Four factors to consider when paying off debt

By Doug Matus

If you find yourself grappling with credit card bills, you’ve likely learned an important lesson about debt: it’s much easier to accrue than to repay. As interest accumulates, minimum payments rise, and zero balances can feel farther out of reach. The problem compounds itself when you owe multiple debts to various lenders, and have rising payments on a fixed income.

If you’ve decided to make paying off debt a priority, then congratulations. The decision to direct discretionary income towards debt is never easy, especially when the repayment effort extends to years. To make the most of your efforts— and get the debt wrangled sooner, rather than later — consider these factors as you construct a repayment plan.

1. The Size of Your Debts

When dealing with multiple debts, it’s necessary to prioritize your payments. Most financial experts recommend that you focus on one debt at a time; for the others, simply make the minimum payments.

“Consider paying the small debts first,” says Idowu Koyenikan, principal consultant with Grandeur Touch, LLC. “One of the pros of tackling the small amounts is the psychological relief of paying a debt off. This in turn encourages you to continue with your efforts.”

In addition to its psychological impact, this method also has practical benefits. Known as the “snowball method,” paying smaller debts first allows you to concentrate more money toward larger debts. As debts get repaid, you have fewer individual payments; eventually you will only have one debt — your largest — toward which you can dedicate your efforts.

2. Your Obligations

Your monthly legal and financial obligations provide another important factor to consider when paying off debt. If you cannot make all of your monthly payments, you need to either reevaluate your budget or find additional sources of income. An updated budget can serve as a valuable tool.

“Make sure to create a budget to have a clear picture of your financial situation,” says Lacey Langford, accredited financial counselor with Sage Services. “A budget is a tool to guide your debt payoff plan, and is key to finding extra money to put towards debt.”

After reviewing your budget, you may need to enact changes with your discretionary income. For example, the $400 a month you spend at restaurants could make a sizable impact if re-allocated toward debt for a year.

3. Is Bankruptcy An Option?

If your debts are truly crippling, you may need to consider which are eligible for bankruptcy. Though never ideal, bankruptcy does provide an ‘out’ for some insurmountable debts; though your credit will likely get ruined, you can at least get your finances in order and retake control of your money.

Generally speaking, student loans can never get discharged through bankruptcy. Medical bills, on the other hand, are the number one cause of bankruptcy

in the United States. A consumer with crippling debt would, therefore, focus efforts on the inexpugnable, and reserve bankruptcy for everything else. Keep in mind, however, that bankruptcy stays on your credit for up to 10 years, and should only be considered in the direst of scenarios.

See our guide to rebuilding credit after bankruptcy.

4. Interest Rates

The various interest rates of your debts provide the last factor to consider for your repayment plans.

“A rational consumer should pay off the credit card debt with the highest interest rate first,” says the University of Denver’s Professor Ali Besharat, a debt repayment expert at the Daniels College of Business. “Then the second most expensive debt and so on, because this approach lowers the total cost of carrying debt.”

The faster you pay off high-interest debt, the less additional debt you will accrue. If possible, you should re-finance high-interest debt, or perform a balance transfer. Keep in mind, however, that zero-percent APRs are temporary. Once the promotional terms expire, you will begin to pay interest on the full amount owed.

Debt can present a serious obstacle to personal freedom. Not only this, but excessive debt can have psychological consequences that outstrip even financial concerns. No amount of debt is impossible to deal with, however, provided you take the right approach. If you look closely at your budget, consider these factors, and formulate a plan, you’ll find yourself debt-free sooner than you thought possible.

About the Author

Doug Matus is a freelance writer who frequently contributes to Self Lender.

Written on August 3, 2016

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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