Conduct A Full-Budget Checkup
You’ve put the credit cards away, done whatever you can to lower the cost of your existing debt and found a long-term goal to motivate you along your debt consolidation journey.
Now it’s time to take a thorough review of your budget. Track every dollar coming in and going out so you can get a realistic idea of how much you can pay against the debt.
McClary advises following the 50-20-30 rule of budgeting: Allocate up to 50 percent of your budget to fixed expenses like mortgage, rent and car payments; 20 percent to savings; and 30 percent to variable expenses, especially discretionary spending for things like hobbies, recreation and dining out. That 30 percent zone is the first area to target for cutting back, McClary says.
Make sure you’re earning a decent return on your savings. Compare savings accounts on Bankrate.
Climb Down The Debt Ladder
Let’s say you’ve trimmed your budget enough to pay significantly more than the monthly minimum on your credit card bills. You can either apply the extra payments evenly across all your accounts or choose a payback strategy that focuses on paying off one or two accounts first before moving on to the others.
To get out of debt using the ladder method, start by attacking the balance on the account that charges the highest interest rate, McClary says. While you’re ramping up payments on that account, you make minimum payments on the others. When your highest-interest balance is gone, you move down a rung of the ladder and apply all your extra payments to the account with the next highest rate. You repeat the process until all your debt is eliminated.
Use this debt payoff calculator to calculate your debt pay-off plan and see how to accelerate repayment.
Build A Repayment Snowball
The other common strategy for paying off debt is called the snowball. In this method, instead of using interest rates to determine which account to pay off first, you focus on the size of balances. You start by putting extra money on the account that has the lowest balance and, once it’s paid off, shift the funds to the next one up.
Targeting your lowest balance first means you’re likely to get to a zero balance sooner than you would using the ladder method.
“For people that need to see instant results to keep them motivated, that may be the best process for them because it’s the quickest way to get them to a successful conclusion,” McClary says.