How to Pay off Debt

By Barbara O’Neill, Ph.D., CFP®, Financial Resource Management Specialist, Rutgers Cooperative Extension and eXtension Military Families Learning Network (MFLN) Personal Finance Team

Two hallmarks of a financially successful life are little or no debt and a good credit score. Over a third of your credit score is based on debt repayment history and 30% is based on credit utilization ratio (relationship between the amount borrowed and the maximum credit limit). For example, if you have a $10,000 credit limit and a $1,000 balance, the ratio is a 10%. Borrow $9,000, however, and the ratio jumps to 90%. The lower your credit utilization ratio, the better.

Let’s say you have a high debt balance and want to whittle it down as quickly as possible. What to do? 

  • Seek additional income to make larger payments to your creditors. In addition, make sure that you’re taking advantage of public benefits such as the earned income tax credit, utility assistance, and food stamps, if eligible.
  • Work on expense reduction. Be willing to forego non-essential expenses such as expensive coffees, junk food and premium cable channels to “find” money to pay down debts. Keep track of your spending for a month or two to help identify these expenses.
  • Think twice before adding new debt. For regular expenses, either use your credit card as a charge card, paying the balance in full every month, or some other form of payment such as a debit card, check, or cash. Try to delay a purchase until your financial situation is more secure and you’ve whittled down most, if not all, of your debt.
  • Follow a debt repayment acceleration plan. A great free debt reduction program is Power Pay which assumes that you are currently paying at least the required minimum payment to each of your creditors, and can continue to pay the same total monthly amount until all your debt balances are down to zero. PowerPay also assumes that no new debts will be added during the debt repayment plan. To use PowerPay, enter the names of creditors and the outstanding balance, annual percentage rate (APR), and monthly payment on each debt. Then print out a calendar that shows how much to pay each creditor monthly. When a debt gets paid off, its previous monthly payment is added to the payment sent to a remaining creditor. The analysis shows when each debt will end and the time and interest saved by following the PowerPay program. Generally, you’ll save the most money by paying off the most expensive debt first (i.e., adding extra payment amounts to debts with the highest APRs).
  • If you need assistance with debt repayment, contact the personal financial counselor assigned to your installation or a non-profit credit counseling agency. Each military installation has a financial manager that can assist servicemembers dealing with financial strain. Alternatively, servicemembers can contact Military OneSource, which has trained financial counselors available to assist service members and their families with financial advice by telephone, online or email. Servicemembers can also contact a nonprofit counseling agency that assists servicemembers, such as the Military Debt Management Agency. Counseling agencies can not only advise you on budgeting, but also put you in a debt management plan (DMP) where you make one monthly payment to the credit counseling agency that is prorated among your creditors. With many DMPs, creditors may be willing to accept lower payments and/or reduce interest rates and fees.

In summary, if you want to start saving, investing, and/or increasing the amount that you currently set aside, pay off your debt as soon as possible.  There are five smart things that people can do to get out of debt:

1.       Increase income

2.       Decrease expenses

3.       Avoid new debt

4.       Accelerate debt repayment

5.       Reach out for help, if needed.

Don’t ignore a growing debt problem because it will only get worse. Take action to address the situation today.

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