Debt isn’t always a bad thing. Taking on manageable debt for things like mortgages and student loans can be a healthy investment in your future, and paying back debt on time and in full is one of the best things you can do to increase the chance of improving your credit score.
However, when debt becomes unmanageable or prevents you from achieving other financial goals, creating a plan to help you pay it down should become a top priority. Doing so can help you visualize a path to financial freedom, stay on track and celebrate your progress every step of the way.
Below are a few first steps you can take to create a repayment plan that will help you break out of the cycle of debt:
1. List out your debts
Knowing what you owe is the first step towards tackling your debt. Make a list of all of your debts, including things like credit cards, payday loans, student loans and your mortgage. Include information such as the balance for each debt, minimum payment and interest rate.
2. Prioritize your debts
Once you are able to see all of your debt in one place, you can begin mapping out a plan for repayment by choosing which debt to prioritize paying off first. The idea is to make more than the minimum payment on one debt at a time, while continuing to pay the minimum on all other debts. When you focus overpayments on one debt at a time, you’ll rack up less interest and be able to pay individual debts off more quickly. You can then reallocate funds to targeting another balance as you pay each debt off.
3. Select a repayment strategy
Two common strategies for tackling multiple debts are the debt avalanche and debt snowball methods.
With the debt avalanche method, you prioritize debt with the highest interest rate first to save the most money in interest over time. On the other hand, the debt snowball method means prioritizing and paying off your smallest debts, regardless of interest rate, before moving on to the larger ones. It is generally recommended to pay off high-interest debts from things like credit cards and payday loans as quickly as possible to save the most money long-term but seeing smaller balances erased quickly with the snowball method can have motivational advantages that encourage you to stick with the plan.
4. Make room in your budget
Speeding up the debt repayment process requires you to pay more than the minimum amount due each month, which means making room in your budget for overpayments. Draw up a spending plan that accounts for how much you have coming in and going out each month to see where you can reallocate funds from other spending towards your debts.
5. Consider restructuring existing debt
Consolidating multiple debts with a personal loan or zero-interest credit card can help make your payments more manageable and lower the total interest you may pay on your debt. You’ll no longer need to keep track of varying monthly payments and due dates and you may even be able to lower your interest rate to help you pay down your principal balance faster.
6. Reach out to the professionals
If you are struggling to meet all of your monthly debt payments, it might be time to reach out to your creditors to see if they’ll work with you on a payment plan or negotiate a lower credit score. It is in both you and the creditors interest to see your loans paid off and they may work with you to keep your repayments affordable.