Getting into debt can be easy and even enjoyable.
The “getting out” part, on the other hand, isn’t so fun. Interest costs start piling on, making your debt harder to manage. If you aren’t careful with your spending, things will only get worse.
Fortunately, there are plenty of ways to reduce or eliminate debt. Read below to learn some of these tactics.
1. Consolidate and Refinance to a Lower Interest Rate
Perhaps the most popular way to cut down on debt is refinancing. This involves taking out a new loan at a lower interest rate to pay off an old loan at a higher rate. Less interest means more payments go to principal — which means faster payoff.
Many who refinance also consolidate debt, meaning they combine multiple debts into one loan. If you do this, make sure your old weighted average interest rate of all debts is lower than the new interest rate. It sounds complicated, but there are calculators online that can help you with this.
2. Do a Balance Transfer
Credit card debt saps your savings due to high interest rates.
A balance transfer card could be your way out. This kind of credit card lets you move balances from multiple credit cards onto it, then offers a 0% interest rate for a defined time, usually 12-18 months. You can then pay down your debt over time without interest.
It’s a lot like consolidation and refinancing.
Just be aware of balance transfer fees, ranging from 3-5% of the balance transferred. Also, avoid spending with your balance transfer card. This makes it harder to pay it off on time.
3. Cut Expenses
Once you use one of the previous tips to lower your interest rate, find ways to cut expenses and free up money to use on debt.
Start with discretionary expenses, especially subscriptions. Comb through your bank statements and look for subscriptions you rarely or never use, then cut them. After that, consider canceling ones you do use temporarily if your situation is especially dire.
From there, you can move onto cutting one-time discretionary expenses.
Now, no need to pinch pennies here. You can still enjoy life — just be selective with your discretionary spending for the time being as you work on the debt.
4. Focus on One Debt at a Time
There are two popular methods for paying down your debt.
- Debt avalanche: Pay off debts in order of interest rate, starting with the highest rate. Doing so minimizes your interest costs and saves money.
- Debt snowball: Pay off debts in order of principal balance, starting with the lowest. Doing so builds momentum, as that first debt often takes little time to pay off.
5. Seek Out Debt Forgiveness
Debt forgiveness is available to people in specific industries — mostly public service roles such as firefighters, police, and teachers. Once you reach certain requirements outlined by the forgiveness program, you can apply to have your loans forgiven.
Generally, student loans forgiven through government programs aren’t taxable, although you should consult that program’s website and/or a tax professional. Most forms of private debt cancellation/forgiveness are taxable. Again, speak to a tax professional to be sure.
