I Want to Create a Plan for Paying Off Debt

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Stop increasing your debt.

Simply making payments toward your debts isn’t enough to pay them down—you also have to also begin living within your means. In order to stop increasing your debt—especially credit card debt and personal loans—you have to do two things. First, you need to figure out how much you need to live on per month. Run through our budgeting checklist to find out how much money you need to set aside for shelter, food and other living expenses. Now that you know how much you have to live on, your second step is to stick to set up a system that keeps you from spending more than this amount. Subscribe to one of the following:

  1. A cash diet: You give yourself just as much as you can spend every week. This has the benefit of making every purchase more meaningful, as it is psychologically harder to part with cash than to swipe your card.
  2. A“cashless” diet: Leave your credit cards at home and instead use your debit card for all purchases, making sure not to go over your weekly limit. This has the benefit of allowing you to track everything you spend, without racking up more debt. Make sure you don’t have “overdraft protection” on your debit card, which could let you overdraw your account and rack up fees.

Tally up all your debts.

If you haven’t yet, connect your accounts to the My Money Center to see how much debt you have. Most can be automatically tracked by connecting your accounts. Any that can’t, like taxes owed, can be added manually. Include these debts:

  • Credit card debt
  • Car loans
  • Personal and payday loans
  • Student loans
  • Mortgages
  • Small business loans
  • Taxes owed to the IRS

Determine how much you can pay toward your debt every month.

Before you can begin to tackle your debt, you need to know how much is coming in and going out of your wallet. If you haven’t buckled down and created your budget yet, you must complete the budget checklist before you continue. Once you’ve budgeted for your monthly essentials, you’ll know how much is left over to pay down your debts.

If you are feeling overwhelmed, consider credit counseling.

If you realize after completing your budget that the amount you can allocate to debt payments is not enough to meet your minimum monthly payments, it might be time to seek credit counseling. Call up the National Foundation for Credit Counseling and read our guide on finding a reputable credit counseling agency in order to avoid scams that will put you deeper in debt.

Research the interest rate for each debt and prioritize them.

If you can’t find the interest rate in your monthly statements, the document you received upon opening the card or in your online account, call up the lender to verify what it is. Rank your debts from highest interest rate to lowest interest rate, but always prioritize credit card debt over debt from loans, even if the credit card has lower interest rate. The interest on credit cards snowballs, whereas the debt on other loans is set at a fixed amount.

Call each of your lenders to negotiate down the interest rate.

We don’t want you paying unnecessary interest, which can really add up. So first see if you can bring that down by calling up each lender. Lenders want you to repay them, so if you’re more likely to pay them back at a lower interest rate, that’s an incentive for them to help you. If they turn you down the first time, keep calling back. The first person you talk to might not be able to help you, so ask to speak to a supervisor. If your finances have taken a dive recently and that’s why you are struggling with this debt, you might even qualify for a hardship program, which would lower your interest rate or your minimum monthly payments or both. If you’ve been getting offers from other companies, mention those offers in your conversation.

Calculate your payback time and total interest.

Use this calculator to calculate your payback time and total interest paid. Let’s say you have:

  • $5,000 on your Visa with a 15% interest rate and $50 minimum
  • $2,000 on your Mastercard with a 20% rate and $15 minimum
  • $8,000 on a car loan with a 10% rate and $250 minimum

You have $500 in your monthly budget for paying it off. You’ll see that the calculator will have you paying the minimum on the Visa and car loan, because they have lower interest rates. All the extra will go to your highest interest rate card, the Mastercard, until it’s paid off, which will save you money on interest. If you stick to your plan, you’ll pay off all your debt in 18 months and pay $831 in interest. But we’re not done yet.

Search for balance transfer offers.

