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NARRATOR: Making Cents. Improving Personal Finances. Strategies to Get Out of Debt.
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In an animation, a pickaxe repeatedly hits a mountain of debt.
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Have you ever wished you could be debt-free or there was a faster way to pay down debt?
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Here are some tried and true ways to do just that.
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Stacks of cash. Text, Pay more than the minimum payment
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First, see if you can find a little extra money in your budget.
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Scissors slice through icons of a carry-out coffee cup, Chinese food container, and a computer monitor.
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Are there places you can cut back on spending? If so, use the money you saved from cutting spending to reduce your debt. You'll find that paying even just a little more each month can reduce your debt faster and save you a ton on interest.
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Interest Rate percentage symbol, Balance, dollar sign
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With that in mind, it's time to choose your payoff strategy.
Two simple methods proven to work with all kinds of debt focus either on paying down both debts with the highest interest rate or the lowest balances.
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A percentage symbol rolls down a slope.
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The avalanche method focuses on reducing how much interest you pay. Here's how it works.
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A list under Credit Type and Rate. Credit Card, 18%. Auto Loan, 5.59%. Student Loan, 4.53%.
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Start by listing out all your debts from highest interest rate to lowest.
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Under Minimum Monthly Payment, Credit Card, $130, Auto Loan, $337, Student Loan, $156. Under Extra Payment Amount, Credit Card, +$25.
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Make all your minimum payments. But on the account with the highest interest rate, pay extra each month.
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Now, under Extra Payment for Auto Loan, +$145
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Once you pay it off, add that payment and any extra to the minimum payment for the account with the next highest interest rate, which in our example, would be the auto loan.
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Extra Payment for Student Loan, +$482
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Then, repeat the process for each account.
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The Snowball Method, 16K, 10K, 7K. A scope with crosshairs over the 7K.
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The snowball method focuses on reducing the number of accounts you have so you'll work on those you can pay off the fastest.
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List under Credit Type and Amount. Credit Card 1, $3,000, Credit Card 2, $4,500, Auto Loan, $15,000
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You'll still pay all your minimum monthly payments, but you'll pay extra on the account with the lowest balance.
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Extra Payment Amount, $25,
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For this example, you'd first add extra to credit card number ones payment, because that has the lowest balance.
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Credit Card 2 Extra Payment Amount, $115
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When it's paid off, you'd concentrate on the account with the next lowest balance, and so on.
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A happy face emoji next to a credit card. Text, Remaining Balance
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Although you won't save as much money on interest as you would with the avalanche method, smaller balances are easier to pay off. And each time, you'll feel great about having one less bill.
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More Ways to Save on Interest
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There are two more methods you can use to reduce what you pay on your debt each month. If you want to reduce how much you pay each month on your credit card, you might consider a balance transfer.
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Find a card that has a lower interest rate than what you're paying and transfer the balance on your current card to the one with a lower rate. Just be sure to check whether there are balance transfer fees and whether new purchases will change your interest rate, how long the intro rate period lasts, and what the regular interest rate will be after it ends.
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An arrow points from two credit cards and a car to a money bag
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If you'd like to have just one monthly payment--
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A consolidation loan might work well for you. Depending on the amount you owe and your credit rating, many financial institutions will allow you to roll multiple debts into one loan. With just one monthly payment and one due date to keep track of, you're less likely to miss a payment. And it may even lower how much you pay out each month.
Keep in mind that consolidation loans work best if you don't rack up new debt.
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A scale balances stacks of money on one side, a trapezoid-shaped debt on the other
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Whichever method you choose, you'll be well on your way to a faster debt reduction plan.
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A happy face emoji in the debt's speech bubble
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Navy Federal Credit Union-- Army, Marine Corps, Navy, Air Force, Coast Guard, Space Force, Veterans-- Our Members are the Mission. For more information, visit MakingCents.navyfederal.org. This is not a commitment to lend, and conditional/subject to the verification and accuracy of the information submitted to Navy Federal. This video is intended to provide general information and shouldn't be considered legal, tax, or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation. An FSU copyright 2020. Federally insured by NCUA.