Week 5 of Totally Worth It: Debt Relief from PaydayNow

Making a dent in my debt was the entire point of budgeting for me.

We discussed strategies to save money last week. There’s just so much wiggle space for most of us. You’ve pared down subscriptions and are making an effort to bring lunch to work. However, if you have school loans, a vehicle that isn’t paid off, and a handful of credit cards with balances. In that case, even small monthly minimum payments may build up.

Credit card issuers used to set your monthly minimum payment so low that you could never get out of debt if you simply paid that amount each month. During the Obama administration, this changed. If you look at a credit card statement, you’ll find a box that compares how much extra interest you’ll pay if you merely pay the minimum each month vs. paying off the debt in 36 months.

You should have a good idea of what’s due each month now that you’ve been keeping track of your costs. And I instructed you previously in this newsletter course to start by budgeting simply the minimal monthly payment for your debt per month when you initially prepared your budget. If you just do that, you’ll finally pay off your debt, but you’ll end up paying a lot more in interest on top of it.

This week, we’ll devise a strategy for paying it off quicker.

When you first take control of your money, there’s a strong urge to use every dollar you have to pay off debt. However, as we’ve already covered, this may be setting you up for failure. You should make acceptable, long-term lifestyle modifications rather than vowing to live like a nun until you’re debt-free.

There will be snow metaphors ahead.

Snowball, avalanche, and blizzard are three prominent debt-reduction strategies.

The snowball approach would function: Sort your obligations by their size, from lowest to most significant. That means credit card number two comes first, followed by the ER bill, credit card number one, the automobile, and finally, the school loan. Every month, pay the minimum on all of them and put any additional money you have toward the lowest debt until it’s paid off. Then, working your way up to the most significant number, “snowball” that minimum payment into the extra you throw towards your following obligation. So you’d take the $44 you were paying on credit card two every month and put it toward the ER bill minimum.

What would happen if you used the avalanche method: Order your loans from highest to lowest interest rate. Extra money should be used to pay down the highest-interest loan first, then the next highest, and so on. That means the ER bill comes first, followed by credit card 2, then credit card 1, the school loan, and finally the automobile. You’d put at least an additional $35 each month on a credit card two after paying off the ER charge.

These techniques have advantages and disadvantages. Using the snowball, you gain the psychological win of having a debt paid off faster. A victory is something I like. Practically speaking, with the avalanche, you save money in the long term by paying off higher-interest debt earlier. From a mathematical standpoint, it makes more sense. (In debt is a popular tool.) It includes a calculator to help you figure out how much time and money each technique will require. Depending on whatever budgeting program you use, you may also have access to a debt management function.)

However, if your higher-interest loans are also your highest-balance obligations, you’ll be juggling a lot of monthly payments and may get disheartened if you never get close to zero.

The “blizzard” approach incorporates both techniques. Choose one or two lesser debts to concentrate on initially. If you bring those sums to zero, you may eliminate a line item or two from your budget and start paying minimum obligations. Then you may start paying off your high-interest loan.

None of these approaches is correct or incorrect. The proper strategy is the one you’ll use. Don’t underestimate the value of swift victories! My husband took out a personal loan to consolidate his credit card debt, and it was one of the first things we paid off. Although the interest rate was modest, the monthly minimum payment was enormous. I wanted to reclaim those funds to focus on my other goals.

Bills and interest rates should be negotiated.

Debt and money are both fictitious. You’ve got cash, and you’ve got money owed to you. Interest rates, due dates, and totals are a lot more adjustable than you may think.

For example, did you know that you may ask your credit card provider to decrease your interest rate by calling them? And do you think they’d do it? Seriously. Here’s a sample script: “Hello, I’m an existing customer who is examining my monthly expenditure and was hoping to see whether I was qualified for a reduced APR on this card.” When I did this many times, the response was, “Oh, sure, you are,” and they would deduct a few points.

Due dates aren’t fixed in stone, however. I recognized that the fact that all of my payments fell in the final two weeks of the month was part of the reason I felt so wealthy half of the month and broke the other half. We paid rent on the 15th of the month and all other bills between then and the 1st of the following month. You may, however, adjust the due dates on your invoices. Go to your credit card or utility company’s website, and some of them will allow you to change the due date from there. If it doesn’t let you, give us a call, and we’ll see what we can do.

Refinancing and personal loans

You could want to check into a balance transfer or personal or debt consolidation loan for credit cards or other minor personal obligations (if you financed the purchase of a mattress, for example). Some individual financial experts despise debt consolidation loans, in which you combine your debt into a loan with lower interest rates (but generally much higher monthly minimums, since it’s a loan rather than a line of credit). The aversion goes like this: you consolidate your high-interest credit card debt with a lower-interest loan, but then you have all that spending power on a credit card, prompting you to rack up additional high-interest debt. You don’t want to do that, I agree. However, you’ve become a budgeting expert who only spends money you already have.

