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Digging out of the debt hole can feel frustrating, intimidating and ultimately impossible. Fortunately, it doesn’t have to be any of those things if you learn how to take control.
Paying down debt is not only about finding the right financial tools, but also the right psychological ones. You need to understand why you got into debt in the first place. Perhaps it was a medical emergency or a home repair that needed to be taken care of immediately. Maybe you’d already drained your emergency fund on one piece of bad luck when misfortune struck again. Or maybe you’re struggling with a compulsive shopping problem, so paying down debt will likely result in you accumulating more until the addiction is addressed.
Understanding the why and how of your debt isn’t the only reason psychology plays a role in how you should create your debt attack plan.
You also need to understand what motivates you to succeed. Do you want to pay down your debt in the absolute fastest amount of time possible that will save more money or do you want to take some little wins along the way to keep yourself motivated?
The common terms for these debt repayment strategies are:
- Debt avalanche: starting with the highest interest rate and working your way down, which saves both time and money.
- Debt snowball: paying off small debts first to get the warm and fuzzies that will motivate you to keep going.
Whichever version you pick needs to set you up to be successful in your debt repayment strategy. Now it’s time to find the proper tools to help you dump that debt for good.
The first step in crafting a debt repayment strategy is to understand what you’re eligible to use. Your credit score will play a big role in whether or not you’ll qualify for products like balance transfers or competitive personal loan offers.
A credit score of less than 600 will make it difficult for you to qualify for a personal loan and will eliminate you from taking on a balance transfer offer.
If you have a credit score above 600, you have a good chance of qualifying for a personal loan at a much lower interest rate than your credit card debt. With new internet-only personal loan companies, you can shop for loans without hurting your score. Use this tool to see if you can get approved for a loan without hurting your score. Click here to get rates from multiple lenders in just a few minutes, without a credit inquiry hurting your score. For people with the best scores, rates start as low as 4.80%.
If you have a score above 700, you could also qualify for 0% balance transfer offers.
Not sure what your credit score is? Click here to learn how to find out.
Now let’s talk about the financial tools to add into your debt repayment strategy in order to dig out of the hole.
Let’s say you have $10,000 in credit card debt, and are stuck paying 18% interest on it.
You already know that putting as much spare cash as you can toward paying down your debt is the most important thing to do. But once you’ve done that, so what’s next?
Use your good credit to make banks compete and cut your rates
MagnifyMoney’s Paying Down Debt Guide has easy to follow tips on how to put banks to work for you and get your rates cut.
You could save $1,800 a year in interest and lower your monthly payments based on several of the rates available today. That means you could pay it off almost 20% faster.
Here’s how it works.
Option One: Use a Balance Transfer (or Multiple Balance Transfers)
If you trust yourself to open a new credit card but not spend on it, consider a balance transfer. You may be able to cut your rate with a long 0% intro APR. You need to have a good credit score, and you might not get approved for the full amount that you want to transfer.
Your own bank might not give you a lower rate (or only drop it by a few percent), but there are lots of competing banks that may want to steal the business and give you a better rate.
Our favorite offer is Chase Slate®. You can save with a $0 introductory balance transfer fee and get 0% introductory APR for 15 months on purchases and balance transfers, and $0 annual fee. Plus, receive your Monthly FICO® Score for free.
If you have excellent credit, another great option is Barclaycard Ring – which also offers a $0 intro balance transfer fee and 0% APR for 15 months. Consider Barclaycard if your credit card debt is with Chase already, or if Chase is not able to approve a big enough credit limit.
If you think it will take longer to pay off your debt, consider Discover, which offers an intro 0% APR for 18 months (with a 3% balance transfer fee). MagnifyMoney keeps the most complete list of the longest and lowest rate deals available right now, including deals with no fees. Just answer a few questions about how your debt and much you can afford to pay, and you’ll get a personal list of the deals that will save you the most.
You might be scared of a balance transfer, but there is no faster way to cut your interest payments than taking advantage of the best 0% or low interest deals banks are offering.
Thanks to recent laws, balance transfers aren’t as sneaky as they used to be, and friendlier for helping you cut your debt.
Sometimes the first bank you deal with won’t give you a big enough credit line to handle all your credit card debt. Maybe you’ll get a $5,000 credit line for a 0% deal, but have $10,000 in debt. That’s okay. In that case, apply for the next best balance transfer deal you see. MagnifyMoney’s list of deals makes it easy to sort them.
Banks are okay with you shopping around for more than one deal.
Option Two: Personal Loan
If you never want to see another credit card again, you should consider a personal loan. You can get prequalified without hurting your credit score, and find the best deal to pay off your debt faster. With just one application, you can get multiple loan offers with rates as low as 5.99% here.
Personal loan rates are often about 10-20%, but can sometimes be as low as 5-6% if you have very good credit.
Moving from 18% interest on a credit card to 10% on a personal loan is a good deal for you. You’ll also get one set monthly payment, and pay off the whole thing in 3 to 5 years.
Sometimes this may mean a higher monthly payment than you’re used to, but you’re better off putting your cash toward a higher payment with a lower rate.
And you’ll get out of debt months or years faster by leaving more money to pay down the debt itself. One of our favorite lenders is SoFi, which has some of the lowest interest rates on the market if you have good or excellent credit. Variable interest rates start as low as 4.99%*. You can apply now on their website, without impacting your credit score, by clicking on the apply button below.