4 strategies to pay down debt

This article originally appeared in OfColor, a platform established to improve the financial health of people of color.  It has been licensed by Upwise.

Debt can feel crushing, but it is common, and not a predicament that justifies berating yourself. After accounting for student loans, mortgages and car loans, the average U.S. consumer has a little more than $90,000 in debt. Living with debt is hard; dealing with the ramifications can be even harder. That’s why it’s important not to let your debt paralyze you into inaction.

Ted Rossman, Senior Industry Analyst at CreditCards.com says, “As a general rule, take a step back and come up with a plan to tackle the issue. That right there should help you start to feel better because you’re starting to act and move in the right direction. Getting out of debt is hard, but you can do it.”

To make matters worse, people of color tend to have a harder time finding loans, and when they do, they typically qualify on less favorable terms. For example, according to 2020 data from the Home Mortgage Disclosure Act, Black loan applicants are 80% less likely to be approved for a mortgage than white applicants with similar finances. The bias found throughout the lending market makes it all the more important for people of color to understand their rights and the resources available to them.

Two repayment strategies: snowball vs. avalanche 

Mathematically, it makes the most sense to start by prioritizing debts with the highest interest rates (for example, credit cards tend to charge much higher rates than car loans, mortgages and student loans). Rossman says this is referred to as the avalanche method. 

Research shows that another winter metaphor—the snowball method—can be even more motivating. This is when you pay off the smallest debt amounts first as a way of building psychological momentum, like a snowball rolling downhill. In this scenario, you might pay off your $500 store credit card first (even though the interest rate is 15%) instead of a $5,000 balance on a bank-issued credit card that charges 20% so that you can enjoy the psychological benefits of having an entire loan scrubbed off your books. 

“It’s a personal choice, although I tend to side with the snowball because I believe personal finance is very emotional. Achieving those quick wins can help you get motivated, and stay motivated, on your debt payoff journey,” Rossman says.

Here are four tips Rossman recommends for paying down debt. 

1. Increase income and cut expenses 

A debt repayment regimen doesn’t have to last forever, but if you’re managing extreme debt, your priority (besides making minimum payments) is to increase your income and reduce your expenses. For most people, this involves finding ways to make extra money, such as a side hustle or selling things you don’t need, while also cutting back on discretionary expenses like subscriptions and dining out. Any money you put toward your debt will save you money on interest. 

2. Apply for a 0% balance transfer credit card

Balance transfer cards are designed for people who have accumulated some credit card debt and want to stop paying the interest. Typically, they come with long introductory periods where no interest accumulates, saving you hundreds or even thousands of dollars in interest, depending on how much you owe. If your credit score is at least 670, you’re in the right ballpark to be approved. The best way to use a 0% balance transfer card is to divide how much you owe by the number of months in your 0% term and stick to those monthly payment amounts. Don’t put any new purchases on the card (even if they offer you a 0% promotional rate) since it’s harder to hit a moving target. Consider using cash or a debit card for your everyday expenses while you’re paying off your credit card debt. 

3. Ask for help

Reputable nonprofit credit counselors such as Money Management International and GreenPath can provide you with effective, low-cost advice, negotiate lower rates with your creditors and consolidate your monthly payments. For example, they might be able to get you on a three- to five-year payback plan with a 7% interest rate. You could replicate something similar on your own with a personal loan, but nonprofit credit counseling can provide crucial support for people with lower credit scores and those who want a little more hand-holding. 

4. Avoid quick fixes like settlements  

One of the most common mistakes people make when trying to tackle debt is relying on debt settlement, which can wreak havoc on your credit and long-term financial health. 

“Debt settlement companies tell you to stop paying your creditors for a while. Then they try to use this as leverage to negotiate a settlement. They hope the credit card company will be willing to take a fraction of what they’re owed because it’s better than nothing,” Rossman says. “Even after you try this technique and damage your credit, you could still be sued or have your wages garnished or be otherwise held responsible for the full amount.”

In personal finance, as in life, if it sounds too good to be true, it probably is.  

“Debt settlement companies tell you to stop paying your creditors for a while. Then they try to use this as leverage to negotiate a settlement. They hope the credit card company will be willing to take a fraction of what they’re owed because it’s better than nothing,” Rossman says. “Even after you try this technique and damage your credit, you could still be sued or have your wages garnished or be otherwise held responsible for the full amount.”

This article was written by OfColor and was legally licensed through an agreement with OfColor.  Please direct all licensing questions to legal@OfColor.com.