Debt can be devastating, affecting every aspect of your life. Chances are you’re one of 80% of Americans struggling with student loans, car payments, or credit card bills.
You’ve probably tried numerous ways in an attempt at paying down debt that you’ve collected. Debt can be so overwhelming that you never get your head above water.
We know you’re looking for the best way to pay off debt, so we’re going to guide you through the ins and outs of the fastest ways to pay off debt.
What Is Debt?
So, what exactly is debt?
Debt is anything that you owe: everything from credit card bills to your student loan. Bills by themselves don’t constitute debt—this includes utility bills, insurance, and taxes—that is, until you start missing payments.
The most common forms of debt include:
- Credit card balances
- Medical bills
- Mortgage payments
- Personal loans
- Auto loans
- Income tax debt
With credit cards and loans, you’ve entered into an agreement with explicit terms. You’re required to pay off the balance over a series of installments within a specified due date. When paying off credit card debt and loans, you’ll also need to pay interest, which is calculated from the balance of the loan. Interest is the fee for taking out the loan and also acts as an incentive to pay it off within the agreed-upon timeframe.
The Pitfall of Credit Card Debt
One of the most dangerous forms of debt is your credit card balance.
When you first receive a credit card, the first thing you should plan for is how to pay off credit card debt. Without understanding the fine print, paying off credit card debt can be a long and difficult road.
Credit card companies can entice you into using their cards, usually by offering you an extremely low introductory rate or an amazing credit limit. But, there are a lot of caveats to using a credit card. Going past your limit can hit you with some hefty fees, and if you miss a credit card payment, you can easily lose that 0% APR that was used to snag you in the first place.
Credit card debt is also called revolving debt because you have a specified limit to your credit, if you pay off part of the balance, you can use the freed-up credit for future purchases.
Revolving debt can be tricky to manage, mainly due to the fact that your monthly bill will also include interest on the used portion of the credit. This means that by paying only the minimum payment each month, you prolong the amount of time you spend in debt and are increasing the amount you’ll spend on interest.
If you’ve taken on a new credit card, the best way to pay off credit card debt is by paying off the entirety of the balance every month so that you don’t have to pay higher interest fees.
So, before you make your first purchase with your shiny new card, you need to have a plan for how to pay off credit card debts on time.
Understanding Your Personal Debt
While the majority of people in America have debt in some shape or form, everyone’s circumstances are unique to themselves. When you begin paying off debt, you need to know what your finances currently look like.
Your number one priority when erasing your debt is to create a budget plan. First, gather all of your financial statements, bills, and receipts. You want to have everything in front of you so that you can create a clear picture of how much money you bring home and how much money leaves.
There are a number of programs that you can use to help you do this, or you can just take out a notebook and a pencil.
You want to detail every penny that goes into your pocket. This includes your main source of income plus any side gigs or rental properties that you may have. Then you want to calculate your expenditures. This will be all of your monthly bills, groceries, and regular expenses. Don’t forget to include items that show up once a quarter or once a year.
Now that you have all of this in place, you can begin creating a debt plan.
Creating a debt plan can be complex because there are several factors that you need to consider. If you feel like you’re missing something or want some guidance when getting your finances back in order, then you may want to consult a debt consultant.
Methods to Pay Off Debt
If you’ve spoken to an expert, then you know that there are quite a few options that you can choose from when it comes to ways to pay off debt.
The first method to consider is debt consolidation. If your credit score hasn’t been damaged by debt yet, then you might consider combining all of your debt into one loan. This can help because you won’t have to manage multiple companies asking for payments, and you won’t need to keep track of the various minimum payments. By having one creditor, you can more effectively plan your budget since you won’t need to recalculate the interest of several companies continuously.
Debt settlement, also known as debt arbitration, is a process to pay off debt through negotiating down your debt with your creditors, so you effectively owe less. At the end of the negotiation, the balance agreed upon will need to be paid in full. Unlike other debt relief options, debt settlement actually reduces your debt.
The debt snowball method is a debt plan that needs to be monitored extremely carefully. With the debt snowball method, you gather all of your debts together and organize them by balance, beginning with the smallest. This method doesn’t take interest into account.
Every month, you make only the minimum payment to the balances of all your debt, except the smallest one, which you aim to pay off as fast as possible. Once you’ve paid it off, you roll the amount you were using on the smallest balance and add it to the minimum payment you were making on the next highest debt. You want to do this until you’ve paid off all of your debt, ending with the largest balance.
The pitfall of this method is that the smaller amounts may have lower interest rates than some of the higher balanced accounts. This means that while you’re tackling the smaller ones, the bigger ones may be taking on more and more debt.
The debt avalanche is similar to the debt snowball, except instead of balances, your debt is organized by interest rates, and rather than starting with the smallest, you work high to low.
Gather up all of your debt and arrange them from the highest APR and begin hacking away at the top of the pile while making the minimum payment on the lower debts.
The pitfall of the debt avalanche is that it can be difficult to maintain, especially if several of your lines of credit are at their limits.
Don’t Pay Just the Minimum Balance
It’s easy to fall into the trap of credit card ownership, thinking that you only need to pay the minimum amount due every month. By paying only the minimum amount due, you’re significantly increasing the time it will take to become debt-free.
Your aim should be to maximize your credit card usage. You can do this by using credit cards with bonus perks to pay for things you need to pay in full anyway. If you have a card that earns you points, then it should be used to pay for your utility bills, and then immediately pay off the card every month.
Stop Using Your Credit Cards
Spending habits can be extremely difficult to change. If you find that using your credit card to gather points, cashback, and perks lead to overspending, then it’s best to cut them off completely.
You don’t want to close off your credit card because your credit history and your credit utilization ratio play a crucial role when determining your credit score.
Remove Payment Details from Online Retailers
Online shopping has become an addiction in this day and age. If you feel like you’re easily tempted by online shopping, then make sure you make as many obstacles as possible for yourself to hit that “Buy Now” button. If your credit card details are stored on a frequently used website, then you’ll want to remove it as soon as possible. Having this ease of access only encourages impulse buying.
Change Your Spending Habits
To get out of debt and stay out of debt, the most important thing you can do is change how you think about and use money. We’re creatures of habit, and it’s easy to get out of debt only to find yourself back into the same problems.
Debt can be crippling, but hopefully we’ve given you some avenues to consider on the path towards paying off your debt. If your struggle to overcome debt seems like an impossible task, then you should speak with the debt relief experts at CreditAssociates. Contact us today at 844-378-2633 or apply online for a free consultation to learn more about our programs.