23 July 2019

6 Ways to Pay Off Debt

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As the economy slowly improves, Americans are racking up more debt. And experts say they often make big mistakes when trying to shed that debt and get back into the black. Total outstanding revolving credit card debt reached $873.1 billion at the end of June 2014, according to the latest data from the Federal Reserve, up from $861.5 billion in the first quarter of 2014. Americans owe around $11.74 trillion in debt, up 5% from last year.

Here are 6 smarter and faster ways to pay off debt:

Prioritize payoffs based on interest rates 

For many consumers, it makes sense to concentrate on paying off the credit card with the highest interest rate first, while making smaller or even just required minimum payments on their other debt accounts. Do the math to see how much will be ultimately paid on each card with interest. A couple cleared $125,000 in debt over four years as they decided to pay off the lowest dollar amount on each credit card first because it gave them a greater sense of achievement.

Treat your debt plan like a diet plan 

Paying off debt is like getting in shape and losing weight. Both require discipline and little treats along the way, and both should target the one area that bothers you the most. As with a diet, make sure your debt repayment plan is not unrealistic. There’s no point in giving up halfway through and going on another spending splurge.

Don’t miss any payments 

If you are overwhelmed by your credit cards or car loan, but haven’t yet missed a payment, make sure you don’t. Becoming a problem won’t endear you to the credit card companies. In 2001, a consumer owed $100,000 on credit cards, and she paid them all off within three years. She says she had one advantage hadn’t missed a payment in 20-something years. This track record helped her negotiate double-digit interest rates to single digits, in one case cutting an interest rate to 4.9% from 16%.

Tread carefully around debt management and debt settlement 

Know the difference between a “debt management” organization and a “debt settlement” company that offers legal and financial services. The former category includes non-profit organizations that belong to the National Foundation for Credit Counseling, while the latter is made up of for-profit companies. Confusing the two could cost thousands of dollars.

The practices of debt settlement companies have frequently been the target of consumer complaints and warnings from regulators. Earlier this year, one client heard about a debt settlement company on the radio. He was instructed to stop paying his creditors so the company could offer a reduced lump sum. He made seven payments of $400 a month, yet no accounts have been settled, and the company has charged him a $2,100 fee.

Debt management programs aren’t completely seamless for consumers, either: When you enter a debt management plan, that fact can be reported to credit agencies, hurting your credit score. But when payments are made on time through a program, that can also help rebuild credit scores.

Student loan forgiveness for public employees 

Student-debt holders who work in public service, for the government or a non-profit, or who want such a job, should find out whether they’re eligible for debt forgiveness. Under the government’s Public Service Loan Forgiveness Program, borrowers in public service jobs may qualify for forgiveness of the remaining balance of their Direct Loans after making 120 qualifying payments on those loans. A person with $150,000 in federal student loans at 6.875% with a $40,000-a-year job who owes $281 a month in student-loan payments could save $321,000 in principal and interest payments by committing to public service for 10 years.

Refinance debt to get lower interest rates 

Consolidate your loans, but only if you can do so at a lower interest rate. Your home loan could also help you manage your other debt. Most mortgages have an interest rate of 5% or less, while student loan debt might be closer to 8%, auto loans could be as high as 7% and credit card debt could range from the teens to 20% or more. It might be worth paying off hefty credit card bills or unexpected medical debt by borrowing money against your home through a home-equity loan refinancing. But you should only do this if you’re 100% sure you’re not putting your home at risk.

Click here to access the full article on MarketWatch.

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