If you think you can pay your debt off in just a few months, or your current interest rates are less than 10%, this step probably isn’t worth your time and you can move on to step 10. That’s because cards often charge balance transfer fees, which could be more than the interest you will save. Otherwise, use Bankrate.com to search for credit cards that offer the opportunity to transfer to a card with a lower or 0% interest rate. Comparison shop, looking at these factors:

  • Balance transfer fees: These fees are a percentage of the debt being transferred, which are typically around 3%.
  • Introductory interest rates: These are usually 0% to entice you to transfer your debt.
  • Regular interest rates: These are the interest rate you’ll get after the introductory period is over.
  • Accrued interest: If you don’t think you can pay off your credit card before the introductory period ends, don’t sign up for a card that charges accrued interest. When the intro period ends, you’ll have to pay the regular interest rate on your entire transfer—not just what you have left to pay.

The higher your credit score, the easier it will be to find a balance transfer offer with especially good terms. You can also try this with other types of debt, such as student loans or personal loans, and you could consider refinancing your mortgage. As with a credit card balance transfer, make sure the fees you pay won’t outweigh the interest you will save.

Transfer your balance(s).

Once you’ve found some promising balance transfer offers, call up the companies and ask:

  • What is the balance transfer fee? That seems really high, can you bring it down? Is it capped? If not, can it be capped at a dollar amount, like $75?
  • Do you have anything better to offer me?
  • Will a better offer be coming up soon?
  • When does this introductory interest rate end?
  • What is the rate after the introductory period ends?
  • Will you charge accrued interest if I don’t pay the entire balance before the introductory period is over?

Once you select a card, use it to its max. You may even be able to transfer balances from two cards. Let’s say you find a 0% balance transfer offer from Chase with a limit of $6,000, a 12-month introductory period, a post-introductory period interest rate of 16% and no accrued interest charges. You can put a total of $6,000 of your credit card debt on this card.

Using the debt scenario we laid out above, you could move the entire $2,000 from your Mastercard (since it has the highest interest rate) and close to another $4,000 from your Visa to the Chase card to take full advantage of the low interest rate. (You won’t be able to move the full $4,000 because the balance transfer fee counts toward your $6,000 limit.)

Remember that if you do this, the 0% interest card must then be your top repayment priority because you want to make sure you pay as much as you can—ideally all of it—before the rate expires and, in this case, jumps to 16%.

Now that you have the 0% card, you can use this calculator again to see roughly when you’ll finish all your debt payments, but note that it will assume you are paying your 0% card last, since it has the lowest interest rate. Though you will actually pay this card off first, the calculator can still give you a rough timeline of your new debt plan.

If you cannot transfer to a card with a lower interest rate, that’s OK. You can stick to your original plan. If you can’t handle your debts without transferring them to a 0% interest rate card, you might consider credit counseling, as mentioned in step 4.

Set up your payment plan.

Focus on paying off one credit card at a time. Pay the minimums on all your debts except the top debt, and then for the top debt, pay as much as you can. After you pay off the top debt, pay as much as you can toward the second-highest debt while paying the minimums on the others. Continue in this fashion until you’ve paid off all your debt, but keep in mind the end dates of the introductory periods on any cards to which you’ve transferred balances.

Free up more money in your budget.

To pay off your debt faster and save on interest, look at areas where you can cut back and come up with more money to put toward your debt. One way to do so is with the Cut Your Costs Bootcamp, which will help you cut expenses in every area of your life.

Look into earning more.

Don’t just go super-frugal. Also try to earn more, a tested and proven method of paying off debt. Use the Build Your Career Bootcamp to up your salary and/or use creative methods to bring in extra income, like selling your unwanted possessions on eBay, picking up jobs on Taskrabbit, and turning your hobby into a source of income.

Don’t neglect your retirement and emergency funds.

While paying off your debt is important, we would like to reiterate that you should not ignore your retirement or emergency fund in the pursuit of a $0 balance. If your employer offers a 401(k) matching plan, take full advantage, or open an IRA. Also send some money every pay period to your emergency fund, until you have the equivalent of at least six months of your paycheck in the bank. We don’t want you to put emergency expenses on a credit card!

If you feel like you need to get a good handle on your overall financial life, sign up for our Take Control Bootcamp, which will walk you through handling your entire financial picture.

Finally, smile!

You’re on the road to becoming debt-free! As long as you stick to your budget and keep making your payments, you can get there by following the clear plan you created.