Evaluating your debt and making a plan

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Step 1: Lay it all out on the table

Step one is easy to do, but mentally it’s a tough task. You should look at all your debt and write it down in one place. It might work best for you to write it all down on paper, or maybe you prefer an Excel spreadsheet. The vital thing is to not leave anything out. Maybe you have a store card balance you’ve been ignoring. Maybe someone else in your household has a credit card you don’t know about.

Seeing all the numbers add up can be hard. It can also be hard to acknowledge all the store cards and credit cards your household might have, especially if you don’t talk about your finances often. Remember that this process will make it easier to pay off your debt, and it isn’t about guilt. Debt happens for a lot of different reasons. What matters most is how you now decide to pay it off and avoid debt in the future — by setting up savings goals and an emergency fund.

Step 2: Consolidation and refinancing

Okay, so you have listed out all your debt. Now, you have some decisions to make. One step you could take right away is to look at your store cards. If you have a $50 balance here and there, pay those off! If it’s a bigger balance, think about transferring your balances to a lower-rate card. Store cards can have rates over 20 percent APR and by moving your balances it will help you immediately start saving money. Transferring balances to a lower rate card or card with an introductory APR can be a terrific way to minimize the interest you accrue while paying off your debt, but make sure you check the balance transfer fees before you start any transfers.

Another way to lower your interest rate is to roll your debt together into an auto or home equity loan. If your car or home is worth more than you owe, you have equity. You can borrow against this equity at a low rate. So, if your car is worth $20,000 and you have a $10,000 auto loan, you may be able to borrow up to $10,000 at an auto loan rate by refinancing your car for the full value. Then, you can pay off $10,000 of higher-interest debt! Consolidation can also reduce the number of payments you have, making it easier to track your payments.

Step 3: Snowball, avalanche or another method?

Once you’ve consolidated your debt and lowered the interest rates as much as possible, it’s time to make a plan to pay off your debt. There are two main methods to paying off multiple debts: the snowball method and the avalanche method. 

Debt snowball:

The debt snowball is when you start small with debt repayment and get bigger. So, you’d look at your list of debts and pick the one with the lowest balance to tackle first. Once you pay that off, you move to the debt with the next biggest balance and keep going until you pay off your largest debt. By starting small, you build up momentum and knock out small debts fairly quickly, which can be exciting.

Debt avalanche:

The debt avalanche starts off a little slower than the debt snowball, but it definitely saves you money. Instead of starting with the smallest balance, you work on paying off the card or loan with the highest interest rate. This means as you go along, you’re paying less and less in interest.

Another method:

Both snowball and avalanche methods have their pros and cons, so it depends on what you think will motivate you the most. A third method would be to consolidate your debt into one loan and only make payments on that loan until it’s gone. This option is the most convenient, but you might pay more in interest, depending on your debt and credit score.

Step 4: Setting Goals

So, you’ve recognized your debt, consolidated and refinanced and decided on a plan. You’re doing great! Now you’re ready to pay down your debt. This is where setting goals come in. 

Debt repayment goals are very much like savings goals: cutting your expenses and automating your debt repayment work just the same as when you’re trying to hit savings goals.

As with everything financial, debt is incredibly personal. Everyone is in a different situation, and your method might be radically different from someone else’s plan. If you have questions or need help making a plan, you can always contact MSU Federal Credit Union. We’d be happy to go over your plan with you and help in any way we can.


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Deidre Davis

Deidre Davis is the Vice President of Marketing and Communications at MSU Federal Credit Union. MSUFCU's headquarters are at 3777 West Road East Lansing, MI 48823. Contact Deidre ad deidre.davis@msufcu.org or (517) 664-7877.