8 Approaches to Paying Off Significant Debt
Do you have debt? If so, you’re part of the majority of Americans who do. In fact, about eight out of every 10 U.S. adults — including millennials, Gen Xers and Baby Boomers — owe money.
Figuring out how to pay off debt will depend on what kind and how much you owe. Here are eight approaches to paying off substantial debt. See more
Debt Snowball
If you decide to try to pay down your debts on your own, you’ll need a strategy to stay organized. Otherwise you may end up throwing money at debts haphazardly without seeing clear results.
The Debt Snowball is one such repayment strategy. Snowballing your debts means paying off the smallest balance most aggressively while paying only the minimum on all your other balances. Once you’ve wiped out the smallest balance, you move up the line one by one until you’re free.
This approach is good at helping build momentum like a snowball rolling down a hill.
Debt Avalanche
Debt avalanche means tackling debt by interest rate, from highest to lowest. Make minimum payments on all your balances while prioritizing whichever account has the highest interest rate. Once it’s paid off, move down the line.
This approach is good at helping you reduce how much you ultimately pay in interest over time.
Balance Transfer
Struggling with high interest rates on your credit card balances? It’s possible to transfer high-interest balances to a new card — one with no interest for an introductory period of six months, a year or 18 months. You’ll usually have to pay a fee of three to five percent per balance transfer, but you’ll earn a grace period on paying down your balances without accumulating interest.
Cash-Out Refinance
Homeowners with equity built up may have the option of refinancing their mortgage with a larger loan, then taking out the difference in cash and using it to wipe out other debts with higher interest rates. Be aware you will have to pay closing costs, which can run two to five percent of the mortgage.
Debt Consolidation Loan
Another way to pay down various high-interest debts all at once is to take out a debt consolidation loan from a bank, credit union or online lender. Your credit score and financial history will affect which loans you’re able to get and the annual percentage rate (APR) you’ll pay in interest. Just make sure you’ll be saving money in the long term before taking out a loan.
Debt Management
After meeting with a qualified credit counselor to go over your financial situation, you may find you have the option to enroll in a debt management plan (DMP). You’ll start making one monthly payment to the agency, who will pass on the funds to creditors, rather than paying lenders directly. Creditors may give you more favorable interest rates and waive certain fees if you adhere to the requirements of the DMP.
Debt Settlement
People who owe $10,000 or more and are struggling to stay current on minimum payments may want to consider debt settlement before jumping straight to bankruptcy. Some creditors are willing to accept smaller payments because they see it as a better alternative than getting nothing when borrowers default. Enrollees in debt settlement programs are responsible for making monthly deposits until they’ve saved up a certain amount, at which point negotiators contact creditors and attempt to reach a settlement.
Bankruptcy
Bankruptcy is a last-ditch option for people whose debt measures half their yearly income or more. You will work with an attorney to file — and depending on the chapter you may lose some of your assets. Bankruptcy remains on your credit report for years to come, so think carefully before proceeding.
It’s up to you to decide which of these eight approaches to paying off significant debt are right for you. Doing your research early on in the process will help you know just what to expect.
Thank you,
Glenda, Charlie and David Cates
