QuickTips: Paying Off Your Debt

Pay off your highest-rate debts first. Use our Debt Reduction calculator to figure out which debt to pay off first and how much to pay monthly towards all your loans. Set a fixed amount to pay toward your highest-rate debt, and don’t decrease it as your balance dwindles. Once you’ve paid off your highest-rate debt, shift that fixed monthly payment to your next highest debt. With these steady payments, you’ll pay down your debt more quickly and save a bundle in interest.

Increase your monthly debt payments. Even adding a little to each month’s payment saves you a lot of money in the long run. For example, say you owe $3000 on an 16% credit card, and you’re paying the $75 minimum each month. At this rate, it’ll take you more than 14 years to get out of debt. If you add just $100 to your payments, you’ll be debt free in about 2 years, and you’ll save more than $2300 in interest.

Consider paying off a high-interest rate loan in one shot. If you’ve built up some relatively high-interest rate debt, like a credit card balance of several thousand dollars, think of ways to pay it off all at once. For example, sell some unneeded belongings or have a garage sale, and use the proceeds to pay off your debt. Or consider dipping into any savings you have, since the interest you’re paying on your credit card is costing you a lot more than you’re earning on your savings account. Either way, commit to not rerunning up your debt, and concentrate on building, or rebuilding, your savings account as soon as possible.

Consider consolidating your loans. If you have high-interest debt, such as large outstanding balances on several credit cards, look into combining them into one lower-rate credit card or loan. Make your not-for-profit credit union your first stop, and avoid high-interest rate consolidation loans from finance companies. Then, make your best efforts to redirect the money you’re saving in interest toward paying down the loan principal.

If you’re a homeowner, another option is to consolidate your debt into a home-equity loan. Since the interest on the first $100,000 borrowed is generally tax deductible, this is an attractive option. However, you may be swapping short-term debt for long-term debt, which means you’ll end up paying a lot more in interest over the long run. What’s more, you’re putting your home on the line. So if you go this route, get serious about repaying the loan as soon as possible, and commit to not running up additional debt.