- 1 Paying off Credit Card Debts
- 2 Using Balance Transfer Credit Cards
- 3 Taking Out a Consolidation Loan
- 4 Paying off Cards Using Debt Avalanche
- 5 Paying off Cards Using Debt Snowball
- 6 Paying off Cards Using Debt Blizzard
- 7 Types of Loans
- 8 Paying off Personal Loans
- 9 Paying off Installment Loans
- 10 Paying off Payday Loans
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Millions of Americans are familiar with the challenges of dealing with debt. Taking out a loan is a common practice when paying for school, medical bills, or starting a business. However, if left unchecked, your loan obligations can spiral out of control and leave you in a difficult financial position.
If you have recently made the decision to tackle your multiple loan payments, you may be confused regarding which ones should be addressed first and which ones should be handled later. This guide can teach you the correct order for paying off your credit cards and loans.
Paying off Credit Card Debts
Credit card obligations are a growing problem in the country, especially in the wake of the COVID-19 pandemic. Many people relied on credit cards to make purchases after losing their jobs or businesses, but are struggling to pay off their bills fast enough to counter the interest compounding on them.
Let’s look at some strategies that could help make this repayment process easier for you.
Using Balance Transfer Credit Cards
If your credit card balance is rapidly accruing interest, you should try transferring to a balance transfer card. These are special credit cards that offer a 0% APR for the duration of a promotion period.
You can move the balance from your existing credit card to this new card for a balance fee between 3% and 5%. This frees you from the burden of having to pay interest on your debt for a limited period. This strategy is advantageous if you can pay off your debt before the promotion period ends.
You will need to possess a good credit score to qualify for a balance transfer card. Card companies usually issue these cards to applicants with scores higher than 740.
If you do manage to secure a balance transfer card and transfer your debt to it, you will need to pay off the balance before the promotional period ends, or you will be subjected to very high interest rates. For this reason, balance transfer credit cards may not be a suitable option for everyone.
Taking Out a Consolidation Loan
If your credit score isn’t high enough to qualify you for a balance transfer card, you should consider taking out a consolidation loan. These are special loans used to pay off multiple high-interest credit card debts at once.
You will still need to pay interest on your new loan, but the rate may be lower than that of your previous credit cards. In addition to this, you will need to make only one payment per month. This makes a consolidation loan easier to manage than multiple credit card debts.
Paying off Cards Using Debt Avalanche
Before starting the process of paying off multiple credit card debts, you should aim to pay off the card with the highest APR. You can then focus on paying off the card with the second-highest APR, and so forth.
This strategy is known as “debt avalanche” and is useful for reducing the amount of interest owed when paying off multiple credit card debts.
Paying off Cards Using Debt Snowball
Debt snowball is similar to the aforementioned debt avalanche. However, in this strategy, debtors pay off the credit card that has the lowest balance. They then tackle the card debt with the second-lowest balance, and so forth. APR isn’t usually a consideration when using the debt snowball strategy.
You may end up paying more interest by following this approach. However, it is useful for rapidly reducing the number of debts you owe.
Paying off Cards Using Debt Blizzard
The debt blizzard strategy is a combination of debt avalanche and debt snowball. In this method, debtors start by paying off the debt with the smallest balance. They then focus on paying off the card that features the highest APR. This is then followed by the card with the second-highest APR and so forth.
This strategy helps you reduce the number of debts faster while also saving on interest charges.
Types of Loans
Many Americans are burdened with loans taken out during periods of financial difficulty or to pay for their education. All loans can be categorized as either secured or unsecured loans.
To apply for a secured loan, you typically need to put up some type of collateral, such as your house or car. These loans are usually low-interest, but failing to make your payments in time may result in you forfeiting your collateral.
Unsecured loans feature higher interest rates, but you do not need to put up collateral to qualify for one.
The three main types of loans issued are personal loans (usually used for debt consolidation), payday loans, and installment loans. Each of these requires a specific strategy to pay off. Let’s look at how each one should be handled.
Paying off Personal Loans
People often take out personal loans when they have a large expense to make. These loans can be secured or unsecured, and are usually offered at low interest rates, as long as you have a good credit score.
If you believe you can pay off your personal loan within a period of 18 months, it may be worth applying for a balance transfer credit card. This strategy saves you from paying interest on your balance during the 18 month 0% APR period.
Paying off Installment Loans
Installment loans are fixed interest rate loans that can be secured or unsecured. The payback period for these loans can vary significantly, so you should make sure to pick one you can manage.
If you have taken out a secured installment loan by using your car as collateral, you will need to keep up with payments or risk losing your vehicle. If you are struggling to pay your bills, you should contact your lender and discuss a more manageable payment plan.
Paying off Payday Loans
Payday loans are unsecured loans that are easy to get. However, they are offered with very high interest rates. It’s not uncommon for payday lenders to provide these loans at an APR over 300%.
If you have multiple loans to manage, you should aim to pay off your payday loan first, as the interest charges on it can add up very quickly.