Sense & Centsibility Blog
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Tips to Reduce Your Debt and Pay it Off For Good

America Saves Week 2022, February 21–25, is an annual call to action for everyday Americans to commit to saving successfully.

LSS Financial Counseling is among the participating organizations that are encouraging savers nationwide to set a goal for savings and make a plan to maintain or improve financial wellness.

This blog was written by Breanna Johnston, AFC® Candidate from the America Saves campaign coordinated by the nonprofit Consumer Federation of America (CFA).

One of the greatest contributors to financial stress is debt. If you're having a tough time financially, it can feel isolating, but the truth is that 80% of Americans have consumer debt. The only way to relieve financial stress is to make a plan and work your way through it. But to make that plan, you'll need to understand the type of debt you have, your best-case scenario to pay down your debt, and how to leverage your knowledge so that you can maintain or increase your credit score. When you reduce your debt, you save in the long run — on late fees, interest and a higher credit score, which will lower interest rates.

Get a Clear View of Your Finances

You thought we'd say budget, didn't you? While creating a spending and savings plan (our preferred term instead of "budget") is essential, the true value in having a plan is clarity. When you know your exact income and expenses, you can better steward the discretionary income left over after your bills are paid. It will become easier for you to decide how much to spend, if you can put more toward debt, what goes into savings, and whether to begin making investments. Your spending and savings plan will also highlight areas that need attention.

For example, is your grocery allocation adequate? Are all your subscriptions and recurring monthly expenses still necessary, or can any be canceled? Knowing where all your money is coming from and going to helps you build financial confidence and shows you where you can afford to reduce your debt and begin building wealth.

If you need support with making a spending and savings plan, we've created a straightforward tool that will help!

Work with What You Have

When you're paying down your debt, one conscious decision to make is to stop adding to your debt. This step may seem intuitive, but there are circumstances where the urge to just "charge it" might arise.

Many "Buy Now, Pay Later" options are becoming increasingly popular. Though it might not feel like it, options like Klarna, Afterpay, and Affirm are debt and should be treated as such.

As you work to pay off your credit cards, here's a word of advice: do not close your credit cards! Closing your credit card accounts might reduce your credit score, as the "age" of your credit factors into your FICO score. By keeping your card open with a $0 balance, you'll have a longer credit history and a larger amount of available credit. The only time you may want to consider canceling a card is if it has pricey annual fees.

Increase Your Income 

If you can, consider increasing your income temporarily so you can put more money towards your debt. This will allow you to pay down your debt faster! There are so many options to get a quick cash injection or additional income in today's economy. Some ideas include selling items around your home you no longer use; purging your closet on sites like thredUp; leveraging a talent or skill you have, like tutoring or singing, to offer as a service; or taking advantage of the booming gig economy.

Paying It Off For Good Starts with a Decision

There are many strategies to use when working toward paying off your debt. The most popular strategies include the snowball method or the avalanche method. By deciding beforehand which method you want to use, you will reap the benefits of paying it off faster.

Snowball Method 

"Snowballing" your debt is a type of accelerated debt repayment plan. First, list all your debts from the smallest balance to the largest balance. Next, make the minimum payment on all your debt except the smallest one. With your smallest debt, you will put as much money as you can toward the balance. Once the smallest debt is paid, take the amount you were putting towards that debt and apply it to the next smallest. With this method, interest rates are not the focus.

Avalanche Method

With this method, you will still make the minimum payments on every source of debt, but you apply the remaining funds toward the debt with the highest interest rate. By paying off the debt with the highest interest rate first, you reduce the overall amount of interest you pay. 

Making extra payments allows you to pay off your loan(s) more quickly when paying toward installment loans, like your car payment. Just be sure to specify that any additional funds outside of your monthly payment go toward the principal. Before you begin making extra payments to installment loans, check the terms of your loan to determine whether additional fees or prepayment penalties may apply.

Regardless of how you decide to reduce your debt, let America Saves be your savings accountability partner! Take the America Saves Pledge, and choose “reduce debt” as your savings goal. We'll support you by sending email and text reminders, resources and tips to keep you on track towards paying down your debt.

Another option, which LSS Financial Counseling can work with you to develop, is a Debt Management Plan (DMP). You would make one simplified monthly payment, and typically interest rates and payments are reduced. LSS Financial Counseling also offers Budget and Debt Management Counseling. Call 888.577.2227 to schedule a phone or virtual appointment, or get your support online. Our certified, experienced and nonjudgmental financial counselors are here to assist you!