Are you feeling a lack of progress in wrestling with your credit card and other loan balances? If so, that’s understandable: High interest rates and the deceptive ease of making only the minimum payment make it harder to wipe out debt. But there are ways to control the cost of carrying those balances, and the speed at which you pay them off.
U.S. Credit Trends Hit a Record
By getting started on a debt elimination plan, you can avoid being part of these sobering statistics:
- U.S. consumers’ balances on revolving credit have reached a record-high total of $1.038 trillion, according to the Federal Reserve.
- The average consumer carries $8,195 in combined credit-card and retail-store balances among 5.6 cards, according to Experian.
- The average student loan balance was $34,144 in 2017.
Consider putting the following tactics to work in supporting a plan to reduce or completely eliminate your debt – and avoid becoming a statistic.
Attack the most-costly debt first – and keep going.
Crunch your household budget numbers to determine how much you can put towards paying off your bills. This monthly amount should well exceed the total estimated minimum payments for all of your accounts—otherwise you’re not accelerating the repayment process at all, but actually making it worse.
Now prioritize your accounts. Make minimum payments on all of them–but apply the entire remainder to making a larger payment on the highest-interest balance. Once that’s paid off, move on to the next-highest-rate account on the list, until you’re done.
Look for extra money.
To find more cash for your debts, you may need to get more creative that the typical “skip the fancy coffee” approach. Consider these tactics:
- Tax any windfalls. Allocate a percentage of every raise, bonus, inheritance or other bounty to your debt goal.
- Adjust your paycheck. If you usually get a tax refund, ask your accountant if it’s wise to change your tax-withholding status. Increasing your take-home pay in this way makes that refund-to-be work for you now, when you need it most.
- Clean out your closets. There’s a rich second-hand merchandise market online that’s waiting for your old clothes, electronics, and other household items. You can search the web, as various websites offer easy ways to open a virtual storefront.
Hone your negotiating skills.
Good things come to those who ask…particularly if you’re a loyal customer. Try these tactics to find extra cash:
- Are you a good customer who always pays your bill on time? If so, call your creditors to see if they’ll consider rewarding your responsible habits with a lower interest rate. Even a minor reduction can help.
- Hit the phones. Call your insurance companies, cable provider, and phone carrier to request better deals. You might also find some lost cash on your smartphone or tablet, by cancelling long-forgotten app subscriptions.
Consolidate your debt.
Debt consolidation is the process of funneling all of your balances in a single lower interest-rate account. When you choose the right debt consolidation product, you can save money and pay off your bills more quickly. Options include:
- A personal loan from a bank or other lender. These are typically unsecured loans, just like a credit-card, with no collateral backing them. As a result, their interest rates aren’t always as appealing as other products. But you can shop around for the best deal.
- A zero-interest balance transfer credit card, like a Discover Card. If you have excellent credit and you know you can pay off your debt in a year or so, this is a great way to accelerate your plan to become debt free.
- Borrowing against your home equity. Options here include refinancing your mortgage to include extra cash, establishing a home-equity line of credit (HELOC), or securing a home equity loan, like a Discover Home Equity Loan. This last option lets you draw a lump sum of cash against your home’s value, which you repay in monthly installments. With these equity-based products, you can enjoy the low-interest advantage of a secured loan. (The average home-equity loan rate was hovering at about 5.75% in August 2018.)
The Savings are Clear
Debt consolidation can offer simplicity and convenience, while trimming dollars and years off of your debt. This example uses an $8,000 debt, a rounding of the average American revolving credit total. Plug in your own numbers using the Discover Debt Consolidation Calculators.
|Interest rate:||15 %|
|Minimum monthly payment:||$320|
|Payoff time:||11 years, 8 months|
|Total interest paid:||$3,543.37|
Now, let’s change the interest rate to 5.75% (the average home-equity loan rate):
|Minimum monthly payment:||$320|
|Payoff time:||2 years, 3 months|
|Total interest paid:||$541.80|
Time saved: 9 years, 5 months
Money saved: $3,001.57
Fast Forward: Choose and Use Credit Wisely
As you pay off your accounts, apply for credit and/or loans with lower interest rates and better overall terms that reward responsible borrowers. Once you’ve replaced your higher-interest accounts with these more affordable credit and loan sources, you’ll be able to keep the reins tight on your debt. Then, when you need to borrow in a pinch, you can more easily repay your loans, while still staying on track with your total savings and investment plan – mission accomplished!