When you’re in serious debt, your first course of action is to get out of it as quickly as possible. However, if you’re in too much of a rush, you might neglect one of the most important things: the overall cost of your debt. Besides the amount of debt that you have to pay back, you have to consider how interest and fees can add to it over time. Here, we’re going to look at ways you can cut down the overall cost of your debt. This way, not only can you have a little more money at the end of it, but you might even be able to get out of it sooner.
Pay yourself first
You have to create a budget so that you can see how much you can cut your expenses and how much you can pay towards your debt every month. As a general rule: the more you can pay per month, the sooner you can clear accounts, the less interest accrues over time. However, you may find that you don’t always pay off the full amount you set aside in your budget. You might accidentally spend more than you intend to or simply forget. Figure out how much you can contribute to your debt for a certainty and separate this cash as soon as you can. Make it impossible to spend by accident by making your debts your very first priority with every paycheck.
Stop paying the minimum
Logically following the last point, you shouldn’t be paying the minimum on all your lines of credit. Often, the minimum repayment is enough to meet the interest rate and perhaps a little more. It only prolongs the amount of time you spend in that debt. As the interest continues to add, this increases the eventual and total cost of all your debt. If you plan on using your credit cards in future, even after you’re out of debt, remember this habit. It can save you up to 29% of your total credit card payments per year.
Pay off one at time
The only time that you should pay the minimum on a credit card or any debt is if you are, instead, focusing on another debt. In fact, one of the best ways to better manage your debt is to focus on one at a time. Pay the minimum on all but one, which gets the majority of your debt-busting budget. Which debt you pay off first is up to you. Some prefer to tackle the smallest first, but if you really want to save money in the long run, those with the biggest interest growth per year are the debts to tackle. Otherwise, the overall growth of your total debt can stay the same or increase.
Use balance transfer cards if available
This option is only generally available to those who have a good enough credit score to apply, so it may rule out some who could use it most. However, there are balance transfer cards available that have extremely low interest, or 0% deals, that you can use to move your credit card debt. There are certain risks to using balance transfer cards, however. Asking for a quote can leave a footprint on your credit rating which you may no want. You need to also pay close attention to any potentially hidden fees. If it offers 0% deal, see for how long it’s on offer. If that deal runs out before you can pay off the balance, it might not save you very much at all.
Put it all in one place
Paying off debts one by one is one of the two best strategies to help tackle the problem of interest. The other best strategy is to get loan help in the form of a debt consolidation. This is a loan which allows you to pay off existing debts. Essentially, you put all your debts in one place. Besides decreasing the number of creditors that you have to deal with, it can offer lower interest payments when dealing with things like credit cards. Debt consolidation is largely more available to those with poor credit than balance transfer cards are, as well. Just make sure you understand the terms of the loan and that it will genuinely decrease the overall size of your eventual repayments.
Consider using your savings
Some savings should not be touched. You shouldn’t be freezing your retirement contributions or taking out of the savings you have for any emergency expenses. For other savings, like ISAs for the sake of investment, you should be willing to dig into them. Largely speaking, the interest of your current debts will vastly outweigh the interest you receive from your current savings. You should use a savings calculator to figure that out for a certainty. However, it only stands to reason that if you lose more in interest than you gain, it’s more important to get rid of the negative interest than to keep building the positive at a slower rate. To put it simply, the money in your savings account would be much more useful for paying off debt.
Stop using your credit
If you’re still using your credit cards while trying to pay them off, you are obviously going to be in debt for longer and end up having to pay more in total. This is known as the debt spiral and many may not be aware that they are in it. If you have bad credit card habits and you simply can’t stop yourself from reaching into your wallet to use them, you should consider cutting the majority of them up. Keep at least one active line of credit, but lock it away so that you don’t use it for everyday expenses.
Slow and steady wins the race. Paying as much as you can every month is all well and good, but only if you make use of the strategies above. Don’t be in such a rush that you end up paying more than you need to.