Debt is beginning to climb to all time highs in our country. According to CNBC Consumer debt and credit rose 1.7% in the first quarter to $15.84 trillion, which is a new record. Student loan debt climbed by $14 billion in the first quarter, bringing the annual increase to 6.5%. The rise in total household credit was propelled largely by a $250 billion increase in mortgage debt, which now stands at $11.18 trillion, an increase of 10% from the first quarter in 2021.
Credit card balances fell during the three-month period by $15 billion but still remained $71 billion, or about 9% higher than they were for the same period a year ago. Auto loan originations declined in the first quarter, after what the New York Fed described as “a historically brisk 2021,” in which used vehicle prices soared by nearly 27%.
The acceleration in debt overall comes with consumer price inflation up by 8.5% over the past year through March and with interest rates surging to multiyear highs.” As a country our debt is spiraling out of control and although inflation, the war in Ukraine, and bad policies have added fuel to the fire, we must create a plan to address our debt individually.
As young professionals, waiting for politicians to help us is not going to get it done. While doing some research I found some commonly asked questions about debt. Paying down debt is part of our journey to financial independence as young professionals. The media won’t be covering these questions, so we will do it here.
10 commonly asked questions about paying down debt
What are the 2 most common methods for paying down debt?
The two main methods for paying down debt are the debt snowball method and the debt avalanche method. Both methods have a similar plan but start at different points of the debt owed. When we use the debt snowball method, we focus on paying off our smallest debts first. Once our smallest debts are paid off, we move on to paying off our next smallest debts, and so on. I like this method because you see results more quickly.
When we use the debt avalanche method, we focus on paying off our debts with the highest interest rates/balances first. This method saves money in the long run because you pay less in interest overall. The downside is it may take longer to see results since you’re not paying off smaller debts first.
Currently I am using the debt avalanche method to pay down my credit card debt. Its best to create an excel spreadsheet to keep track of your progress because looking at credit karma can make you anxious waiting to see your recent payment reflected.
Is it better to take out a loan to pay down debt or pay off the debt yourself?
This is a really great question! However, there is no easy answer when it comes to whether it is better to take out a loan to pay down debt or pay off the debt yourself. It depends on a variety of factors, including your overall financial situation and your ability to repay the loan.
If you can get a low-interest loan and you have the income to make the payments, paying off your debt with a loan can be a good option. This is especially true if the interest rate on your loan is lower than the interest rate on your credit cards or other debts.
However, taking out a loan can also be risky. If you are not able to make the payments, you could end up even further in debt. Before taking out a loan to pay off your debt, be sure to do your research and understand the terms and conditions. Also speak with a financial advisor to get guidance on whether this is the right option for you.
What are some disadvantages of paying down debt?
When we pay down our debt it can be a good way to improve our financial situation, but there are some potential disadvantages to consider. For example, if we have a lot of debt, paying it down may require us to make major changes to our lifestyle. We have to scale back on eating out, traveling, and shopping. This can be difficult and may seem impossible for some of us. Additionally, paying down debt can take a long time. Some plans can take 3-10 years depending on how much debt you owe. While paying down the debt you may end up paying more in interest than you would have if you had kept the debt. Lastly, if you take out a loan to pay off your debt and you’re unable to make the monthly payment, you can possibly damage your credit score and make it more difficult to get loans in the future.
What are 12 common mistakes made when trying to get out of debt quickly?
1. Not having a plan
This is the top mistake made. We must create a plan. It is difficult to pay down debt if we don’t have a plan. Without a plan we can easily get sidetracked or discouraged. Make sure you know how much debt you have, what your budget is, and how much you can realistically pay each month.
2. Not prioritizing
Our high-interest debt should always be a priority. Paying down high interest debt will save you money in the long run. Likewise, paying off smaller debts first can also be helpful in boosting your motivation. Remember our 2 most common methods used to pay down debt are the avalanche method and snowball method.
3. Missing payments
Missing payments can result in late fees, higher interest rates, and damage to your credit score. Stay on top of your payments by setting up automatic reminders or paying more than the minimum each month.
4. Using the wrong credit card
It can be tempting to use credit cards to pay off debt, but this can make the situation worse. Not only will you accrue more debt, but you’ll also likely end up with a higher interest rate. If your plan is to pay down your balance using a credit card. Use the correct card. Balance transfer credit cards can be used to pay down amounts owed with lower interest. Please be sure to do your research to find out which card is right for you.
5. Refinancing
Refinancing may lower your monthly payments, but it can also extend the life of your loan and end up costing you more in the long run. Make sure you understand the terms of any refinancing agreement before signing on the dotted line.
6. Taking out a loan
Taking out a loan may be necessary in some cases, but it’s important to understand the terms and conditions before doing so. Make sure you can afford the monthly payments and that the interest rate is reasonable.
