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Paying Down Debt

Date: 7/1/2017

Author: Financial Hotline

There are two popular strategies for paying down debt. Let’s call them the snowball and the avalanche.

With the snowball method, after you pay the minimum due on all your bills, any leftover funds are applied to your smallest debt. This will allow you to pay that off as soon as possible. Once this debt is eliminated, you take the amount you were paying towards that debt to pay down the next lowest balance. Repeat until all debts are paid in full.

The avalanche method uses the same theme but instead you focus on paying down the debt with the highest interest rate first. This might be a debt with a higher total balance, so it could take longer to accomplish. However, depending on your debts and their differing interest rates, it may save you more in the long run by reducing the overall amount you pay in interest.

If neither of these methods work for you, and you are forced to borrow to pay down debt, consider these options:

Balance Transfer Credit Cards. You need to get approved for a credit card with a high-enough spending limit to pay off the rest of your debt, and a 0% introductory APR period. Using this card, you just transfer as many high interest balances as you can. Now you have one 0% debt. These cards usually come with a low rate for a specific amount of time. So while you can you want to use all your extra cash to pay down this debt before the interest rate converts to a higher rate. Since there is no interest, all your payment goes to reduce the balance owed. The best-case scenario is that you manage to pay off all your debt before the 0% offer ends AND you resist making any new charges.

If all else fails, a last resort is a debt consolidation loan. These loans are offered through several sources including your local bank, debt consolidation firms and specialty lenders. Your goal is to have one monthly payment, preferably much lower than the combined total of your various debts with a lower overall interest rate. But beware, the debt consolidation industry is unfortunately rife with lenders charging huge upfront fees without offering much in return. Make sure you research your potential lender in detail before signing anything.

If your credit score has taken a hit, some lenders will still offer bad credit loans. These usually come with risks such as securing the loan with your home or vehicle as collateral. Beware of trading unsecured debt for It may also be tied to forms of collateral, such as your home or car, which you could run a risk of losing if you can’t keep up with your payments. That’s called a secured loan. It definitely has its place in lending, but it can be risky if you’re not 100% sure that you’ll be able to make single payment. After all, you don’t want to end up worse off than you were before, meaning still in debt but with the bank foreclosing on your home.

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