Whether you're trying to get a credit card bill paid or you want to tackle a significant student loan balance, the principles for paying down debt are the same. Where do you start? What mistakes commonly derail any progress? Here are some of the best ways to start paying off debt, including expert methods for chipping away at what may seem like an insurmountable task.
How to start paying off debt in 4 easy steps
1. Know your credit and loan terms
If you have a credit card or loan, can you name your interest rate off the top of your head? Few can, simply because rates can change for a variety of reasons. Before you can ever hope to pay your debt down, you'll need to know what you're up against. If your interest rate is high, it may take longer to get the job done. Being an informed consumer is the first lesson in learning how to get out of debt.
2. Pick a repayment strategy
Ask two different finance experts how to pay down debt faster, and you may get two different answers. The fact is that there are two popular strategies that can help get your balance back down. These methods include the snowball strategy and the higher-interest strategy.
Snowball strategy — This method advises you to pay off your smallest debt balance first, so you will ultimately have one less bill to pay each month. This could give you more money to put toward your other bills. It can also create some confidence to help you stay committed to your financial goals.
Higher-interest strategy — With this concept, you pay the most expensive debt first, based on the interest rate. If you had a $500 credit card balance with a 29% interest rate, you would pay this balance off first before paying off a $120 balance subject to a 15% interest rate. This method requires you to pay closer attention to your balances and fees, but it could help you to pay your debt down faster and possibly with a lower overall expense.
Consider reaching out to a financial counselor or advisor to help guide you.
3. Seek an interest rate reduction
There are two strategies for paying less interest for your existing debt. First, you can call your credit card company or loan issuer and ask for a rate reduction. If you generally pay on time, they may grant you this request.
For credit cards, you can also shop for another card with a lower interest rate. This may be a card with a lower rate for a short time (introductory rate), or it may be possible to get a card with a standard rate lower than what you already pay. A word of caution for trying to save money by transferring balances to a new card: Most balance transfers come with a fee or interest rate on the total amount transferred. If the rate difference isn't much, you may actually end up spending more, especially since that fee is applied to the total balance transferred at the time of the transfer. Read the new account terms carefully to see what you'll really pay.
4. Watch the market
Finally, many consumers are reluctant to even look at new credit cards or taking out new loans while paying off debt. This makes sense, as you don't want to be tempted to spend more than what you already owe. There's a benefit to keeping an eye on new offers, however. Even if you don't take advantage of the balance transfers mentioned in the previous step, you may want access to better credit terms someday.
When your debt is paid off, and you are ready to use it wisely again, you owe it to yourself to know what's out there. Researching and shopping around will help you to know what offers work for your credit profile and how you can get the right terms for you.
Working towards a debt-free future
For anyone wondering how to pay down debt, the truth may seem simple. You start with one payment at a time and never give up. If you can't make much progress with older debt, just be sure you're not doing anything to add to the growing balance. Don't use more credit than you can pay off each month, and pay close attention to the balances you have. Never miss a payment and do your best to meet your existing obligations each month.
Getting out of debt is a mindset, not just a series of actions. If you are determined to make a change, however, you can do it. Even if your goal isn't to get to a zero balance but to have a more manageable debt load, these debt strategies can help you potentially save money and could put you in a better overall financial position.
