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Methods For Reducing Debt
For 2023, the most popular New Year's resolution people made was to budget better or save more.1 If you're looking to do the same in 2024, reducing your debt is one of the more meaningful actions you can take to improve your finances.
When you reduce your debt, you'll raise your credit score and lower your monthly expenses. All the money you would have paid toward debt can now go toward your various savings goals like buying a home or saving for retirement.
Explore the tips below to help you reduce your debt and make good on a New Year's resolution that will pay you back for investing in your financial wellness.
Get a Side Hustle
If you find you have some time to spare, a side hustle can help you chip away at your debt. From gig economy jobs to part-time or seasonal work around the holidays, every little bit you earn means more cash toward paying down your debt.
Side hustles don't have to bring in much to make a big difference, either. For example, if you have a $5,000 credit card balance that charges 15% interest, making a minimum payment of roughly $113 means you'll take over five years to pay off that card and pay over $2,300 in interest. If you put an extra $200 toward that debt each month from a side hustle, you'll pay off your debt in only 18 months and only pay $612 in interest. A part-time gig that brings in just a couple hundred dollars a month can make an impact.
Adjust Your Budget
If you already have a budget in place, a budget review might be just what you need to find more money to help reduce your debt.
When reviewing your budget, don't automatically think you have to eliminate everything fun. Depriving yourself is a good way to make you quickly resent your debt payoff strategy. Instead, think of ways you can reduce everyday expenditures. Reducing your grocery bill or skipping a few take-out meals a month can translate to significant savings.
Leverage Balance Transfers
If you have available credit on your credit cards, using balance transfers can be a powerful way to accelerate your debt payoff. Many credit cards offer low balance transfer rates for a promotional period, say six or twelve months. By transferring balances to cards offering low introductory interest rates, you can save a significant amount in interest and make your debt disappear faster.
When exploring balance transfers, be on the lookout for any balance transfer fees and how those will add to the balance you're transferring. Transfer fees average 2% to 5%2 of the balance you're transferring.
Because a HELOC is secured by your home, interest rates are often lower than with credit cards, student loans, and other personal loans.
Ask for a lower interest rate
Depending on how long you've had your credit card, you might be able to call your card issuer and ask for a lower interest rate. While this is a more aggressive strategy that's not guaranteed to work, those with longstanding good payment histories could score a rate reduction.
If you're also considering a balance transfer, you can use this as leverage to entice your card issuer to extend you the same offer or reduce your rate. The worst that can happen is the issuer says no, and you're no worse off than you were before you asked. However, if you score the rate reduction, you'll be saving interest, and your monthly payments will go further toward reducing your debt.
Consolidate to save
If keeping track of multiple loans and credit cards with higher interest rates is a hassle, you might consider a debt consolidation loan. If a loan offers a lower interest rate than the debts you want to combine, you'll save in interest and gain convenience by having one easy monthly payment.
Keep in mind that consolidating debt can seem like a convenient option if you're currently making multiple monthly payments. However, you don't want to sacrifice savings for convenience. Only consolidate debts that are at an interest rate higher than a new loan.
Consider a HELOC
If you're a homeowner, a home equity line of credit (HELOC) could help you reduce your debt by consolidating your debt into a single, low-interest monthly payment using your home equity as collateral. Because your home secures the loan, interest rates with a HELOC are often lower than with credit cards, student loans, and other personal loans.
When reviewing a HELOC as an option, speak with a loan officer or financial advisor to see if this type of strategy makes sense to help you reduce your debt. You'll need to take into consideration your home's equity, how long you plan to stay in your home, the interest rate (and how it compares to your current debt), and the closing costs associated with this type of line of credit. All will have an impact on whether a HELOC makes sense to pay down your debt.
With the six strategies above, you now have more tools in your financial toolbox to help you reduce your debt and stick to your New Year's resolution of managing your finances better.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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