate and a minimum payment of $1,300/month
- Car $20,000 with a 5.7% interest rate and a minimum payment of $334/month
- Student Loan $25,000 with a 3% interest rate and a minimum payment of $175/month
- Credit Card 1 $1,729 with a 22% interest rate and a minimum payment of $102/month
- Credit Card 2 $570 with an 18% interest rate and a minimum payment of $25/month
I would pay the minimum on all but Credit Card 2. I would then look to my budget to see if I can pull together any additional funds. Let’s say I find another $25. I would then pay $50 per month to Credit Card 2 until it is paid off. Then, I would add that $50 to the minimum payment for Credit Card 1 for a total of $152/month. Next, that $152 is added to the $334 car payment for a total of $486 to the car loan.
The debt snowball is a great strategy when you have lower credit card debt, or you have several accounts with lower balances. However, using the Snowball strategy can result in paying more money in interest if your more significant debts have higher interest rates.
- Avalanche – The “debt avalanche” works similarly to the “snowball” except with a focus on interest rates rather than the amount owed. In the above scenario, you would pay off Credit Card 2, then Credit Card 1, followed by the car loan. This strategy is often slower to achieve goals and gives a sense of accomplishment. However, the savings in interest can be worth the frustration.
- Debt Consolidation – The idea behind this strategy is to combine as many of your debts as possible into a single, lower-interest account. This can be done in a variety of ways. For those who own homes, refinancing to a lower interest rate with a cash payout could allow you to pay off the majority of your non-mortgage debt while lowering or maintaining your monthly payments. For everyone else, there are personal loan options that provide a similar opportunity.
- Balance Transfers – If your debit is primarily wrapped up in credit cards, it might be a good idea to look into transferring your balances to an account with a lower APR. Many cards offer 0% APR and free transfers for a period usually spanning 6-18 months.
This strategy is meant to be coupled with either a debt snowball or debt avalanche approach. If you select to do this, be wary of balance transfer fees and make sure any card with 0% APR does not roll over to something higher than you are currently paying.
- Debt Settlement – If you have encountered recent hardships such as job loss, medical problems, or divorce, you may qualify for this option. Debt Settlement is when a credit card company, debt collection agency, or other company agrees to accept partial payment to fulfill an account. To take advantage of this option, you will have to reach out to the businesses holding your accounts and explain your current situation. Some creditors may be willing to work with you even if you do not have extenuating circumstances. Be aware, however, that you may have to pay taxes on any amounts forgiven.
Debt in the United States has skyrocketed, and the global pandemic is only worsening the crunch for many Americans. Fortunately, these five strategies can help those who are struggling with the weight of their financial dependence find a slow and steady path toward relief.