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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. Click here (you will be taken to the LendingTree site) to get rates from multiple lenders in just a few minutes, without a credit inquiry hurting your score. With a simple, single online form, you can get matched with multiple lenders. People with excellent credit can see APRs below 6%. But even if your credit isn't perfect, you might be able to find a good loan because LendingTree partners with dozens of lenders. [Disclosure: LendingTree is the parent company of MagnifyMoney.]
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 the Chase Slate® credit card. There is a $0 intro balance transfer fee for transfers made within the first 60 days of account opening and 0% intro APR for 15 months on purchases and balance transfers. The card charges no annual fee.
If you think it will take longer to pay off your debt, consider Discover it® - 18 Month Balance Transfer Offer, which offers an intro 0% APR for 18 months (with a 3% balance transfer fee).
MagnifyMoney regularly surveys the market to find the best balance transfer credit cards. If you would like to see what other options exist, beyond Chase and Discover, you can start there.
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 at multiple lenders without hurting your credit score, and find the best deal to pay off your debt faster.
Personal loan interest 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. If you want to shop for a personal loan, we recommend starting at LendingTree. With a single online form, dozens of lenders will compete for your business. Only a soft credit pull is completed, so your credit score will not be harmed. People with excellent scores can see low APRs (sometimes below 6%). And people with less than perfect scores still have a good chance of finding a lender to approve them. (Note: MagnifyMoney is owned by LendingTree)
If you don't want to shop at LendingTree, you can see our list of the best personal loans here.