Debt can wreak havoc not only on your finances but also on your ability to borrow. Having a lot of debt can create stress and be hard to get under control.
The good news is that there are ways you can aggressively pay down your debt, helping you to get in a better financial position more quickly and alleviating the stress that debt can bring.
1. Always Pay More Than the Minimum
Not only will making the bare minimum payments cost you a significant amount in terms of interest, but it will also typically take ten years or longer to repay the debt, even without additional charges. Look at your budget and find areas you can cut that can allow you to pay at least double the minimum each month.
2. Consider the Avalanche Repayment Structure to Reduce Debt
Start with your highest interest rate card or loan and pay as much as you can each month while paying the monthly minimums on the rest. Once that first debt is paid, take the amount that you were paying on it each month and begin paying that in addition to the minimum payment on the next highest interest debt. Continue this method until each debt is paid off.
3. Snowball Down Your Debt
A snowball repayment plan is similar to the avalanche repayment, except instead of targeting your highest interest rate debt first, you will start with the debt with the lowest balance. This may be the best method if you have multiple cards with low balances as it will free up funds more quickly.
4. Look at Balance Transfer Offers
You may receive credit card offers with a zero percent balance transfer interest rate if you repay the debt in a certain period. Consider these offers as a possible way to manage high-interest credit card debt. Without interest accruing, you will be able to pay the balance down much more quickly.
5. Apply for a Home Equity Loan
If you have accrued a large amount of equity in your home, you can secure a home equity loan to pay off your debt. If you have a lot of equity and a fairly good credit score, you will be able to get a much better interest rate than most credit card interest rates. Also, in many tax situations, you will be able to deduct the interest from your loan on your personal tax return.
6. Look at a Debt Consolidation Loan
Debt consolidation loans are personal loans that are used to pay off high-interest rate credit cards. You will typically need good credit and a strong income for this option to result in significant savings. The other benefit of a consolidation loan is that it will be for a set term. This means if it is a three-year loan, you know at the end of three years you will be debt-free.
7. Trim Your Budget to the Bare Minimum
Part of aggressively paying your debt down involves finding more money to put towards your debt. This means taking a hard look at your income and budget and finding areas where spending can be cut so you can put more money towards paying down debt.
8. Raise Additional Income
If you have trimmed down your budget and realize you need more money coming in to put towards debt repayment, consider taking on a side gig to bring in some extra money used solely to put towards debt.
9. Consider Loans From Friends and Family
If you have family and friends that have the means to loan you money, you might want to consider borrowing money to pay down your debt. Odds are your family and friends will give you a more favorable interest rate, but always make sure to honor your repayment so the relationship can stay strong.
10. Try to Renegotiate With Your Creditors
When you are way in over your head with debt, it may be time to talk to your creditors to see if they would be open to renegotiating the terms of your debt. Sometimes creditors will offer settlement amounts to save you on fees and interest, but this can have a negative effect on your credit, so it should be done with caution.
When following the tips above to aggressively pay down your debt, it is also critical to take the time to identify what caused the debt in the first place. You will need to develop a strategy to make sure that once you have paid down your debt, you prevent yourself from getting into the same situation. This can include cutting back on spending or setting up emergency funds. Remember, one of the most essential strategies for paying off debt is to put systems in place to ensure it won't happen again.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors