5 Tips to DESTROY Debt

If you have debt from multiple sources and you are only making the minimum payments each month, it will take a VERY long time to pay it off. 

Debt consolidation companies may be able to help but before paying someone else to help you pay your credit card company (sounds funny when you put it that way), try these few actionable steps to get on top of your debt. 

1) Balance Transfer Credit Card

Credit card companies try a number of different ways to attract your business. Some credit card companies offer a 0% introductory rate, usually 12-18 months. Some even offer free balance transfers while others charge a small fee that you will usually make back in saved interest charges within the first couple of months. 

Look at your highest interest cards first and then transfer that balance, go down the list to the lower interest rate cards until you run out of credit with the new balance transfer card.  

It goes without saying that any balance before the end of the introductory period or you will get hit with the higher, normal interest rate. 

Check out some sites like NerdWallet or Bankrate to get an overview of a few different options.

2) Personal loan

Sometimes a personal loan from a bank or credit union can offer you a lower rate than you may be paying on your credit cards. This can be a great option to consolidate and pay off debt. The loan will have a fixed-rate monthly payment and a defined number of payments so you can plan for it like any other expense. 

Like the Balance Transfer Card option you need to have relatively good credit to get a good interest rate. Also, it may carry an origination fee so make sure to ask the banker plenty of questions and read the fine print! 

3) Home equity loan or line of credit

Homeowners with equity have a distinct benefit when trying to consolidate debt. Since a home equity loan (or line of credit) since the debt is secured by the value of the property. This is a risk because if you don't pay the loan back the issuer has a right to be paid back by the value of your property. The benefit of such a loan is that the interest rate is generally much lower than most other options. 

In this option you get a lump sum check from the bank to deposit and use to pay off credit. One big benefit besides a lower interest rate is convenience. Instead of a number of payments to a number of cards you have one payment and with the lower interest rate the payment is generally lower depending on the payment terms. 

Another benefit is that you don’t need great credit because if you don’t pay it back they can take your house! 

4) 401(k) loan

I want to stress that this should only be used as a last ditch effort but if no better options exist you can take a loan against your 401(k) to pay off high-interest debt.  401(k) loans still carry an interest rate, they generally have repayment terms and are usually deducted from your paycheck.

This is not a great option for a few reasons. If you quit or get fired you have to pay back the loan in full and the balance will be treated as a taxable distribution. Also, if you are not 59 ½ upon termination you will also owe a 10% penalty on the unpaid balance.  Another issue is that the dollars that are loaned out are no longer growing as they were when actively invested.

5) Attack your debt

Discipline and commitment may be the reason you got into debt in the first place. This is exactly what the final option “Attack Your Debt” requires! Don’t write it off yet, there are a number of easy things you can do to spend less money and put it towards debt. Here are some options. 

1. Set a budget and stick to it religiously.
2. Cut unnecessary expenses. Look at your cable, cell phone and membership bills and eliminate it or reduce them. My wife and I went through this exercise we saved $4620 in 2019 alone!
3. Don't take on new debt! Take out enough cash to satisfy your monthly budget and once the cash is gone, do without! 

This will set you up with good money habits that will serve you for the rest of your life.

High-interest debt can feel like a noose around your neck. But you do have options for getting rid of it. The key is to set yourself up for success, find a plan you can manage and stick with it. YOU CAN DO THIS!!!

Christopher Barker, CFPⓇ, MBA