How to pay down debt.
In this post, I’ll cover a few of the methods that are frequently sighted as great ways to pay off your debt.
The Snowball Method
I mentioned the snowball method in my pervious post, My debt story.
Here’s how it works:
You start with the lowest limit line of credit or the highest interest rate.
Pay what you can above the minimum monthly payment until it’s paid off.
Take the amount you would be paying toward that card and apply it to the next card you choose.
Repeat until you’re out of debt!
I’m a big advocate of this method. I’ve found this to be really helpful to me for two reasons. First of all, it’s been faster than what I tried in the past. Second, and probably more importantly, it is a mood booster.
I love spending money. That’s how I got into this mess in the first place, or at least how I sustained this mess. I get a dopamine rush from spending money, and I’ve come to find, I get the same rush from paying down my debt. So, when I started with the easy one and saw it go away, the next one was even easier, and the one after that is easier still.
Debt Consolidation Companies
I reached out to a debt consolidation company at one point at the beginning of trying to figure out how to get out of this hole I had dug for myself. It felt very scammy, so I decided to do it on my own, but as far as I understand it is not a scam and could be something you consider.
First, what is it?
Debt consolidation is just that - it takes multiple forms of debt and combines them so you only have to make one monthly payment. Usually, the companies that do this will contact your credit providers to negotiate a lower amount due, pay that off, close your account, and add the debt to the new debt you have with the debt consolidation company. They will charge you interest, but the monthly payment tends to be lower than what you were paying before.
A few things to know before you go down this route:
It hurts your credit. When you close lines of credit, especially all at once, it will ping your score. It also requires a hard inquiry to your credit, which also lowers your credit. Of course, with credit, as long as you make on-time payments your score will go back up.
It could increase the amount of time until you pay down debt.
Like I said, I would avoid this stuff. The personal loan I have was with the goal of consolidating my debt and getting a lower interest rate at the same time. However, I ended up both having to use my credit card and frivolously using my credit card, which just made my debt bigger and more unmanageable. It’s important that if you want to do it yourself to close the accounts.
Balance Transfer Cards
A balance transfer card is a type of credit card that allows you to move your other credit balances to the new card as another form of consolidation. Before you say, “no way, not another credit card!” Hear me out.
The benefit of doing this is that you have a 0% interest rate for sometimes up to 21 months. That’s 21 months of only paying what you owe, which could be more than enough time to pay off your debt.
Now, there are things to know here, too.
You need to have pretty good credit already to use this. I’ve seen that you need a score of 690 or higher.
There’s a transfer fee, which is a percentage of the debt you’re transferring, usually around 3% or 5%.
It has a limit, so if your debt is more than the limit it won’t help completely.
The reason this is separate from the other kinds of debt consolidation above is because I can see this being really helpful. I didn’t do it myself because my credit was really poor when I had more credit lines to deal with, but I would have done it have I been able to.
Extra Income & Cut Expenses
This is WAY easier said than done, I know.
And I gotta say, it’s incredibly frustrating that this is the advice that people are given to “help” them pay down debt. I mean, no duh if I had more money and fewer expenses I wouldn’t have as much debt. Thanks.
Of course, if you don’t have kids or a life, finding a second job or a higher-paying job is worth your time. And if your expenses don’t include housing and food or other necessities, please do cut down on expenses. Unfortunately, this just isn’t the case for most people who are struggling. Most people who are struggling are struggling because they’re not paid enough, they’re busy, and life is expensive.
For example, I talked about living in Portland in my last post. Well, I just did my registration and title transfer where I’m living now at $75.00 for two years. In Portland, the same thing is over $300.00! Before anyone says just move to someone who lives somewhere expensive, know that people live in places for all sorts of reasons. For me, I was in Portland because I needed a job badly and that was the fastest I could get a job in my situation. Other people may live somewhere for their family or friends, or simply because moving is more cost prohibitive than staying.
So, if you have the capacity to even LOOK for another job, you deserve to get yours. But if not, no pressure, try something else.
Honestly, if you want a lifestyle change to pay of debt, here’s what I suggest:
Pay at least your minimum monthly payments on time every month.
Use the snowball method of debt reduction.
That’s it.
We’ll talk more about credit in an upcoming post.
Talk soon, Madeleine