If you have debt, you’re not alone. Whether it’s a mortgage, student loan or credit card balance, many people share your frustration, especially since debt can negatively impact your credit score, and prevent you from getting a loan.
…Now for the good news: paying off your balances is easier than you may think. You won’t find any shortcuts to debt relief, but you can achieve it faster by using a few proven tactics:
1. Calculate the total cost of what you owe
A credit card balance is only part of what you owe. To see the big picture, you have to add up all of the card’s additional fees.
Let’s start with APR (Annual Percentage Rate). The APR is the interest that creditors charge you. It varies wildly and can change seemingly overnight. Miss a payment or two, and the rate may quickly blow up. Some credit card companies may offer a low introductory rate to entice you, only to increase it dramatically after a few months.
Check out this example to see how APR affects your debt:
A card balance of $2,000 with a rate of 14% and monthly payment of $50 has a finance charge of $709.75 over time.
That same balance and monthly payment with an APR of 29% has a much higher finance charge of $5,121.84, and takes significantly longer to pay off.
And don’t forget your credit card’s annual fee, ranging from $0 to $50 (or more) each year. Additionally, if you neglect to pay your bill on time, you’ll be assessed a late fee, typically between $15 and $35.
If you’re already close to your credit limit, a single late fee may push you over. You’ll be charged an additional over-the-limit fee of $15 to $35 per month until you pay the balance down.
2. Make more than the minimum payments
Making only the minimum payments on your balances every month guarantees that you’ll stay in debt for longer. The older your debt, the more interest you have to pay on it, thereby increasing the total cost of what you owe.
Here’s an example: If you have $10,000 in credit card debt at 15% interest, and make the minimum payment of $200 per month, it will take you 79 months to pay it off. It will also cost you $5,805 in interest.
Now consider that same balance ($10,000) and rate (15%), but double the monthly payment to $400. You cut your repayment time by more than half, from 79 to 31 months, and save a whopping $3,730 in interest.
3. Set a budget
Of course, the fastest way to reducing the total cost of debt and repayment time is to increase your monthly payment, but it also requires careful planning. By creating a budget, you can organize and prioritize your monthly expenses, freeing up more cash to put towards your debt.
Struggling to increase your monthly payment? Ask your creditors to lower your interest rate. If you have good credit, they’ll probably consider it. Also, check with your credit union to see if it offers accounts with lower interest rates. Transferring your high-interest balances will cut down what you owe.
4. Try the Snowball Payment Method
After you’ve set a budget for a higher monthly payment, build on the momentum and try the Snowball Payment Method. Check the statements for your different accounts, compare finance charges, and figure out which card is costing you the most.
Going forward, start paying the lower-cost cards only the minimum monthly payment. Take the extra money from your budget, and put it towards your most expensive creditor.
Once the most expensive card is paid off, roll that payment into your second most expensive account, and so on.
You can also apply the Snowball Payment Method in reverse. Instead of targeting your most expensive credit card, focus on your least costly creditor. You won’t save as much money, but paying off smaller debts first can motivate you to tackle the bigger ones later, and leave you with fewer bills to pay.
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