Are you juggling multiple debts? You might have credit card debt, student loans, a car loan and a mortgage. How can you repay it all? Here are a few simple steps and strategies you can use to help organize and pay off your list of debts.
First, commit to not taking on any new debts. You may need to curb your lifestyle by giving up, for example, restaurant dining or buying the latest video game system. These seemingly small expenses can add up into a credit card balance that’s larger than you anticipated. You might also want to rethink any new big-ticket expenses that you’d previously planned on, such as remodeling your kitchen or upgrading your vehicle.
Write down a list of every debt, along with its interest rate and balance. This will give you a comprehensive understanding of how many debts you carry. Seeing the balance can help you understand how much money — in total — you owe across the board. And writing down the interest rate can help you understand how much these debts are costing you in additional financing charges.
Here’s a hypothetical example, listed in no particular order:
Once you see the size and number of debts you have, try to renegotiate your interest rates, if possible. This may allow you to spend less money on financing charges. You may be able to redirect those payments into paying off your principal a little more quickly.
Call your credit card company to see if they’ll offer you a lower rate, says the Consumer Financial Protection Bureau (CFPB). When you talk to your credit card company, you may want to consider mentioning you’ve been a long-time loyal customer, that you’re current on your payments, and that you’re working diligently to continue your relationship with them. Then ask politely if, as an act of customer appreciation, they may look into lowering your interest rate.
Consider creating a budget that may allow you to keep your spending under control, and ideally find extra savings that you can apply toward your debt. This worksheet from the CFPB can help you start a spending plan.
Finally, choose a debt payoff strategy that fits your needs. Here are two common options to consider:
Option 1: Debt Stacking
Debt stacking is when you rank your list of debts based on interest rate, from highest to lowest. The example listed above reflects this arrangement, placing the highest interest debt — the credit card — at the top of the list. Make the minimum payment on every debt, and apply extra payments toward the debt with the highest interest rate. This is your “target debt,” and your goal is to focus on getting rid of this one first.
Once this debt is paid off, take the money that you used to pay for the credit card debt, for example, and use it on the student loan debt with the second-highest interest rate. This will become your new “target debt.” Continue down the list until you’ve repaid each debt. This strategy is designed to help reduce your interest payments by targeting the highest-interest loan. Harvard Business Review found that people with a “concentrated repayment strategy” repay their debt more quickly than those who disperse payments equally among accounts.
Option 2: Debt Snowball
A debt snowball is when you rank your list of debts based on the outstanding balance, from smallest to largest. In the example above, the $2,000 loan from your brother would be at the top of the list, while the $25,000 student loan, which has the largest balance, would be at the bottom of the list. Similar to the debt-stacking strategy, you’ll make the minimum payment on every debt. This time, however, you’ll make your extra payments on the loan with the smallest outstanding balance.
This strategy is designed around keeping you motivated. Once you feel the satisfaction of wiping a loan off your list, you may be more likely to continue sticking to your debt-repayment budget, according to the Harvard Business Review.
Choose any strategy that works for you. As long as you’re making steady progress toward repaying your debt while not taking out any new loans, you’re moving in a more financially stable direction.