Perhaps you have multiple credit card bills each month, with balances that are growing. Or, maybe a student loan obligation hounds you. And that car payment sure doesn’t help.
Do you feel buried by a mountain of debt?
There are smart ways to dig your way out. By contrast, pick the wrong way, and you’ll make a bad situation much worse, adding years and thousands of dollars to your burden.
Following are some tips on how to get the job done right.
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The worst ways to pay off debt
There are some telltale signs that your debt is getting the best of you. One is choosing to pay some bills and not pay others because there’s not enough money in your account.
Maxing out your credit cards is another sign you have too much debt, as is using your credit cards even though you swore you’d leave them in the sock drawer.
If any of these sound familiar, you need to take some steps to pay down that debt. But don’t employ the worst possible strategies, such as:
Making minimum payments. While paying the minimum payment each month will keep the card companies happy, it’s a counterproductive way to pay off debt because you pay far too much in interest.
Pillaging your retirement plan. The money in your retirement savings may be a tempting fix for your current financial woes, but you’ll be short-changing yourself in the long run. Take the money out and it’s no longer being invested and growing for your retirement. And, other than in a few limited circumstances, withdrawing the money early means you’ll pay not only taxes on it, but also penalties.
Paying off debt with the wrong loans. Don’t pay off debt with loans that carry exorbitant interest rates and fees. These include cash advances from credit cards and payday loans.
How to pay off debt the right way
The best way to pay off debt is to simply look your obligation square in the eye and use every cent you can to pay it down. One of the most effective ways to do this is called the debt snowball.
For example, let’s say you are trying to pay off credit card debt. Start by making a list of all your debts. Order them from smallest to largest, or from highest interest rate to lowest rate.
Paying off the credit card bill with the highest interest rate first is the smartest way from a purely financial point of view. But paying off the smallest debt first may give you the confidence boost you need. Think how good you’ll feel when you cross that first debt off your list.
So, while you continue to pay the minimum due on your other credit card bills, throw every extra cent you have at the first debt on your list.
Do whatever is necessary to come up with more cash to pay down the debt. Cut expenses, sell stuff you don’t need, take on a side hustle. Anything that brings in more cash will get you that much closer to being debt-free.
Once the first bill on your list is paid off, apply the amount of money you used for payments on that debt to the next credit card debt on your list. When it is paid off, repeat the process with the next debt, until all of your debt is gone.
What if your debt has spiraled out of control and the collection companies won’t stop calling? Your best bet may be a reputable credit counseling agency. Stop by our Solutions Center to look for help paying off your debts.
For more tips, check out “7 New Ways to Destroy Your Debt.”
What have you done to destroy debt? Let us know on our Facebook page.
Karen Datko and Chris Kissell contributed to this report.