Debt can often feel like a giant weight on your shoulders that prevents you from obtaining the things you want. Having debt can affect your quality of life and impact your well-being, and the relationships with those around you. Also, any time you need to borrow funds, say for a house or a car, a lender is going to look into your debt-to-income ratio, as well as your credit score.
Aside from the mental perks that accompany being debt-free, it can also have a huge positive impact on your credit score. The balance of your debt to available credit makes up a whopping 30% of your credit score. So, the best thing you can do for your credit score is to keep debt as low as possible. Experts recommend 30% or lower. For example, if your maximum available credit is $5,000, you’d want to keep your balance below $1,500.
There are several different schools of thought on the best way to approach paying off debt. No financial approach is one-size-fits-all, and some people find that a combination of a few different strategies works best for them. Here are some expert-approved strategies and solutions for paying off debt.
1. Live on a budget
The first step is to ensure that you’re not spending more than you’re making. That’s where a budget can help you out. To get ahead, you have to plan where each dollar is going every month before it’s spent. It’s okay if you have a few growing pains at first. Famed financial advisor Dave Ramsey says that it takes people about three months to get into a regular rhythm with a budget, but it’s worth the effort. He also notes that a budget doesn’t put an end to your fun, but instead it gives you freedom to spend, because you have peace of mind knowing exactly where each hard-earned dollar is going.
2. Reduce your spending
Every dollar counts, and each dollar you’re able to trim from that second or third streaming service subscription, or that delicious delivery order, is a dollar that you can put toward your debt. Look over the budget you made in step 1, and consider what you’d potentially go without in order to be debt-free faster.
3. Use the “snowball method”
The aforementioned financial guru Dave Ramsey is a big proponent of the “snowball” method. Here’s how it works: You take your extra money and put it towards your smallest debts first, while maintaining the minimum payments on your other debts. Once the smallest debt is paid off, you take that money and apply it toward your next-highest debt, and so it goes until your largest debt is paid off.
Experts say that there are benefits to this method, as you can gain momentum and motivation by paying off your smaller debts first. While this method is not a quick fix if you have a lot of debt, purveyors of this technique say that people are more likely to stay motivated when they see their smallest balance wiped out.
4. Use the “avalanche method”
This is a similar structure to the “snowball” method, but instead of tackling your smallest balance first, you initially address your outstanding balance with the highest interest rate. Then once the balance with the highest interest rate is paid off, you then apply that payment to your next-highest amount, and so on.
You’d include your other non-mortgage debts as well — such as car loans, student loans, personal loans, or medical bills. The strategy behind this method is to eliminate the high-APR obligations as quickly as possible. Eliminating a credit card balance with high interest rates frees up some of your hard-earned cash and can accelerate your payoff goals.
5. Apply for a debt consolidation loan
If you have a good credit score and debts that may take years to pay off, like student loans or auto loans, another option is a debt consolidation loan. If you’re treading water and sandbagged by high-APR credit card debts, this option can give you an inflatable to keep you afloat.
Debt consolidation rolls multiple debts into one payment — ideally with a lower interest rate. This can make your debt easier to manage and less expensive overall. A 0% interest balance transfer credit card or a debt consolidation loan are two solid options for debt consolidation.