Creating a Debt Payoff Strategy for the New Year

Ready to make a fresh start financially in the new year? Here’s how to create a debt payoff strategy so you can pay those bills, stop accruing interest, and start improving your credit score.

Pay High Interest Debt First

The first step to becoming debt-free is to pay off your highest interest debt first. Make a list of all your debts and their APRs, so you understand what’s costing you the most in terms of interest. Pay down debt with the highest APR first, then move on to the next credit card or loan. In the meantime, continue to make the minimum monthly payment on all debt in your name so that you don’t lower your credit score or accrue additional late fees.

Consider a Balance Transfer

At the beginning of the year, many credit cards offer a 0% APR balance transfer promotion. Signing up to this promotion means moving your current balance to a new card and receiving a lower interest rate. A balance transfer can be a great way to pay down your debt, without accruing interest. Just make sure you know when the introductory rate ends, and do your best to pay off the debt within that time—otherwise, you’ll continue adding to your debt when interest payments begin.

Talk to Creditors

If you’re struggling with debt and can’t make minimum payments, call your creditors and explain the situation. Credit card companies or other lenders may be willing to work with you to develop a repayment plan, and you’ll likely have more luck if you get in touch with creditors before they reach out to you about unpaid bills.

Look Into Debt Management Plans

A credit counseling agency can offer free advice on debt and help you develop a debt management plan. Often, with a debt management plan, you’ll be able to consolidate debt and take advantage of a lower interest rate on a single monthly payment. When searching for a credit counselor, look for accredited agencies that don’t charge a fee. Any company which is for-profit, or tells you they can make your debt disappear for an up-front fee, should be avoided.

Refinance or Consolidate Loans

Refinancing means replacing your current loan with a new loan to receive more favorable terms: such as a lower interest rate, or a longer loan with a smaller monthly payment. Multiple loans can also be consolidated, to simplify monthly payments and potentially lower interest rates. Talk with a lender about your refinancing and consolidation options, and beware terms that look too good to be true—unscrupulous lenders pray on people with debt, so always work with a trusted and reputable financial institution to refinance.

Make a Budget

No debt payoff strategy can survive without a good budget. Making a budget enables borrowers to see a clearer picture of where household income is going, which often enables more money to be set aside for paying off debt. A budgeting app is a good place to start, but simply listing monthly income and expenditures can work equally well. As a bonus, creating and regularly checking in with your budget often reduces credit-card impulse buys that can contribute to further debt.

Build an Emergency Cushion

Paying off debt may be a long and difficult journey. In most cases, financial experts recommend paying off high-interest debt before putting money into an emergency fund. However, once your high-interest debt is paid and your credit score is healthy, it’s time to think about starting an emergency fund. Maintaining an emergency fund means that if an unexpected expense arises, you’re not reliant on a high-interest credit card or predatory loan—which could land you in even more debt