The average household debt in the U.S. is $129,579 according to Nerd Wallet, which includes credit card debt, student loans, mortgages, and car loans. Carrying debt is not only a stressor that can lower your quality of life, it can also affect your credit, making it hard (sometimes impossible) to get a mortgage, car loan, or credit card. It can even affect your ability to get a job, as many employers look at credit reports during the hiring process.
The goal is to eliminate debt completely, but if that seems out of reach – say, you have $40,000 in debt but only make $30,000 in a year – you can still take steps towards to actively reduce improve your financial situation and working towards that eventual goal.
“Good Debt” Versus “Bad Debt”
Debt is debt, right? Yes and no. All of it is money you owe, so it’s hard to think of any debt being “good.” But there are certain kinds of debt that are considered less desirable than others.
School loans and mortgages are considered “good,” while credit card debt and car loans are “bad.” And credit card debt, which is “revolving debt” (meaning that the amount you owe on a card can go up and down over time), affects your credit differently from installment loans, like mortgages and student loans.
Knowing this, your goal should be to tackle whatever “bad” debt you have first. Pay off credit cards and car loans before taking big steps towards lowering your student loan or mortgage balance.
Paying Off Credit Card Debt
Of that average $129,579 debt, over $15,000 is in credit card debt. So if you feel like your Visa balance is a tad on the high side, know you’re not alone.
Pay just $200 per month on that $15,000 debt, assuming a 14.9% APR, and it will take you over 30 years and over $100,000 in interest to pay it off. Really. That’s a lot of money to pay for the privilege of borrowing $15,000! You could buy a Dodge Viper outright for that amount of money, or take a round-the-world cruise in the nicest suite on the Queen Mary 2.
The first step towards getting a handle on your credit card debt is knowing what you owe to whom and what the APR is for each card. You can always call your credit card company and ask if they can lower your rate; sometimes this simple trick works. You might also look into doing a balance transfer, where you transfer money from a card with a higher APR to a card with a lower APR, saving you money in interest.
Those tactics just delay the inevitable, though. The goal is to pay the debt down. One popular method is the “debt snowball,” where you make minimum payments on all your cards except the one with the smallest balance, and pay that off first. Once it’s paid off, you can apply the money you had been putting towards that card to the card with the next highest balance, and so on, until they’re all paid off.
The other method is to pay off the card with the highest APR first, regardless of the balance. From a numbers perspective, this makes more sense, as you’ll save more in interest over time. If you think you’ll find more motivation with the “quick wins” from the debt snowball method, try that instead.
Qualifying for Forgiveness On Student Loan Debt
It’s practically a given that students will take out loans to finance their studies, given the high costs of education today. The average student graduating in 2014 owes close to $30,000, according to The Institute for College Access Success.
Unlike credit card debt, student loan debt is generally not discharged in bankruptcy, meaning you will have to pay them off, no matter what. If you don’t relish the thought of paying them off for the next several decades, look into student loan forgiveness programs. If you have certain federal student loans and you qualify, you can have a portion or the balance of your student loans forgiven after a period of time. The Public Service Loan Forgiveness Program, Teacher Loan Forgiveness, and Teacher Cancellation programs are open to people in certain public service jobs.
Other programs like the Income-Based Repayment Plan and the Pay As You Earn Repayment Plan forgive your student loan balance after 25 or 20 years of qualifying payments. Finally, people in the military should look into programs that were created specifically for the military.
Paying Down House and Car Loans Faster
A mortgage is likely the largest loan you’ll ever take on in your life. Unless you win the Powerball, you probably won’t be paying it off entirely this year. But even making some small extra contributions towards your mortgage each month can save you years of payments and thousands of dollars in interest.
For example, let’s take a loan balance of $333,182, the average loan amount in December 2016 according to the Mortgage Bankers Association. At 3.8% on a 30-year, fixed-rate mortgage, making a minimum monthly payment of $1,550, the amount you’ll pay in interest is a staggering $225,710. Ouch!
But add just $50 to that monthly payment – the average cost of a meal for four at Applebee’s – and you’ll reduce the time you have to pay off your mortgage by 1 year, 8 months and pay $14,481 less in interest over that time. For just $50 extra per month! Make that $250 instead of $50, and you’ll save 6 years, 9 months and $57,024. Just make sure any additional payment goes towards the principal. (For other amounts, play around with this additional payment mortgage calculator.)
The same holds true for car loans. The more you can pay on a regular basis, the faster you’ll pay it off, and the less you’ll pay in interest. Calculate how much you can save.
Taking the First Step
Make this the year you decide to take control and reduce debt. Every step you take will move you towards the goal of being debt-free.