5 Painless Ways to Slash Your Debt This Year
By Rebecca Lake
MARCH 5, 2015
If you’re struggling with credit card debt, student loans, or car payments it’s easy to feel overwhelmed by what you owe. Paying it off can be even more frustrating if you’re carrying high interest rates, which can make it tough to see any real progress.
While it would be nice to throw a big wad of cash at the debt and just make it go away, that’s not always a realistic plan. Sometimes, you have to focus on making changes on a smaller scale to see results. If you’re ready to make bigger dent in your balance, here are five easy ways to slash some big bucks off your total this year.
- Consolidate your credit cards
Credit cards are convenient but for some people, they only end up being a trap. If you’re paying 15 or 20 percent in interest each month, seeing any kind of light at the end of the tunnel seems impossible. Transferring your balances to a card with a lower rate makes it easier to put more cash towards what you owe instead of just throwing it away on interest.
For example, if you owe $5,000 on a card with an 18 percent rate and you’re paying $200 a month, it would take you close to three years to pay it off and cost you about $1,300 in interest. If you transferred it to a card with a zero percent introductory rate for the first 12 months and an 11% rate after that, you could eliminate the debt in about two years and cut $1,100 off the interest with the same $200 payment. If you could manage to double what you paid each month, you’d have it gone in a year and pay nothing in interest.
- Make the most of windfalls
Financial experts will tell you that you’re better off adjusting your withholding so you don’t get a tax refund, since you’re basically loaning the government your money interest-free. But, it can be a boon if you’re trying to get out of debt. For 2015, the average refund is right around $3,000, which is a nice bit of change you could put towards those lingering bills.
If you’re planning to get a raise this year, resisting the urge to spend it is also a smart move. Putting that extra money straight towards your debt can make a big difference on how much you owe once December rolls around. For example, let’s say you make $40,000 a year and you get a 3 percent cost of living increase. That’s an extra $1200 you’d have to slap down on your debt.
- Switch to weekly payments
Paying on your debts once a month may be convenient but switching up to weekly payments can help you chip away the balances faster if your interest is compounding on a daily basis. For example, if you owe $30,000 in student loans at an interest rate of 5 percent, you’re going to rack up about $125 in interest if you’re making payments every 30 days. That comes out to just over $4 per day.
If you normally pay $300 a month on your loans, breaking it up into $75 payments each week would cut down on the principal balance faster and reduce the total amount of interest you’re paying. It also means you’re effectively making one full extra payment each year. If your normal payments are $300, that would bring the total amount you paid during the year to almost $4000.
Bumping up your monthly payments by a few extra dollars can also make a difference. If you pay $100 a week instead of $75, for instance, that’s $5,200 that you’re sending toward your loans altogether versus the $3,600 you’d be paying on a standard plan.
- Refinance your student loans
Student loans typically have lower interest rates than other debts but borrowing for your education can be more expensive if you have to go through private lenders. Rates on private student loans can be as high as 18 percent and when you owe thousands of dollars, making progress can seem pretty hopeless.
Refinancing your loans allows you to consolidate them so you have fewer payments to make each month and snag a lower rate to boot. There are several banks and alternative lenders that refinance private student loans so when you’re shopping around, you need to be sure you’re comparing the interest rates to make sure you’re getting the best deal.
You also want to think about whether you want to go with a fixed or variable rate loan. Refinancing at a fixed rate means your payments are always guaranteed to stay the same, but you could end up paying more in interest if variable rates stay relatively low.
Finally, you’ll have to take a look at your credit to determine if you qualify for a refinance. Private student loan lenders take your income and credit score into account when making approval decisions and if you don’t meet their standards, you’ll need to have a cosigner in order to qualify.
- Use your rewards to pay it off
If you use a rewards credit card to earn cash back or points towards travel, that’s essentially free money you could use to get rid of your debt. Instead of cashing out your rewards on your next flight or getting a check in the mail, ask your card issuer if you can have them applied to your balance as a statement credit. Even if it’s just a few dollars, that’s more money that’s going to your debt and since it’s not coming out of your pocket, odds are you won’t even miss it in the long run.
Taking budget down to the bare bones can free up the extra cash you need to destroy your debt but it doesn’t mean you have to consign yourself to a permanent diet of rice and beans. Exploring different options for making your debt less expensive or looking for ways to pay that don’t directly impact your bottom line can keep you from feeling too much of a pinch.