Step 3 of 10 Steps to Financial Wellness
Paying down debt can be one of the biggest challenges you’ll face.
As you try to keep your credit card balances in check, it can often feel like you aren’t getting anywhere. But with intentional action and commitment, the road to being financially independent is possible.
In step 3 of your financial wellness journey, here’s how to effectively pay down debt in five steps:
- Organize your debt. First, determine how much debt you have. List all credit card and other fixed installment loans that have outstanding balances and jot down the amount owed to each. Next, list the interest rate for each. These numbers will help you build a debt-payoff plan in the next two steps.
- Choose your debt-crushing method. There are two main approaches for getting rid of debt—snowball and avalanche. With the snowball method, start by eliminating your smallest debt and work your way up. And with the avalanche, knock out the highest interest-rate card/loan first, then head downward.
- Maximize your payments. Once you’ve chosen how you’ll crush your debt, it’s time to find ways to maximize your monthly payments. Start by trimming your spending in one budget category and channeling that money toward your debt. Once you’ve determined how much you can afford to pay each month, create a debt-payoff plan using your new budget systems.
- Consider debt consolidation. For some consumers, the most challenging part of paying down debt is managing multiple credit cards. A low-interest debt consolidation loan can change all that. A single monthly payment will be easier to manage, and the savings on interest payments can be significant. A SELCO personal loan or HELOC may be exactly what you need to tame that debt.
- Negotiate with your creditors. Many credit card companies are willing to lower your interest rate once you prove you’re serious about paying down debt. After kicking off your debt payment plan, it’s worth contacting each credit card company to discuss your options.
Debt-crushing strategies to avoid
As you choose a method of paying down your debt, beware of these tactics, which may do more harm than good:
- Debt settlement. Debt settlement services offer to lower your interest rates and boost your credit score in a short amount of time. There are legitimate debt settlement companies out there, but even those come with significant risks. Do your due diligence.
- 401K loans. It’s rarely a good idea to borrow from the future you. Withdrawing funds from your 401K to pay down debt can mean getting hit with all sorts of penalties, fees, and taxes.