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Having a lot of debt makes life harder. Making monthly debt payments can eat up too much of your income, leaving you often strapped for cash. Not only that, but too much debt can make it difficult to build an emergency fund or qualify for mortgages and other loans, which can mean sacrificing your long-term future.
Unfortunately, debt is a common denominator for too many people. According to a recent report from Lending Tree, Americans owe a total of $925 billion on credit cards as of the third quarter of 2022, and credit cards charge an average annual percentage rate (APR) of 16.27%, with rates likely to rise further by early 2023.
A lot of debt and interest to pay off, but not insurmountable. Fortunately, there are some strategies you can use to pay off debt faster, save money, or both. So, here are six of the best ways to get out of debt in 2023 and start saving for the things you really want.
If you have a bunch of credit cards and you only make minimum payments on them, it will take decades to pay off your debt. This is especially true if you have a high APR on your credit card, and if you’re still using your credit card to make purchases while you’re in debt, you’re almost guaranteed to never catch up.
Consider this example: Someone who owes the national average credit card balance of $6,569 would likely have a minimum monthly payment of about $131. If the APR on this card is 19%, it would take 101 monthly payments of $131 to pay off the debt. It will take over eight years to pay off the debt, and they will pay $6,604 in interest along the way!
But by increasing the monthly payment to $170, they could pay off the debt in just 61 months and cut their interest costs by nearly half, to $3,672. If they can make monthly payments of $200, they can pay off the balance completely in 47 months and pay only $2,777 in interest.
If you’re juggling multiple credit card debts and feeling overwhelmed, one way to manage them is to consider creating a “debt snowball.” With this method of debt repayment, you’ll make the minimum payment on all of your largest debts, then use all of your extra money each month to pay down your smallest debts. If the smallest debt is paid off over time, the money spent on that debt will “snowball” to pay off the next smallest debt, and so on.
Debt snowballing can be advantageous because it can help people get rid of some of the smallest bills in no time. This helps build momentum in the debt repayment process and reduces the number of monthly bills you need to pay at any time.
The “debt avalanche” approach is basically the opposite of debt snowballing. With this strategy, people pay off all their debts at the minimum, and then use any extra money they have to pay the debt with the highest APR. Over time, the debt with the highest APR is paid off, at which point the individual “avalanches” these payments onto the debt with the next highest APR.
This method of debt repayment helps save on interest because you pay off the loans and credit cards with the highest interest first. However, it often keeps users paying more bills for longer because it focuses on APR rather than what is owed. Both the debt avalanche method and the debt snowball method are great ways to get out of debt—it depends on which you prefer.
Another way to pay off debt quickly is to apply for a debt consolidation loan. With this debt management strategy, you can use your personal loan to pay off all your other existing debt. This allows you to ditch high-interest credit cards and other high-interest debt and swap them for a single loan with a fixed interest rate and fixed monthly payments.
When you consider that personal loans typically come with no annual fee, origination fee, and a fixed APR as low as 6%, you can use this strategy to get out of debt faster and save money in the process. Reducing from multiple bills per month to just one can also greatly simplify budgeting.
The second method of debt consolidation involves signing up for a balance transfer credit card. With this type of credit card, consumers can earn 0% APR on balance transfers for up to 21 months. There are balance transfer fees (typically 3% to 5%), but zero interest for the entire period, making it easy to pay off debt faster. After all, every penny paid at 0% APR directly reduces your balance.
While balance transfer credit cards can help consumers save big on interest, keep in mind that the 0% APR offer doesn’t last forever, and if you don’t pay off your debt before the introductory offer expires, you’ll be on your introductory offer Pay after the high variable APR promotional period ends.
Making more money is another strategy that can help pay off debt faster, although this step is often easier said than done. You may not be able to get more hours, or a raise may not be possible (although given recent inflationary trends, this is the year to ask for a raise). But in many cases, the best way to earn more income is to work other types of work. Perhaps you can work “part-time” in your spare time, become a part-time consultant in your field, or apply for a second job on top of your current one.
No matter what you do to increase your income, the key to maximizing your efforts is to use all of your extra cash to pay down your debt each month. If you work overtime and spend that money, you won’t pay off your debt any faster. But if you put the extra money toward paying down debt, you’ll improve your debt-to-income ratio, making it easier to save and qualify for the best future financial products.
Making more money can definitely help you pay off your debt faster, and debt snowball and avalanche methods can help you quickly reduce your bills or optimize your savings with interest. However, debt consolidation is an entirely different situation because you are exchanging your current debt for a new loan or balance transfer credit card with different terms.
In general, debt consolidation can be a good idea, but it all depends on how it’s done. Consider, for example, that consumers who plan to consolidate debt can pay off their bills well with a lower APR (or zero interest rate) and also save time with shorter loan terms.
However, debt consolidation comes with risks, mainly because it opens the door to accumulating more debt over time. We say this because debt consolidation allows you to transfer all your debt to a new credit card or personal loan, which means that any cards that previously had balances suddenly become empty and usable again.
So if you decide to consolidate debt, make sure you don’t use this as an excuse to start overspending on your newly available credit cards. While canceling a credit card will reduce your available credit limit and thus hurt your credit score, it’s probably not a bad idea to keep those unused cards in your sock drawer so you don’t add additional debt or debt in the process. Pay off existing debt.
Any of the six methods outlined here will help you pay off your debt faster and put yourself on solid financial footing. But no matter which debt repayment strategy you choose, there is one simple golden rule you should remember, no matter what.
If you want to get out of debt, you have to stop digging.
Overall, this means taking disciplinary action against your credit card. Only spend the entire credit card fee you can afford each month, and that’s it. If you find owning a credit card too tempting, stopping using it altogether — at least until you’ve paid off your debt — and focusing on using cash or debit cards in the short term may be the best debt reduction strategy of all.
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