Smart Moves for Managing Debt

It’s hard to get ahead financially when a big chunk of your paycheck is weighted down by debt payments — whether for student loans, credit cards, car loans, or a mortgage. The following steps can help you pay down debt, reduce your interest charges, and free up more money for other goals.

Pull out your records for all of your debts, including credit cards, student loans, car loans, a mortgage, and any other debt. List the balance remaining, the interest rate, and the term of each loan.

Make paying off the highest-interest debt your top priority. Boosting your monthly credit-card payments can cut your interest charges and payoff time significantly. If you owe $5,000 on a credit card with an 18% interest rate and are only required to pay $100 per month, it will take you more than seven years to pay off the debt, and over that time you will have paid more than $4,300 in interest. But if you boost your monthly payments to $300, then you’ll pay off the debt in one year and seven months and pay just $797 in interest. You can use our debt payoff calculator to see how much you’ll save in interest and time by increasing your monthly payments.  

Try to reduce the interest rate on your credit cards. Look into balance transfer offers, but be careful about annual or balance-transfer fees, and find out how long the low rate will last (usually about a year). You’ll want to pay off the balance before the rate jumps back up. Before you switch to a new card company, tell your current credit-card company about the balance-transfer offer — it may agree to reduce your rate to keep you as a customer.

Investigate programs to reduce student-loan debt. Go to the Department of Education’s loan repayment page to find out about income repayment and loan forgiveness programs for federal student loans (www.studentaid.ed.gov/repay-loans). See our Save Money on College article for more information about these options, especially about the public service loan forgiveness program.

Manage the rest of your debt. If you have a high-interest-rate car loan, paying off that debt should be near the top of your priority list. Beware of any prepayment penalties. Consider whether you can benefit from refinancing your home mortgage. Just make sure you plan to live in the house long enough that interest savings will cover the closing costs ... and then some. See the Federal Reserve Board's Consumer’s Guide to Mortgage Refinancing for more information. You can also speed up your mortgage payoff by adding extra payments when you can — but do so after you’ve paid off higher-interest debt.

Learn about paying down debt at www.icmarc.org/debt.