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Your Quick Guide to Paying Off Debt Before the Holidays

Debt can get a bad reputation. Just look up “debt” in the dictionary and read the example sentences:

  • “The company has run up huge debts.”
  • “He is trying to pay off gambling debts.”

When you’re obligated to pay someone back, it can be difficult to think of it as a good thing, right? A nominal amount of debt can actually be actually good for your credit health if you can afford it and manage it well. It makes sense if you think about it: If you make timely payments on your loans, mortgage and credit cards, this proves that you’re a reliable borrower who is likely to pay back debts in the future.

However, a spotty history of paying back your debts can be detrimental. That’s why it might be a good idea to pay off, or at least minimize, the amount of credit card debt you have prior to the busy holiday shopping season. Throughout November and December, many people’s minds will turn toward family get-togethers and naturally, gift-giving is often a part of that. Whether you’re shopping at the mall or online in the comfort of your home,  the experience can be diminished if the worry of credit card debt is looming in the back of your mind.

So, how do you ensure that you stay on top of all your bills? Here’s a quick debt repayment guide to help you stay on track before, during and after the holiday shopping season.

Credit Cards

The way you manage your credit cards can directly impact your credit score. One of the aspects the credit bureaus consider when calculating your score is your credit card utilization rate, or how much of your available credit you use on a monthly basis. Most experts recommend keeping your rate between 1 percent and 30 percent, according to the Huffington Post. This shows lenders that you use but don’t rely too heavily on credit.

What you need to know about paying your credit card bills is simple: Pay them on time and in full as often as possible. Avoid credit score myths such as more debt means a lower credit score. Interest rates add up quickly, so if you just pay the minimum amount due each time, you actually mostly pay off interest and barely scratch the surface of your actual debt.

Your percentage of on-time payments is a heavily weighted factor in calculating your credit score, so just one late payment can drop your score drastically. Late payments usually aren’t reported to the credit bureaus until they are more than 30 days late, but you may be charged a hefty late fee. It typically takes 180 days of missed payments for your account to be “charged off” and sent to collections. Having an account in collections can be devastating to your score, so try to avoid them as much as possible.

Student Loans

The amount of your student loan debt may be intimidating, but try not to worry. Student loans are considered installment loans, which means they won’t impact your score as much as credit card debt. In addition, there are a variety of payment plans you can choose from, including:

  • Income-Based Repayment Plans: If your student loan debt is high relative to your income, there are a variety of income-based plans that are designed to reduce monthly payments to make your student loan debt manageable. For example, the payments under the Income-Sensitive Repayment Plan increase or decrease based on your annual income, whereas the Pay As You Earn Repayment Plan usually has the lowest monthly payment amount of these repayment plans.
  • Graduated Repayment Plan: If your income is low now, but you expect it to increase steadily over time, this plan may be right for you. It starts with lower payments that increase every two years.
  • Extended Repayment Plan: If you need to make lower monthly payments over a longer period of time, consider looking into this plan.

The government has many tools to use against borrowers who default on their student loan payments. For example, the IRS can intercept any income tax refund you may be entitled to, take away some federal benefit payments, or even sue you until your student loans are paid in full.

The court may also order a wage garnishment after 270-360 days of non-payment, meaning up to 15 percent of your disposable income can be taken until the entire debt is paid or arrangements are made to pay off the debt. A defaulted student loan is one of the worst marks that can appear on a credit report, according to FinAid.org.

Home/Auto/Personal Loans

There are many different types of loans and sorting them out can be confusing. Some general tips to consider when paying off your loans include:

  • It’s really important to break the costly habit of paying only the minimum required each month. Look for areas where you can cut spending and use that extra money to pay off as much debt as you can.
  • Tailor your plan to suit your personality. For example, paying off your debts with the highest interest rates first would save the most on interest costs. However, if you need a little more motivation, try the popular “Snowball” method, which involves paying off your smallest debts first to create momentum and encourage you to keep slaying those debts.
  • Use an online financial monitoring tool. You can connect all of your accounts to monitor your debt in one place. Plus, you can choose to receive email reminders when a bill is due.

Bottom Line: Carrying debt not only may put a strain on your financial capabilities, but it can also fill life with stress. It may be scary, but clearly assessing your financial situation and following a specific plan is the best way to go about paying off your debt.