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How to Tackle Debt Efficiently and Save Money
Most of us will encounter debt at some point in our lives: credit cards, lines of credit, mortgages, auto loans, student loans, and personal loans. When borrowing money, the goal is to never borrow more money than we can safely manage to repay and to pay off debt as quickly as possible to save money in the form of interest payments over time. Here are a couple techniques that can help you manage and pay off loans and credit cards more efficiently.
The Snowball Method
- Focuses on paying off debt from smallest to largest balance — regardless of interest rate
- Make minimum payments on all your debts except the one with the smallest balance
- Pay extra on the smallest balance debt until it's fully paid off
- Move to the next smallest debt and repeat the process
The Avalanche Method
- Targets the highest interest debt first — saves the most money by reducing interest paid over time
- Make minimum payments on all your debts except the one with the highest interest rate
- Pay extra on the high-interest debt until it’s paid off
- Move on to the debt with the next highest interest rate and continue the process
If you're looking for flexibility, consider combining these two methods. For example, you could start with the snowball method to pay off smaller balances quickly and build confidence, then switch to the avalanche method to address higher-interest debts and save money in the long run.
Other options for dealing with debt:
- Balance Transfers
- Debt Consolidation Loan
- Utilizing Home Equity
What are some signs that you may have too much debt?
- The Debt to Income (DTI) ratio is too high
- Your balances are increasing each month, not decreasing
- You are only able to make the minimum payment due
- You're depending upon credit cards for everyday needs
- You are not saving for retirement
- You do not have an Emergency Fund or financial safety net
Consider making a request for a financial counseling appointment with a certified UMCU financial counselor if you worried about next steps. Debt can slow your progress towards achieving your financial goals, so the earlier you take action, the better.
FAQs
Everyone's financial situation is unique. The best course of action is to speak to a certified financial counselor at UMCU. They will go over your situation in detail and help you create a plan to get out of debt as soon as possible. Give us a call at 800-968-8628, visit a branch, or request an appointment online today!
There are several other options to help pay off debt faster:
- Creditor hardship programs
- Balance transfer
- Consolidation loan
- Debt Management Program (DMP)
- Home refinance
- Home equity line of credit (HELOC)
- Home equity loan or second mortgage
- Reverse mortgage
- Settlement
There are pros and cons to every option and several factors to consider like credit impact, monthly payment, interest rate, fees, collateral, and more. If you’re comparing options, it may be worth speaking to a certified financial counselor for free to review your debts, budget, and options and see what might be best for your situation.
There are two types of personal bankruptcy: chapter 7 and 13. These should always be used as a very last resort option as they can have a severe negative impact on your credit. Bankruptcy can be an option if your debt has become unmanageable, even with some of the alternative options listed above. If you cannot keep up with your debt payments or living expenses or if you have creditors threatening to sue you or garnish your wages, bankruptcy may be an option consider. If this is an option you want to explore, you should speak to a bankruptcy attorney in your area for legal advice and the proper steps to file.