By Denise Hill on 26 March 2019
Getting and staying out of debt is tough. Many people try and
fail, or they succeed only to become ensnared the vicious cycle over and over
again. Eliminating debt takes lots of grit and determination, and strategically
attacking your debt will save you time, energy, and money.
Before you get started, you should know that each type of debt
requires a slightly different strategy. Here's how to tackle different types of
debt, and get rid of it once and for all.
Credit card debt
The best way to attack credit card debt is by using the debt
snowball. With this method, you begin by attacking the smallest debt
while paying the minimum on everything else. Once one debt is paid, you take
all the money you were paying on the first card and apply it to the second
biggest balance. Rinse and repeat.
You may be tempted to attack them based on interest rate, which
is also known as the debt avalanche. And that will work. However, you must keep
in mind that debt is more mental than it is logical. You probably didn't use a
ton of logic to get into debt. And logic won't inspire you to get out of debt.
The debt snowball approach allows you to get quick wins by conquering smaller
debts before taking on the larger ones, which require more time and patience.
Winning becomes a contagious habit that helps you build momentum.
You also may want to contact your credit card companies and
request that they lower your interest rate. Some will and some won't, but it
doesn't hurt to ask. (See also: 2-Minute
Guide: How to Use Balance Transfers to Pay Off Credit Card Debt)
Car and personal loans
Auto and personal loans are a little different from credit card
debt. However, they follow the same principle for repayment. First, make sure
you understand the repayment terms and then contact the lender and ask them to
reduce your interest rate.
In addition to using the debt snowball, a great repayment
strategy for this type of debt is to call the lending agency and set up
bi-weekly payments instead of paying monthly. The minimum payment doesn't
change, you just make 26 payments a year versus 12. This lowers the total
amount of interest you will pay over the life of the loan. When you pay more
than the minimum payment, you'll slash months — even years — off the total
repayment time.
Student loans
Despite how it may feel, paying off student loans is possible.
You just need some discipline, patience, and a plan. For most folks, student
loan debt is one of the most significant debts owed — second only to a
mortgage.
The first thing you want to do is determine the total amount
owed. You can do this by visiting the National Student Loan Data System or
contacting your lender. From there, visit the Federal Student Loan Websiteto
see if your loans can be consolidated, if your interest rate can be lowered,
and if you qualify for any loan forgiveness programs. The Department of Education offers
eight different repayment plans that may be able to assist you if you're
considered low income or have special circumstances. They also provide
repayment calculators and a host of other information and resources that can
assist you in repaying your loans quicker.
Once you know the total amount owed, and have found a repayment
plan that works for you, it's time to get busy. You want to throw ever extra
dollar you have at this debt and make multiple payments a month, if possible.
Mortgage
The term "mortgage," translated from old French,
literally means "death pledge." How fitting. There are several
schools of thought on whether you should pay off your home early. For some
people paying it off early makes sense, for others it doesn't. If you do want
to knock the mortgage off your debt list, there are a few things you can do to
expedite repayment.
Make bi-weekly payments
By simply splitting your monthly mortgage payment into equal
parts where it's paid every two weeks, you can shave years of payments off a
30-year mortgage. If you pay more than the minimum, you expedite the process
even more. You'll have to make arrangements with the lending institution to set
up a bi-weekly payment plan and ensure that the extra money is applied directly
to the principal.
Making one additional mortgage payment a year
This impacts the mortgage the same way making bi-weekly payments
does. It's just done in one lump sum instead of over the course of a year. When
you make the extra payment, you must specify that you would like it applied
directly to the principal.
Make lump sum payments periodically
If you don't feel you have the ability to make bi-weekly
payments or make one large additional mortgage payment, you can still pay extra
on the mortgage as you are able. Paying an extra hundred dollars a few times a
year will drastically speed up the repayment process. Every little bit helps.
Refinance from a 30-year fixed to a 15-year fixed
This may not make sense for everyone, but it is worth
considering. By the time you're ready to begin aggressively paying off your
home, you will have eliminated all other debt. You can afford to pay more. And
your credit score will have gotten better and will allow you to refinance at a
much lower interest rate. This strategy can cut the repayment time down by more
than half.
But first, create an emergency fund
The quickest way to derail your debt repayment efforts is to
have an unexpected expense. And you will have plenty. Establishing
an emergency fund before you begin paying down debt is one of
the keys to success. Having a few thousand dollars set aside just for
emergencies will keep you on track, keep you from incurring new debt and do
wonders for your psyche.
If you do have an emergency and have to use some of the money,
you simply pause your debt repayment plan to replace what you spent. Use the
extra funds you were applying to your debt to replenish your emergency fund.
Once it's restocked, you go back to attacking the debt. (See also: Where
to Find Emergency Funds When You Don't Have an Emergency Fund)
https://www.wisebread.com/how-to-pay-off-these-4-types-of-debt
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