Paying Off Debt

by Krista Davis on April 23, 2012

How many of you know your true debt amount, not just an estimate? I know for the longest time my husband and I didn’t. We just made estimates and paid our minimum payments, not thinking about how interest adds to our total debt. When we finally sat down and looked at all of our statements: credit cards, vehicle loans, RV loan, and student loans, we were astounded to realize we had $115,805 in debt and 18% of that was credit cards that accumulate high interest. We own an RV, instead of land and a home due to work needs; this and my student loans are 26% each of our total debt. In addition both our vehicles are around 15% of our debt. By having these figures on paper we were able to see what our money was going toward and what steps to take in paying off our total debt.

The first step towards paying off debt is to quit using credit cards. Credit cards have a higher interest rate than your typical loan does, with the national average at 15%, and the cards I was using at 20% (Creditcards.com). Like my husband and I use to, many families use their credit cards to pay for food, gas, clothes, and entertainment, instead of using cash, checks, or debit cards on these small purchases. Most items purchased with a typical credit card have no real monetary value. What is the point of buying a $30 shirt and have 20% interest added to it? That is paying the credit card provider $6 for allowing you to use their money to buy a shirt you could have easily paid cash for, or if you don’t have the cash not purchased. That $6 is only if you pay the balance off the first month. If you pay the minimum $10 payment on that one purchase for 3 months you will end up paying an additional $18.  Stopping the use of credit cards reduces the amount of debt accumulated.

As alluded to above, the second step to becoming debt free is to pay over the minimum payment. Sit down with your family and calculate a budget. If money is tight I would suggest working on your smallest debt first. Put your extra money towards that bill, so you can reach one goal quicker. Then once that debt is paid off don’t start adding more to it, use the full amount you paid towards that bill and add that to your payment of the second smallest debt. Continue this pattern until all debts are paid. For example my husband and I paid $570 on all debts each month; we quickly paid off two of our credit cards, then combined those two $570 payments with the $570 payment of our last credit card, making $1,710 payment per month. This allowed the same money to be budgeted but redistributed appropriately, reaching a total debt pay off quicker.

Another way to pay off debt faster is to put your extra money towards your principle payment on loans. You will make your minimum balance, which typically goes towards interest in the beginning, then whatever extra money you are paying you will allocate towards the principle. Unlike with credit cards extra payments on loans can be directed towards the principle instead of whatever the company feels like. This actually reduces the amount of interest you will pay overall. You will need to contact your lender and find out how they handle principle payments. There are different rules for this, some loan companies make you sign up to have your extra payments put towards principle, otherwise it goes towards interest; others require a separate check to a different address. Don’t be afraid to ask questions and for assistance when it comes to paying off your debt.

Paying off debt doesn’t have to be difficult. Follow the three tips described and stick to your rules. You can take charge of your money and have a debt free life; at least until your next large purchase.

Next Financial Tip: Paying with Cash and Saving Money

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Written by Krista Davis

Krista Davis

Krista is a self-proclaimed “health nut” and eco-friendly enthusiast.

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