4 strategies to pay down debt
Debt can feel overwhelming and impossible to tackle. The good news is there are smart strategies you can work into your paydown plan—here are four to consider.
Having the right strategy to pay off your debt can be the key to success. But before you dive head-first into a payment plan, you'll want to make sure your "p's" are in order.
"One must prepare, plan, and pursue," says Shehara Wooten, a Certified Financial Planner® and financial life-planner strategist. "Prepare by having a mindset for completing your strategy; plan by not doing unnecessary spending, automating your payments, and considering an additional income stream to help pay off the debt; and pursue your strategy with the mindset that the sacrifices you make won't be forever," she explains.
The next step: Explore different strategies. You may have heard about the debt avalanche method and snowball method that involve prioritizing and paying off debts with the highest interest rate or lowest balance, respectively (learn more about those strategies here). Here are four more options worth considering.
1. Debt management plan
If you're struggling with credit card debt, another option is to reach out to a nonprofit credit counseling agency and ask for help. Often, these organizations offer a free consultation with a certified credit counselor who can review your finances and offer personalized suggestions to help you create a budget, reduce your expenses, and better manage your money towards paying off debt. One suggestion could be to leverage a debt management plan (DMP). With a DMP, the counselor negotiates with your creditors to try and lower your cards' interest rate, waive fees, remove penalties, and bring past-due accounts current. You'll then make a monthly payment to the nonprofit credit counseling agency that will distribute the money to your creditors.
Successful DMPs generally lead to paying off the included credit card debts within three to five years. And while there may be enrollment and monthly fees, the lowered interest rates could lead to an overall lower monthly payment. If the fees aren't manageable, you can also ask if fee waivers are available. Note: You may be required to stop using your credit cards and be unable to open a new line of credit while under a DMP.
2. Debt consolidation loan
This option lets you refinance and consolidate your debt by taking out a debt consolidation loan, which is a type of personal loan used for paying off debt.
These loans often have fixed interest rates that are lower than credit card rates. So, you could pay less in interest, know exactly how much you have to pay each month, and determine when you can pay off the debt.
In general, you'll want to consider the new loan's origination fees and closing costs and how that affects your savings. There's also often a trade-off with different loan options. For example, you might be able to lower your monthly payment by extending the repayment period (say, from 48 months to 60 months), but you'll pay more interest overall. Or, you could get a shorter term loan that will save you money overall but increase your monthly payment.
3. Balance transfer credit card
Balance transfer cards generally let you transfer balances from different issuers' credit cards at very low or 0% introductory annual percentage rate (APR). That promotional rate often lasts for several months, depending on the offer. These cards can help you save money and pay off debt sooner because your entire payment goes toward the principal balance, rather than your balance and interest. However, there may be a balance transfer fee. Using a balance transfer calculator can help you determine if this method makes sense for you.
4. Increase your payments
Ultimately, increasing how much you're paying each month is a surefire way to pay down debt. Easier said than done—but not necessarily impossible, if you crunch the numbers and determine that you can afford to pay a little more. Ask yourself if you're willing to forgo some of your current discretionary spending to enjoy the feeling of being debt free a bit faster. The sacrifice may be worth it.
In addition, try to break bad financial habits that lead to mindless spending or overspending. Avoiding lifestyle inflation is another important factor. As you pay off debts, use the extra money to pay down another debt, rather than spending it on something else.
Reassess and celebrate
The payoff strategy that works for the first few months or years might not be what brings you to the finish line. "It's important to start with a plan and stay consistent," says Wooten, "but after you have made some strides and experienced success, you can evaluate whether changing to another strategy would be appropriate," she adds.
For example, if your credit improves as you pay down your debt, you might be able to qualify for a lower rate on a debt consolidation loan. No matter what strategy you choose, make sure you find ways to stay motivated. "I'm a strong proponent of celebrating your wins," says Wooten. "[But] celebrate without getting back into financial trouble...treat yourself to a sweet treat or a fun staycation."
Upwise is here to help you celebrate your financial achievements along the way. Because a win is a win, even if it's a small one.