Getting Out of Debt
Welcome to your Financial Fitness Minute. Getting out of debt.
To get out of debt, first understand what makes debt so expensive. It’s the interest and fees over time. To reduce your debt, the key is to reduce the interest and fees while reducing the time you’ll be paying them. First, let’s focus on reducing the time by increasing your payments. Paying just the minimum is a recipe for staying in debt for a very long time. For example, let’s say you have ten thousand dollars in credit card debt at fifteen percent interest and are paying minimum payments of two hundred dollars a month. It will take you seventy-nine months to pay that off and cost five thousand eight hundred and five dollars in interest. If you can increase your payments by two hundred dollars, you’ll cut your repayment time down to thirty-one months and save three thousand seven hundred and thirty-five dollars in interest.
Create a budget so you’ll be able to make decisions about your spending and find areas to reduce. Once you know what you can pay beyond the minimum, try the snowball payment method. This is where you attack the most expensive debt first. Check your finance charges to see which of your accounts is costing you the most. Pay all of your creditors the minimum except the most expensive one. Pay that one all the extra money you pulled from your budget. Once that’s paid off, roll that payment into the next most expensive account.
Some people like to modify this by paying the smallest balances first and then rolling the payment into the next smallest one, and so on. While this might not save you as much money as paying off the most expensive first, it can be very motivating to pay off the small accounts quickly, leaving you fewer bills to pay. The other side of the coin is the cost of the debt. Explore ways to reduce your interest rates and fees. Going back to our example of the ten thousand dollars in debt, if you were able to not just increase the payment by two hundred dollars but also reduce the interest rate to eight percent, you’d be out of debt in twenty-eight months and save four thousand eight hundred and twenty-seven dollars in interest.
How do you lower your interest? If you have good credit, you may be able to request lower rates from your creditors or check with your local financial institution to see if they offer accounts with lower rates you can transfer balances to. If you’re struggling to make the payments and have high interest rates, a debt management plan might be your solution. Making changes to your budget so you can increase your payments and proactively exploring ways to reduce interest can help you save hundreds or even thousands of dollars and get you more quickly to your debt free goal.
Thanks for joining us for this Financial Fitness Minute.