How to Pay Off Debt
Create a debt management plan with this guide from Citizens Bank
Borrowing solutions such as loans and credit cards can be valuable tools when buying a home, upgrading your vehicle or purchasing daily essentials. Developing a roadmap for paying down debt can help you manage both your current budget and your future finances.
The best way to pay off debt is to develop a personalized plan based on your current circumstances and financial goals. In this guide, you’ll learn how to take simple, practical steps to create a plan for debt management. If you have further questions about paying down debt, speak with a Citizens Bank customer service representative.
Discover how to pay off debt with these 10 tips
1. Get informed about what you owe
Before you can create a debt management plan, it’s important to understand what you owe, the interest rates you are being charged and the conditions associated with your accounts. An easy way to start auditing your debt is to obtain a copy of your credit report (everyone is entitled to one free report per year) and review the listed accounts, debts and interest rates. If you see any mistakes, contact the credit reporting company and work with them to correct the issue(s).
2. Update your budget to prioritize money to pay off debt
Successfully paying down debt involves reviewing your spending habits and putting as much money as possible toward your outstanding balances. When you’re making your debt management plan, start by prioritizing current loan and credit card payments in your budget. Then, allocate funds to cover utility bills and other set obligations, such as rent. Next, set aside funds to pay more than the minimum payments on your debt. Paying more than the minimum will allow you to reduce the principal balance sooner and lower the total cost of your debt. Whatever is left after this is what you have available for discretionary spending and other budgetary items such as groceries, gym memberships, subscriptions and more.
3. Try to pay off smaller debts first
Try to reduce the number of payments you are making each month by eliminating smaller balances first. When you pay off smaller-balance debt early, you can reduce your total monthly payment obligations. Then, you can reallocate funds which previously went to those bills to pay down other debts. Watching your total number of payments or debts decrease can lower stress and is often satisfying and empowering – even more so when you can say a complete debt is paid versus a monthly payment made.
4. Put more money toward high-interest debt as your total debt load decreases
After you pay off your smaller debts, refocus your attention on any high-interest debt you have, such as credit card debt. The more quickly you can pay off high-interest debts, the less you’ll pay in interest over the length of your repayment. By tackling this debt, you may be able to save more over time.
5. Try to use cash – not credit – to make purchases
Paying down debt is easier if you are also able to limit your accumulation of additional debt. To resist the temptation to overspend, try to avoid carrying your credit cards with you on a daily basis. This will allow you to curb impulse buys and provide time to consider any non-essential purchases more carefully. If you do choose to use credit for a purchase, monitor your balance to keep it to an amount you are able to pay off in full each month. This will help you avoid high interest rates on your next bill.
6. Use automatic bill pay to your advantage
Once you’ve established your budget, setting up automatic bill pay for student loans, car loans, a mortgage or other debt is an easy way to ensure you never miss a payment and stay on track with your debt management plan. If possible, time these automatic payments to hit your account the day after you receive your paycheck – your debts will get paid regularly, and you will be less likely to spend money allocated for paying down debt on anything else. Just make sure you have overdraft protection set up in case of an emergency or a delay between your deposit and withdrawal.
7. Explore options for lowering your interest rates
When you’re paying down debt, it could be helpful to call your current lenders and make sure you are getting the lowest rate you qualify for. If you have student loans, you could use our Education Refinance Loan® to lower your monthly payments through refinancing or consolidation. With respect to credit cards, keep your eye open for card offers with a balance transfer option and lower rates than your current card. Transferring a balance to a lower-interest card can help you pay off debt faster because you will be charged less interest on an annual basis.
8. Use extra cash to reduce the principal on outstanding loans
If you’re trying to curb discretionary spending, make a deal with yourself to reallocate that money toward debt reduction instead. Each time you choose not to spend money on something – a cup of coffee, new pair of shoes, the latest video game, etc. – you can use the funds to pay down your debt instead. When you forego a discretionary purchase, be sure to write down the total. If you have room in your budget, you can add up the savings and send an extra payment to your lender. It’s a simple, but effective, way to pay off debt.
9. Make monthly savings part of your debt management plan
In addition to a solid debt management plan, setting up an emergency savings account can help you avoid relying too heavily on credit during an unexpected event in the future. If possible, look into using direct deposit to have a portion of your income directly allocated into your emergency savings account each pay period so the payment to your savings is automatic. Opening other savings accounts can also help you reduce your debt for planned future purchases. If you can make regular contributions to a designated account with an automatic savings plan, you can reduce your need for financing when you buy a home or car, or even go on vacation.
10. Avoid borrowing too much or too often
The best way to avoid falling into debt is to make a firm rule to not borrow more than you can comfortably afford. While you might get approval to borrow a higher amount on a house or a car, if the payment stretches your monthly budget thin, you should move forward cautiously. As noted above – this is particularly important with high-interest credit card bills. Ideally, paying off your credit card bill each month should fit smoothly into your budget.
Find out how Citizens Bank can help with your debt management plan
If you have questions about managing your money and creating a plan to pay off debt, we’re here to help. Contact a Citizens Bank representative to learn more about your savings options, developing a debt management plan or opening a savings account to help you meet your financial goals.