Having debts to pay off is one of the main reasons it’s difficult for people in the U.S. to truly save and build their wealth.
We’re in the age of high credit card debt, student loans and mortgages but getting into these financial situations are much easier than getting out. The total U.S. consumer debt is a staggering $3.4 trillion, and about 38% of all household hold some type of debt.
What’s worse is that household that have the lowest net worth are carrying an average of $10,000 of debt – how is someone on a low income supposed to pay that off? Making sacrifices and the right budget can help to dig you out of the whole but there are other steps you can take to pay it off faster.
Here are four easy ways to pay off your debt faster:
1. Consolidate your debt - Consolidating your debts means you are combining multiple debts into one that will give you a lower interest rate. This allows you to pay off the debt faster, without having to increase your monthly payments. While there are usually transfer fees, what you save on a lower interest rate may be greater – but be sure to check before pursuing this option. The key to truly benefiting from consolidating is also keeping your spending habits in check or else you’ll just be accumulating more debt on top of it.
2. Use bonuses for repayment - Instead of taking the money from your holiday bonus to go on vacation or treat yourself to a new pair of shoes, instead use that money to repay your debts. These are the kinds of sacrifices that will take your repayment plan to the next level. Create a budget for yourself and break down how every dollar you earn will be spent, and what won’t be spent either must be saved or used to repay.
3. Pay more than the minimum – Credit cards are meant to be paid off in full each month, but we all know that isn’t the case. So if you can’t pay off your debts in full, you should be paying more than the minimum to shorten your time in the hole. Credit card companies of course don’t mind if you have a balance because that’s an opportunity for them to make money off the interest you pay. But the smaller the balance, the less interest you have to pay. Also, be sure to only use no more than 30% of your credit, since spending above this ratio does affect your credit score.
"You should really have just one card on which the balance is paid in full each month," Cindy Richey, president of Prosperity Planning in Kansas City, Missouri told CNBC.
4. Pay off the smallest debt first - This has been a long debate between finance gurus, whether or not you should tackle the smallest or highest debt first. According to personal finance expert Dave Ramsey, you should start with the smallest debt first, regardless of interest rate, and then move on to the next. This snowball method of quickly eliminate the number of debts you have, and while other issues may be a concern like interest rates on other debts, studies show this is a proven best practice. The snowball method to paying off debt doesn’t seem logical to most but a study done by researchers David Gal and Blake McShane, prove Ramsey might be on to something.
The study compared people who used the snowball method to those who took the approach of first paying off the cards with the highest interest rates. Consumers who utilized the snowball method were more likely to actually eliminate credit-card debt.
What advice would you to someone trying to become debt free in 2017?