Self-Help Articles

Debt Payment Options for Every Budget

Debt. We all have it. Debt in itself is not always bad. It can be a helpful tool in, say, covering bills during employment gaps or paying for a college education. But excess debt can be a financial burden – one that limits your ability to pursue other personal and financial goals, one that keeps you from fully enjoying your life.

By deciding to pay off excess debt, you are making a decision to greatly improve your financial health. How you should go about paying off your excess debt depends on a number of factors, and which payoff route you choose can make a difference in your financial profile and credit scores for years to come.

The first step is to take a good look at your debt. Find out exactly what you owe, who you owe, and how much you currently pay in interest charges every month. If you are currently able to make at least the minimum monthly payments, we have a few tips and techniques to help you get on top of your debt and pay it off faster. If you find that you are unable to make even the monthly minimums, rest assured there is guidance and relief for every situation – and light at the end of your debt tunnel. 

You are current on payments, but you need a plan to pay off debt

If you are current on all of your payments but want to free up more of your paycheck and avoid paying excess interest charges, here are four ways to pay down your debt as quickly as possible:

1. Pay more than the minimum – Minimum payment amounts are set to benefit the lender by drawing out the payoff and increasing the amount you spend in interest charges. This is especially true with unsecured credit card debt, where the minimum payment is typically only around 2%-3% of the outstanding balance. If possible, try to pay double the minimum each month, and watch your balance drop.
2. Snowball your payments – One very effective tactic for debt repayment is the snowball method. The simple explanation of this method is to pay off your smallest debt first, then work your way up to the largest. Do this by paying as much as you can toward the debt with the lowest balance, while still making minimum payments on all other debts. Once the smallest debt is paid off, apply that payment to the next lowest balance until that one is paid off, then move on to the next one, repeating this process until you’ve repaid every debt. This method takes discipline, but it works.
3. Transfer balances to your lowest interest rate credit card – Take a look at the interest rate you are paying on each of your credit cards and other lines of credit. If possible, transfer higher-rate balances to cards with the lowest rate. If your credit score is high enough, you may be able to qualify for a zero or very low interest rate card that offers balance transfer programs.
4. Debt consolidation loan – These combine all of your debt into one single loan, with a single payment and a lower interest rate. Debt consolidation does not reduce the amount you owe, but it does make it easier for you to pay it back. It is important to note that your credit score will sometimes drop temporarily when you take out a debt consolidation loan. But your score will dramatically rise over the long term if you make timely payments and ultimately pay off the loan.

You are behind on payments, but you’re still able to pay some amount toward debt

If you are already behind on monthly payments, struggling to make the monthly minimum, and now incurring late charges, it might be time to call for outside help. Consumer credit counseling agencies provide this type of assistance, but it is helpful to understand how the program works before making the call.

1. Credit counselors take a look at your budget to find out what you are reasonably able to pay;
2. They work with your lenders to negotiate lower terms and payments, then place you on a 3- to 5-year debt repayment plan;
3. You will not be allowed to use your credit cards while on the debt management plan, but consumer credit counseling does not negatively affect your credit score.

You are unable to make payments, and you need debt relief

No one wants to be in the position of needing to file for bankruptcy, but it is important to remember that bankruptcy is really a consumer protection tool. It’s designed to be an aid or relief for people who find themselves unable to pay off debt. There are two types of bankruptcy for individuals, and each one has its own benefits.

1. Chapter 7 – Known as the liquidation type of bankruptcy. Both individuals and business entities may be eligible for protection under this chapter of the bankruptcy code. You must meet certain requirements to file for this type of relief, but most or all of your unsecured debt can be eliminated without the need for repayment. (Keep in mind that taxes, child support, and student loans cannot be forgiven.) You may be forced to sell some assets, but for those with relatively few assets or for people whose assets value less than the total debt amount, this can be a viable option. Chapter 7 gives debtors quick relief from debt, allowing them a fresh start.
2. Chapter 13 – Known as the reorganization type of bankruptcy. This type is for individuals only. It allows the debtor to pay back a portion of their debt while retaining all of their assets. Chapter 13 gives debtors a chance to catch up and removes the heat of debt collection.

Debt repayment can be a boon to your overall financial wellbeing. No matter what position you find yourself in, contact one of our helpful team at American Credit Foundation to discuss which type of debt repayment plan would be right for you.