Personal debt is at an all-time high. As a result, many Americans wonder if they should pay off debt or
save money. Paying off debt first is crucial because the interest on borrowed money is higher than the interest on the money you save. That means you’ll owe more money on debts than you can make by saving it. Additionally, debt negatively impacts your credit score, making it harder to get loans, qualify for credit cards, and even find housing. But paying off debt can be overwhelming. Below,
we provide four critical strategies to help you pay off debt.
4 Important Strategies to Help You Pay Off Debt
Choose the best approach for you.
The first step to paying off debt is creating a plan. For example, some prioritize paying off the most expensive debt or debt with the highest interest rate. Another approach is paying off the smallest debt, then rolling that payment to the next. No matter your method, continue making minimum monthly payments on all debts! Starting with a clear plan will help you stay on track.
Automate payments – and set them above the minimum.
One of the most practical strategies for paying off debt is automating payments so you don’t miss any. You should also set them above the minimum required amount. Paying more than the minimum helps you pay off debt faster. Because your debt-to-income ratio impacts your ability to borrow, your monthly payments on debts should typically not exceed 36% of your gross income.
Shorten loan lengths when possible.
When you shorten or refinance a loan, you have to pay it off faster. You can refinance a mortgage, auto, or personal loan. Refinancing a loan to a shorter term may increase monthly payment amounts, but it saves you money by decreasing the amount of time it accrues interest.
Debt consolidation is the process of combining multiple debts into one. Through consolidation, you make a single payment toward numerous debts. This strategy helps ensure everything is paid on time. In addition, consolidation means fewer payments and lenders to manage.
For help with financial planning and debt management, contact the trusted advisors at Horizon Bank.