Simply put, a balance transfer is when you acquire a new credit card and transfer your previous debt to it. That’s exactly what I did. By switching my debt to a new card with a 0% introductory interest rate for 18 months, I saved a significant amount of money. I divided the sum by 18 and paid down precisely that amount each month, allowing me to pay off the whole bill without incurring any further debt (beyond the initial 3 percent transfer fee).

There are several websites where you may compare balance transfer deals, debt consolidation loans, and refinancing options. You’ll need to figure out the new interest rate as well as the balance transfer charge for a balance transfer, and then calculate how much you’ll have to pay each month to pay off your debt before the promotional period expires and interest begins to accrue again. NerdWallet, BankRate, and U.S. News & World Report all give excellent suggestions for where to start your search.

When it comes to debt consolidation loans, check sure the interest rate is lower than what you’re paying currently, that there are no hidden or excessive costs, and that you can afford the new minimum payment. Credit Karma provides a helpful guide to determining whether or not a debt consolidation loan is appropriate for you. U.S. News & World Report, as well as Bankrate and NerdWallet, provide a guide to picking a debt consolidation loan and rate what they believe to be the most refined firms.

Compound interest is insidious; it might seem as if you’re being pulled back down no matter how much you throw at your debt. Anything you can do to lower your monthly expenses is a good thing. When comparing loans, be sure to consider both the interest rates and the upfront expenditures, such as balance transfer fees.

One thing to avoid at all costs (Never! Not once!!) should you take out a high-interest personal or payday loan. They are both incredibly seductive and exceedingly terrible news, leaving you in nearly always a worse financial situation than when you began. A personal loan with a lower APR than your present debt might be a good option. Avoid, avoid a personal loan with a higher APR than any other debt you have.

It’s essential investigating your refinancing possibilities for large-ticket debts like school loans and mortgages. I’m not endorsing any particular goods or services since I haven’t refinanced any of those sorts of loans myself. However, you have many choices, and it’s worth looking into them to see whether you might save money in the long term. Again, NerdWallet, BankRate, and U.S. News & World Report are all excellent resources for learning about your alternatives and getting professional advice.

More: How do payday loans work?

What about debt consolidation or declaring bankruptcy?

If you’ve exhausted all other options and still can’t make ends meet while paying off your debt, it may be time to contemplate a severe measure like bankruptcy. Some firms claim to deal with your creditors to lower your debt or assist you in filing for bankruptcy. On them, I am not an expert.

Liz Weston, a licensed financial advisor who writes a personal finance column for the Los Angeles Times, is one. So, to paraphrase her advice, be highly cautious who you choose to assist you. Your initial step should be to contact the National Association of Consumer Bankruptcy Attorneys for a bankruptcy attorney or a nonprofit credit counseling service (the FTC offers a list).

Is it possible to use my credit card while paying off my debt?

You’re holding a balance, which is debt if you can’t pay off your credit card bill in full with the money in your bank right now. (Yes, even if you’ll be able to pay off the debt in full by the due date since it’ll be after you are paid again, you’re still spending money you don’t have.)

Some individuals prefer to use their credit card because of the purchasing protection it provides and the cash-back and other benefits it gives. The incentives argument isn’t convincing to me. When you pay interest on a credit card, the “incentives” aren’t indeed rewards. When you’re blasted with an 18 percent APR, 3 percent cashback is a pittance. However, I understand why you’d prefer a credit card over a debit card if you’re renting a vehicle or making a significant transaction.

When I was paying off debt, I realized I needed to keep my distance from the attraction of my readily obtained credit. I didn’t freeze my cards in ice, but I did remove them from my wallet and place them in a box beneath my desk. When I went, I would carry one with me in case of emergency and for things like the refundable deposit on a hotel or rental vehicle, but they would generally remain at home.

Traditional wisdom is that if you have debt, even if it’s just a few weeks’ worths of spending that you’ll be able to pay off shortly, you should avoid using credit cards altogether. However, I don’t believe it is the best match for everyone.

You must make your own decision here. Are you responsible enough to just use your card for purchases that you could make right now with cash? Do you have the resolve to resist the urge to use an open line of credit that you’ve been working so hard to pay off? Are you the kind to say, “Things are tight, and it’s the final weekend of the month, so let’s just put this bar bill on the credit card and worry about it later”? It’s now or never. Take responsibility for the bar tab.