Borrowing money can be useful, allowing you to buy a home or finance a car that would otherwise be out of reach. But debt is only useful if it improves your life. Accumulating too much of it can sink your dreams, your spirits and your financial standing.
So what do you do if seeing the mailman coming puts your stomach in knots because you’re certain another unpayable credit card bill is in his mailbag? When credit turns from helpful to horrific, it’s time to confront your debts and devise a plan.
The unfortunate feature of credit cards is that they are only an asset for those who regularly pay most of their monthly balances. If you allow the cumulative balance to rise month after month, the resulting debt payments – and the interest that accumulates – eventually will swamp your finances.
Consider Julia, whose love of new clothes played havoc with her spending over the past several years. She has five credit cards, and each has a balance. Taken together, she owes $15,000, plus interest, which averages 24% each month.
Her monthly minimum payments are large and hardly dent her balances. Worse, she continues using her cards for purchases, so the amount owed is actually growing as she strains to keep up with payments.
Even if she were to stop using her cards today and just pay $500 a month toward her debts, it would take nearly four years to clear them. But she can’t afford $500 a month, especially when she needs to pay a mortgage, buy food and provide for her 5-year-old son. Julia wants to pay off her debt fast, but how?
How fast you pay off your debt depends on two things: the size of your monthly payments and the interest rate at which the debt grows. To pay off your debt as quickly as possible, you should aim to make the largest possible payments while keeping your debts at the lowest possible interest rate. Here’s how to do both.
Everyone knows that making only the minimum payment on a credit card debt means paying the debt for nineteen years. What happens if you make more than the minimum payment? You pay your debt off faster. Making larger payments, however, means you need more disposable income: more money available to pay your debts. There are two ways to free up money in your budget: make more of it or cut expenses. Both are possible and you should pursue both options while paying down your debt.
If you have a pile of credit card debt at varying interest rates, there are many options you can look into for interest rate relief. You probably already know that the better your credit score, the more options there are for you and the better the terms.
With good credit, the debt world is your oyster… well, sort of. Besides good credit, you’re going to want to have a low debt-to-income ratio to access the best debt relief options at the best interest rates. After all, anyone who loans you money is going to want some assurance that you have the available income necessary to pay them back. Here are some options for paying your debt back as fast as possible when you have good credit and a low debt-to-income ratio:
Don’t worry. If your credit is poor, you can still find a debt relief solution that will lower your interest rates and help you pay off your credit card debt faster than just paying the minimum payment. Here are some options for you:
The speed of each strategy varies, as do the consequences. Julia’s debt counselor will review her alternatives and suggest solutions. Working through the problem might be possible without damaging her credit.
Remember that debt payment is mathematical. Using a credit card pay-off calculator will help you see how much time you can cut out of your repayment schedule by increasing your payments. Do the math and pay off your debt as quickly as possible. There’s no underestimating the peace of mind that comes with starting out each month in the black.
Clements, N. (2015, May 5). Pay Off Credit Card Debt: Balance Transfers, Loans or Dave Ramsey? Retrieved from: http://www.forbes.com/sites/nickclements/2015/05/05/pay-off-credit-card-debt-balance-transfers-loans-or-dave-ramsey/2/#204930e219b1
NA, ND. Four Strategies to Pay Off Credit Card Debt Fast. Retrieved from: https://www.bankofamerica.com/credit-cards/education/how-to-pay-off-credit-card-debt-fast.go
Fontinelle, A. (ND). 6 Ways to Pay Off Credit Card Debt. Retrieved from: http://www.bankrate.com/finance/debt/6-ways-pay-credit-card-debt-1.aspx