Last fall, studies showed that Americans had amassed $14 trillion in mortgages, credit cards, student loans, and other forms of debt. While mortgages made up the largest portion of that debt, student loan debt and credit card debt are also major factors in US consumer debt as well.
If you’re like many other Americans and have a debt to pay off, it’s important to take a look at a debt payoff calculator to figure out how much your debt is costing you in accrued interest. It’s hard to decide how to pay off debt if you don’t understand how much you owe first.
We’ll walk you through some steps to consider when paying off debt, including calculating your total debt owed and figuring out interest rates for each loan, to help you decide which debt to pay off first.
Step 1: Use a Debt Payoff Calculator Calculate Your Total Debt & Payments
It’s time to sit down and take a good hard look at your total debt. In one spreadsheet, or wherever it helps you most to compile the numbers, write out every single debt you owe. This includes student loan debt, auto loan debt, credit card debt, and definitely and mortgage loan you’re still paying off.
When you write out each debt item, be sure to make a column for the total balance, the interest rate, and the minimum monthly payment. Then, with those numbers in mind, look at your own income and personal budget. How much do you have to spend on paying off debt each month?
If possible, try to find ways to cut back on other expenses in order to put more of your cash towards paying off debt faster. Look at a debt payoff calculator and crunch some numbers to see what you could do if you just used another $500 or even $100 a month to pay off a smaller loan.
Step 2: Consider the Debt Snowball or Debt Avalance Strategies
Now that you have a good idea of what your debt looks like and which loans are causing you the most trouble (financially and emotionally), you’ll want to see which debt repayment strategy works best for you, your lifestyle, and your financial situation.
The debt snowball strategy is hailed by financial experts as being one of the best repayment strategies for those with more than a few loans to pay off. Following the debt snowball strategy, you make the minimum payments on all of your loans except for the smallest loan. On that loan, you pay as much as possible each month. This strategy is best for those who need psychological wins (i.e. the boost of seeing a loan completely paid off) to remain motivated.
The debt avalanche strategy is a strategy in which you focus on paying off the loan with the highest interest rate first. Similar to the snowball strategy, you make the minimum payments on all of your loans. However, in the avalanche strategy, you pay as much as you can additionally on the loan with the highest interest rate. This is better if you have a lot of high-interest loans or simply want to eradicate your debt as quickly as possible.
Aside from these two strategies, you can also come up with your own that makes more sense for you either financially or emotionally. Debt tsunami is a strategy, for example, that refers to paying off debt according to which loans stress you out the most.
Step 3: Factor in Your Credit Score
The key to deciding which debt to pay off first lies in establishing your financial goals. Are you trying to pay off debt as fast as possible, get rid of a certain loan, or maybe even lower your credit score? Whatever the answer is, it’s always important to factor in your credit score when figuring out which debt to pay off first.
This is especially true if you’re considering purchasing a home or want to take out an auto loan in the near future. Why? Lowering your credit utilization rate will positively impact your credit score. And, you’ll need that if you’re looking to get a loan or at least good interest rates. This means that if you have credit cards that are near their credit limit, you’ll want to pay those off first to lower your credit utilization ratio and therefore boost your credit score.
Stay Motivated to Improve Your Credit Score
Staying on top of debt and paying it off is rarely fun, but the rewards are great. If you find that you need help staying motivated, it’s great to get a friend or partner involved in the process. Share in your successes and help keep each other motivated to continue on your financial journey.
Not sure how? Float can help. It’s the first credit monitoring app that allows you to share your credit score with others. You choose how much information you want to share, whether that’s your credit score, a credit range, or just an emoji that indicates a range.
Sign up today to get started tracking your credit score. Watch your wins and let others celebrate you with them too.