Paying Down Debt

With rising costs and the pressure to always buy more, many people have too much debt. If you’re in this situation, now is the time to take steps to reduce your debt, so that you can begin reaching your financial goals.

Strategies to Pay Down Debt

Here are seven ideas that can help you pay down your debts:

1. Never just make the minimum payment. If you always pay more than the minimum payment on a credit card bill and stop using the card to pay for things, you can pay down credit card debt more quickly and efficiently. If you only make minimum payments, it can take a long time to pay off the debt. And if you keep charging more items on the card, the debt goes up instead of down. The Dallas Federal Reserve Bank has a Credit Calculator that lets you see how long it might take to pay down a debt if you make the minimum payment or if you pay more each month.
2. Snowballing: Pay your smallest debts first. If you are in debt to more than one creditor, pay the minimum due on all debts except the one with the lowest balance. For that one, pay off as much as you can. Once the smallest debt is paid off, work on paying off the debt with the next-lowest balance. Keep doing this until you’ve paid off all your debt.
3. Pay the highest interest rate first. If you are in debt to more than one creditor, try paying the debts with the highest interest rates first. Pay the minimum due on all debts except the one with the highest interest rate and then pay off as much as you can of the debt with the highest interest rate. When that is paid off, pay all you can toward the debt with the next-highest interest rate.
4. Make sure extra payments go directly to the principal (balance due). Some revolving debts, like student loans, mortgages, and car payments, automatically apply any extra payments to the next scheduled or monthly payment. This means that paying extra changes your next due date, but doesn’t reduce how much you owe. For the snowball or pay-down-the-highest-interest methods to work, you must tell your creditor that extra payments should be applied directly to the balance due. Some lenders let you tell them this by phone or online, but others require a written note with every extra payment.
5. Snowflaking: Make frequent, small, one-time extra payments. Snowflaking lets you get rid of debt by making frequent, small, one-time extra payments. You can combine it with other strategies. “Snowflakes” can be small, like paying a few extra dollars towards your debt instead of eating out for lunch. Or you can use any extra income you have from a one-time job, rebates, coupons, birthday gifts, or other sources to help pay off your debt.
6. Use windfalls wisely. A windfall is money you get from an unexpected bonus, a reimbursement, a forgotten check, a larger than expected tax return, government stimulus money, or a monetary gift. Many experts suggest using one-third of any windfall to treat yourself, one-third for savings, and one-third to pay down any debt.
7. Ask for a lower interest rate. If you’ve been making monthly payments on time and have been a customer for more than a year, you can ask your lender or credit company to lower your interest rate. Mention your good payment history and that you are a good customer. You can also mention that you have a balance transfer offer at a significantly lower interest rate from a different company, but will stay with this current company if they can match it. If you have good credit, you can also shop around for a good balance transfer offer.

Debt Resources

Learn more about how to pay down your debts:

• The Consumer Financial Protection Bureau has an online worksheet with Strategies for Lowering Your Debt.
• The Northwestern Ohio Community Action Commission (NOCAC) offers free financial literacy classes on a variety of topics, including Paying Down Debt.
• Hands On Banking has Tips for Dealing with Debt and Warning Signs of Too Much Debt.
• The Federal Deposit Insurance Corporation (FDIC) has a guide called Time to Take a New Look at Your Money Habits that offers ideas and resources for managing debt.
• MyCreditUnion.gov has a series of articles on Dealing With Debt.
• The World Institute on Disability offers an interactive online course on Paying Down Debt (free account registration required).