Paying Down Debt Isn’t Exactly Easy or Glamorous
With maxed-out credit cards at 23% interest, car loans and student loans, it’s time to step back and come up with a strategy to pay off and outsmart debt so that it doesn’t come back to bite you again!
There are five common ways for paying down debt.
HELOC (Home Equity Line of Credit)
The first is to tap into your home’s equity. If you should or shouldn’t do that is another discussion. Beyond that, there are two good ways to eliminate debt, one bad way and one truly ugly way.
There are also several more advanced ways to eliminate your date that we’ll cover in future discussions but sometimes the simplest method is the best one.
While the primary focus of this blog, & related YouTube channel, is to help you live a debt-free life, we’re also going to explore advanced ways for you to improve your credit scores, learn to recognize good debt from bad debt and learn how to leverage it to create wealth.
So, I hope you’ll stay with us so that you don’t miss a single step along the way.
Better yet, please forward a link to this article to a dear friend or family member so they can benefit as well.
The “Roll-Down” (AKA “Debt Snowball”)
Now, about those strategies. The first is the Roll-down. Others call it the snowball method. This is where you focus on paying off your smallest debt first. Let’s say the payment on that debt is $45/month. Once that debt is paid off, focus on paying off the next lowest balance debt and paying $45/month extra that you were paying to the previous debt. Once this second debt is paid off, focus on the next debt and include what you were paying for the first two debts. This will accelerate the paying off of all the remaining debt.
Another benefit of this method is that the satisfaction you get from paying off a debt fuels your motivation to pay off the next.
The Rate Drop (AKA “Debt Avalanche”)
Now, let’s jump into the 2nd method I call the Rate Drop. This method is very similar to the Roll Down, in that we’ll focus on paying off one debt at a time. Except that instead of paying off the ones with the lowest balances first, we’re going to pay off the debts that have the highest interest rate, followed by the next highest interest rate, etc…
You’ll start by doing all you can to pay down that first debt. Once you’ve done that, apply the same principle as the Snowball and accelerate the paying off of the other debts except with a focus on those with the highest rates of interest.
When you employ this method, you may not gain the early satisfaction associated with quickly paying off a debt in the early stages, as you would with the Roll Down method, but you’ll pay less interest on your debt, which means that more of your payment will go towards the principal.
I’ve had a lot of people ask me which of these two methods is the best. My answer is always the same: The best one is the one that you’ll stick with. So, it’s entirely up to you. You know your finances. You know your motivation level. You know your discipline. So, you would be the best judge on which program will work the best for you.
We’ve discussed a couple of good ways to reduce or eliminate debt. Now, let’s look at The Bad!
Debt Elimination companies.
These are companies that claim to act on your behalf and negotiate lower settlements with your creditors. They explain that they will collect funds from you and redistribute them amongst your creditors in a way that results in a faster debt reduction.
Many of these companies do a fairly poor job negotiating anything except for the fee that they collect from you and end up making late payments to your creditors, leaving you with a horrible credit rating!
Even if they are successful in negotiating a settlement, many creditors will put an unfavorable comment on your credit report stating they settled for less than they owed.
I’m painting this with a fairly wide brush, so if you had a favorable experience with one of these companies, I’d love to hear about it in the comments below. Likewise, if there are companies that others should steer clear of, in your opinion, please put that in the comments.
As for the Really Ugly …
That would be a poor variation of the roll-down method where you completely ignore one creditor in favor of paying more to other creditors. I’ve even seen some debt-elimination companies employ this tactic to pay down one creditor while hoping the ignored creditor will eventually agree to a negotiated settlement. This method will do more harm than good.
