If you are currently facing debt, like many Americans, you are probably wondering if you’ll ever be able to pay it all off. After all, paying off debt can improve your credit score and give you access to better interest rates and lines of credit. Unfortunately, many people simply don’t know where to start when it comes to paying off debt. In reality, paying off debt may be easier than you think if you just take small steps. Here are some tried and true methods for paying off debt.
Snowball Method
If you need to pay off debt and want to see quick gains, the debt snowball method may be for you. As the name of the method suggests, you slowly start off repaying creditors and eventually build more momentum, like rolling a snowball across the ground. In other words, you will pay off your smallest debts first and build up to paying off the larger ones over time.
To get started, list your debts from smallest to largest. Pay off the smallest debts first while making minimum payments on larger debts. As you begin to reduce the amount you owe, you will free up money to pay off the larger debts.
Debt Avalanche Method
The debt avalanche method uses an approach similar to that of the snowball method, but unlike the snowball method, you will pay off your debt by interest rate. You will first pay off debts with the highest interest rates and work your way up to debts with lower rates. While paying off high-interest debts, you will continue to make the minimum payment on other debts with lower interest rates. By using this method, you can greatly reduce the amount of interest you pay and save money in the process.
Debt Management Plan
Have you considered a debt management plan? There are numerous nonprofit and for-profit organizations and businesses that can help you set up a debt management plan with creditors. The agency will typically negotiate on your behalf with your creditors, and often, they are able to get debt forgiven or payments lowered. If you can commit to making the agreed-upon payments, this may be an option for you if you struggle to make minimum payments.
Debt Consolidation
Dealing with a large amount of debt and multiple due dates and interest rates can be overwhelming for even the most motivated individuals. For this reason, if you have a significant amount of debt, you may want to consider debt consolidation. Debt consolidation is when you use a personal loan or a new balance-transfer credit card to pay off existing debt. In other words, you roll all your debt into a single loan with a single payment.
Debt consolidation loans and balance-transfer credit cards may have higher interest rates in comparison to other loans, but you save over time by eliminating late and missed payment fees. If you want to use the debt consolidation method, you may want to find out the interest rate on your new loan or credit card first. This method is ideal for individuals who can commit to not accumulating more debt or opening new credit cards while paying off what they currently owe.
Stick to a Budget
No matter how much you owe, it is always wise to stick to a budget. By budgeting, you can put aside a set amount of money toward paying off your debt each month. When you budget, you can see exactly where your money is going and identify places where you can save money. The money you save can be used to repay debts.
There are countless budgeting apps available, but if you’re old-fashioned, you may want to utilize the trusted spreadsheet. Once you lay out your expenses and income, you can create your own plan for paying off debt. Simply subtract fixed expenses from your monthly income to see how much money you have left over to pay down debt.
Reduce Monthly Bills
If you’re really motivated to save and pay off debt at the same time, you could consider reducing your monthly bills. By eliminating unnecessary expenses, you can free up money and use it to pay off debts. To begin, write down all your monthly expenses and see if there is anything you can go without or don’t need. While some of your monthly expenses are non-negotiable (ex: lights, rent, water, etc.), you may notice a streaming service or add-on to your phone plan that you just don’t need or want.
Pick Up a Side Hustle
It may seem like elementary advice, but if you want to pay off debt, you may need to earn more money. To generate more income, you may want to consider picking up a side hustle to earn some extra cash. These days, many people earn extra money by driving for ride-sharing companies, pet sitting, or selling crafts on sites like Etsy.
When considering side hustles, you should take your hobbies and interests into consideration. Do you have any unique skills you can offer? Which side hustles will fit into your daily schedule? What are you good at? These are questions you need to ask yourself before settling on a gig. By picking up a side hustle, you can earn cash to pay off debt fairly quickly.
Make Extra Payments
For individuals with a significant amount of credit card debt, paying the minimum monthly payment can be an attractive prospect. Unfortunately, it is nearly impossible to get out of debt by paying only the minimum each month. If you really want to make a dent in your debt, you should try paying more than the minimum amount. Ideally, you will want to pay as much as possible without ruining your finances. By paying more than the monthly minimum, you can actually improve your credit score while reducing your debt.
