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How to Pay Off Your Debt

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By Garrett Spence   |    January 23, 2017   |    9:54 AM


Whether it's student loans, car payments or credit card debt, Americans owe more money than ever. In fact, according to a recent report from NerdWallet, the average U.S. household carries $16,061 in credit card debt. 

If you'd like to take control of your financial situation and escape the cycle of never-ending debt, the following tips can help.

Step 1: Stop Creating New Debt

Create a budget and stick to it. Do not open any new credit accounts and make no new expenditures on the accounts you already have. If you depend on credit cards on a regular basis or consistently borrow to pay your bills, consider consulting a bankruptcy attorney or credit counseling agency. No debt-paying strategy works if you lack the means to pay for it.

Step 2: Save Some Money First

It may seem counterintuitive, but you should strongly consider paying your minimum balances a while longer until you've gathered an emergency fund. Even if it's only $500 to cover car repairs, a small savings will help prevent you from incurring new debt.

Step 3: Rank Your Debt by Interest Rate

Write down all your debts and determine the precise interest rates for each. Target the debt with the highest rate as your first priority. Interest significantly increases the amount you will ultimately owe. For instance, if you had a $10,000 credit card debt at 20 percent interest and paid only $200 a month, it would take 9 years and 8 months to pay off the actual amount of $21,680 including $11,680 in interest.

Step 4: Lower Your Interest Rates

If you can trust yourself to open a new credit line without using it, consider a balance transfer. This means moving your credit card balances to another bank in exchange for a lower interest rate. While your bank may refuse to lower your rate, a competing bank may give you a good deal in an attempt to steal your business. Just make sure to carefully read the terms and conditions to make sure you don't get caught off guard by a balloon interest charge at the end of a certain period.

Step 5: Use the Stack Method

Pay the minimum on all of your credit accounts, except for the one with the highest interest rate. For this card, pay more than the interest rate, continuing until you ultimately zero out the balance. Once you've accomplished this, turn your attention to the card with the second highest interest rate. As you begin targeting this debt, compound your payments to include the minimum payment from the previous card you just finished paying off. With this method, you can increase your payments with each card, eliminating debt faster until you finally become 100-percent debt free.

Things to Consider

For people in dire financial situations, debt repayment becomes all but impossible. In these cases, bankruptcy or debt management represents a more practical choice. If you cannot repay your unsecured debt (personal loans, medical bills, credit cards) within five years or your total debt equals at least half your gross income, consider some form of debt relief. Even if you wish to avoid bankruptcy, you may be able to reduce your interest rates, eliminate late fees or wipe out certain debts altogether with the help of a debt-relief program.

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