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How to pay off debt: 3 strategies and 6 tips

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Once you find yourself in debt, figuring out how to get out of it can feel overwhelming. Should you take out another credit card to transfer balances, or apply for a personal loan to consolidate your debt? How to pay off debt isn’t a mystery; people in debt are able to climb out of it by buckling down on saving, curbing spending and cutting bills.

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3 strategies for paying off debt

It may have taken just a few months of job loss or excess spending to get into debt, but it will likely take longer to pay it off. It’s important to commit to a plan and not get discouraged by any setbacks. Slow and steady wins the race toward zero balances.

It’s easy to get into debt unintentionally, whether it’s through carelessness or unexpected expenses, but paying off debt takes a plan.

1. The debt snowball

The debt snowball method gains speed as it goes along, like rolling a snowball across the ground. Begin by paying off debts from smallest to largest. List debts by size and then tackle the smallest one. Make sure to pay minimums on all other bills and send extra cash to that small bill until it’s gone.

Then, repeat this strategy with the other debts. With each bill paid off, there’s more money to put to the next debt. Plus, it’s encouraging to see progress and can keep you on track to see debts vanishing.

2. The debt avalanche

The debt avalanche strategy takes a similar approach but instead orders debts by interest rate. First, you make a list of all your debts from highest interest rate to the lowest. You then concentrate on paying off the highest-interest debt first while making minimum payments on the lower-interest debt. This cuts back on the amount you’re paying in interest, which frees up more cash to pay down other debt.

3. Debt consolidation

If it becomes hard to keep track of various payments and due dates, consider debt consolidation. With debt consolidation, the lender pays off all your existing debts and rolls them into one new loan with one payment. While the new interest rate may be higher than some of your other bills, you could wind up saving money by avoiding missed and late payment fees.

Nonprofit credit counseling agencies can help set up a debt management plan with debtors. An agency will negotiate on your behalf with the companies that you owe money, arranging for lower payments, setting up reasonable repayment plans and possibly securing debt forgiveness.

6 tips for paying off debt

It’s easy to get into debt unintentionally, whether it’s through carelessness or unexpected expenses, but paying off debt takes a plan.

1. Stick to a budget

Whatever strategy you choose for paying off debt, you’ll need a budget. Otherwise, it’s too easy to get off track. With a budget, it’s easy to see where each dollar is going; this will help you identify areas where you could cut costs and save money.

Whether you use an app or a spreadsheet to create a budget, once you see all your income and expenses laid out, you can start planning for how to pay off debt. Subtract your fixed expenses from your income – that’s your free cash flow. That money is what you have available to cover variable costs and pay down debt.

2. Start an emergency savings account

There’s nothing like an unexpected car repair coming to ruin all your plans to get out of debt. Life will continue to happen while you’re focused on how to pay off your debt, which is why you need an emergency savings account.

As much as you may want to put every extra penny toward your credit card balance, if you’ve paid off half your balance but then can’t pay for an emergency, you’d just have to charge it again. Most experts advise having three to six months’ worth of living expenses in savings, so when you’re putting your budget together, it should include a line item for savings.

3. Reduce monthly bills

If you’re wondering how to pay off debt and save, consider ways to reduce monthly bills. Lowering monthly expenses frees up money that can be put toward paying down debt.

Are there any unnecessary expenses that can be cut? Maybe drop Netflix or cable for a few months to save money and free up time for a side hustle. If the heating bills have been out of control, many utility companies offer free energy audits, which would identify changes you could make to lower them.

Lowering monthly bills is an easy way to find that extra cash to help you get out of debt.

4. Earn extra cash

Having a side hustle has almost become an American institution, right up there with apple pie. Many people now maximize free time by making jewelry to sell on Etsy, driving for a ride-sharing service or dog-sitting. The answer to “how do I pay off my debt?” could be brainstorming ways to earn extra cash.

What are your hobbies? Do you have any special skills you could monetize? Which side gigs would work with your daily schedule? Find a way to secure extra cash flow and apply those earnings to paying off debts.

5. Consider debt consolidation

With debt consolidation, all existing debt is rolled into one loan product. A personal loan or a new balance-transfer credit card could be used for this purpose.

Debt consolidation helps pay down debt by helping to avoid missing or late payment fees, making it easier to budget, and possibly reducing your interest rate. To determine if it’s a smart strategy for your situation, you’ll need to calculate your blended interest rate.

Blended interest rate is the combined interest rate paid on all your debts. It’s calculated by summing the total interest you’ll pay in a year and dividing it by the entire principal owed. Or, you can use our debt consolidation calculator. Even though the rate on a debt consolidation loan can be quite high, it could still be lower than the blended rate you’re already paying, in which case a debt consolidation loan would be a good choice.

6. Explore debt relief options

Debt relief companies make grand promises to help solve problems like how to pay off debt, but do they deliver? Yes and no. When you sign up to work with a debt relief company, it negotiates with your creditors to settle or attempt to change the terms of your debt. But there is a catch.

Debt relief companies charge fees for services. To increase a creditor’s willingness to negotiate, the company may urge clients to stop making payments on their bills. But this will lead to late fees, interest charges, and other penalties that increase debt and hurt credit scores.
Debt relief companies can help settle or manage some bills, but they could ultimately do more harm than good. Explore all other options before deciding to work with one.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

There’s no secret to paying off debt and saving money. It just requires discipline and a plan. You may have to investigate several avenues for getting out of debt, depending on how much and who you owe. But taking the time to sit down and make a plan will definitely pay off in the long run.

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