Eight Ways to Pay Off Debt

  • September 5, 2023
  •   •  
  • 4 min. read time
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Having a significant amount of debt looming over you isn’t enjoyable at all. It’s even more disheartening when this burden is substantial enough to hinder your ability to pursue your desires and achieve long-held aspirations.

Imagine wanting to attend your best friend’s destination wedding in Bali, aiming to purchase your first home, or desiring to support your children’s college education. Achieving such goals becomes challenging when you’re saddled with hefty monthly credit card payments.

What’s worse, extricating yourself from a debt avalanche can seem like an insurmountable task, particularly when compounded interest is at play (which is often the case with credit card debt).

Thankfully, a plethora of approaches exist for paying off your debt. Not only does this relieve you of the burden of debt, but it also opens up a realm of possibilities, allowing you to make the most of your surplus funds and improved credit score.

Here are eight effective strategies to help you navigate and eliminate your debt.

Debt Strategy #1: Trim Your Financial Belt.

Begin by assessing your financial situation and meticulously outlining a budget. Detail all sources of income, including your regular salary, earnings from side gigs, bonuses, and more. Also, catalog your monthly expenditures, pinpointing those that are discretionary.

Identify areas where you can curtail spending and allocate the extra funds toward reducing the principal balance of your debt.

Debt Strategy #2: Embrace the Debt Avalanche Approach.

Before your debt becomes overwhelming, employ the debt avalanche method to systematically obliterate your bills. This method concentrates on eradicating your most costly debt first.

Here’s the game plan: Compile a list of all your debts, ranking them from the highest interest rate to the lowest. Maintain minimum payments on all debts while directing any additional funds toward the debt with the highest interest rate.

Once that high-interest debt is paid off, shift your focus to the debt with the second-highest interest rate. Apply the surplus payment you were making to that debt while continuing minimum payments on others.

Persist until you’re debt-free. This approach significantly reduces interest costs over time.

Debt Strategy #3: Implement the Debt Snowball Method.

For some, the debt snowball strategy resonates. This tactic involves settling your debt with the smallest balance initially and then proceeding to the next smallest principal balance.

Unlike other methods, the snowball approach doesn’t account for debt interest rates. Nevertheless, it delivers a swift psychological boost as you cross debts off your list one by one. The sense of accomplishment from conquering some of your obligations can serve as potent motivation to persevere. Eventually, you’ll tackle larger and larger debts until they’re all paid off.

While the snowball method doesn’t lead to substantial interest savings, it proves effective for those who prefer starting with the “easier” tasks, making it a suitable strategy for prompt debt settlement.

Debt Strategy #4: Refinance High-Interest Debt.

In certain cases, leveraging interest rates through the refinancing of high-interest loans into a single loan with a lower rate is advantageous.

Imagine holding multiple credit cards with elevated interest rates. You could consider applying for a personal loan with a reduced interest rate and utilizing the proceeds to settle all the high-interest cards.

If you opt for this route, be mindful of origination fees linked to obtaining a personal loan. Furthermore, invest time in exploring various options to secure the most favorable loan terms.

Debt Strategy #5: Master the Art of Balance Transfers.

Should you possess good credit and a manageable number of active credit accounts, transferring your debt to a new credit card featuring a low or 0% introductory rate might be strategic. Nonetheless, it’s vital to grasp the terms, including the duration, of the promotional rate.

Devise a plan to eliminate your debt before the standard interest rate on the new card takes effect.

Debt Strategy #6: Leverage Your Negotiation Skills.

Contrary to the belief that paying off debt or watching interest accumulate are your sole options, negotiating with your creditors is a viable alternative. Endeavor to secure a lower interest rate or a repayment plan that aligns better with your circumstances.

Be forthright with your creditors about the factors contributing to your debt and your strategy for overcoming it. Numerous creditors are open to adjusting terms, particularly when your sincere commitment to debt repayment is evident.

Debt Strategy #7: Harness Your Home Equity via Cash-Out Refinancing.

If you’re a homeowner, your substantial home equity can be an asset. A cash-out refinance offers one method to address significant debt.

This entails replacing your existing mortgage with a new, larger loan that surpasses your mortgage balance. The difference is disbursed as cash, which can be allocated to debt settlement.

By amalgamating high-interest debts into your mortgage payments, you can capitalize on the typically lower fixed mortgage interest rate compared to astronomical credit card rates.

Despite concerns about potentially undermining a super-low mortgage rate, it’s pivotal to analyze the “blended” or average rate of all your debts to determine if this approach suits your situation. Many homeowners have succeeded in clearing substantial debt while maintaining a new loan payment lower than the combined total of their current mortgage and minimum debt payments. Additionally, a mortgage loan provides a structured payoff plan and timeline.

This option holds the potential for substantial interest savings over the long term, and it might even offer tax advantages. It can also streamline payment management, as a single monthly payment is simpler to handle than multiple payments with diverse due dates. For those struggling to manage numerous payments, this strategy could potentially enhance their credit score.

Debt Strategy #8: Leverage Home Equity through a Home Equity Line of Credit (HELOC).

Home equity presents numerous opportunities. Some utilize it for home enhancements or to clear student loans. Others tap into it through a home equity line of credit (HELOC) to eliminate high-interest debt.

A HELOC functions as a revolving credit line secured by your home. You can access funds as needed, employing your home equity to settle debts. Generally, a HELOC carries a lower interest rate than credit cards, rendering it an astute debt repayment avenue.

Nevertheless, prudent usage of a HELOC is essential. Guard against accumulating additional debt by drawing on this credit line only when necessary.

Seeking Further Debt Repayment Options?

Whichever strategy you opt for, committing to responsible credit usage in the future is paramount. Construct a budget within your means and adhere to it to sidestep financial difficulties down the road.

Debt can be a formidable adversary but don’t allow it to dominate your life or curtail your prospects. Effective methods exist to wipe the slate clean, free up funds, and embark on a new financial chapter.

If you’re interested in additional debt repayment avenues, don’t hesitate to contact Preferred Rate. Our trusted Mortgage Advisors are eager to hear about your financial situation and provide tailored strategies that suit your needs.