7. Consolidating debt
Debt consolidation can be a helpful tool, but it’s important to understand how it works before moving forward. In some cases, consolidating your debt can end up costing you more in interest and fees.
8. Making minimum payments
Making only the minimum payment each month will prolong the life of your debt and end up costing you more in interest. Try to pay as much as you can each month to get out of debt sooner.
9. Ignoring your debt
Ignoring your debt won’t make it go away. In fact, it will only make the situation worse. The sooner you face your debt head-on, the better off you’ll be.
10. Borrowing from retirement
Borrowing from retirement should be a last resort, as it can put your financial security at risk. If you do decide to borrow from retirement, make sure you pay the money back as soon as possible.
11. Using a home equity loan not understanding the risk
Using a home equity loan to pay off debt can be helpful in some cases, but it’s important to understand the risks involved. If you can’t make the payments, you could end up losing your home.
12. Filing for bankruptcy
Filing for bankruptcy should only be done as a last resort, as it can have a major impact on your credit score and financial future. If you do decide to file for bankruptcy, make sure you understand the process and the implications beforehand.
How can we pay off debt in a year?
A follow up question is “How much debt are we talking here?” Is the debt $1,000-$10,000? Is the debt over $100,000? What is your current income? It can be difficult to pay off $150,000 worth of debt on a $35,000 salary. If the debt is under $25,000 the easiest way to pay off that amount in a year is to increase your income and use the extra income to pay down our debt. Another is to pick up an online skill that can be scalable. For example, drop shipping, Amazon FBA, Virtual assistant, or even creating a blog can create some income to help you pay down your debt monthly. Another way we can pay off debt in a year is by moving in with family/friend. By moving in with a family/ friend we might still need to help cover some cost/ rent however we can save money and use a chunck of our paycheck to pay down our debt. This is one common method I learned some college students use to pay down their student loan debt.
What is a debt calculator?
A debt calculator is a tool that can help you figure out how to pay down your debt. It can show you how much money you need to pay each month to reduce your debt within a certain time frame. A debt calculator can also help you create a budget and track your progress in paying off your debt.
Some websites to find debt calculators are
- www.calculator.net
- www.calculators.org/debt
- https://www.ramseysolutions.com/debt/debt-calculator
- https://financialmentor.com/calculator/debt-calculator
What to do when you are drowning in debt?
First things first please don’t be too hard on yourself and understand that you are not alone and this is not your end all be all. In fact, the average American household has over $15,000 in debt. The first step to getting out of debt is to create a budget. You need to know where your money is going every month to make changes and find areas where you can cut back. Once you have a budget in place, you can start working on paying down your debt. There are a few different strategies you can use to pay down debt. Some of those strategies were listed above and include the snowball method and the avalanche method. If you find that the amount of debt owed is an amount that will be very difficult to pay down, please seek help from a financial advisor or credit counselor.
Is there free money we can use to pay off our debt?
Well, we all thought the stimulus checks were free, but we saw how that ended up. All jokes aside there is no such thing as “free” money when it comes to paying off debt. However, there are a few ways you can get your hands on some extra cash to help put a dent in what you owe. One option is to take advantage of government programs and grants that are available for those who are struggling with debt. These programs can provide you with the funds you need to pay off your debts, but they are often very competitive and have strict eligibility requirements. Another option is you might also be able to get a debt consolidation loan from a bank or credit union, which can help you pay off your debts in one lump sum. This can be a good option if you have good credit and can qualify for a low interest rate. If you are a small business owner, remember there are private grants that can help you pay down your debt. These are typically awarded based on financial need, so you will likely have to provide documentation of your income and expenses to be considered for this type of assistance. Please do not use the grant or loan to buy luxury items. This did not go well for those who used the PPP loan to buy a Lamborghini.
How can we get out of debt with no money?
Getting out of debt with no money is very difficult. If anything, you might be able to pay less. One option is to negotiate with your creditors. You can try to get them to lower your interest rates or agree to a payment plan that you can afford. Another option is to get help from a debt relief organization. These organizations can help you get out of debt by negotiating with your creditors on your behalf or even helping you consolidate your debts into one monthly payment.
How to pay off debt in collections?
Before you pay off debt in collections speak to a credit expert. Also understand that if you pay off the debt in collections the negative reporting can still show on your credit report for 7 years. If you are going to pay off the balance owed, speak with a credit expert and ask if there’s a way to negotiate the amount and if the collector will have the negative item removed from your credit report once paid. Also make sure that the accounts in collections are yours and not someone else’s with a similar name.
Conclusion
As stated earlier the debt in this country is increasing. The national debt is now 30 trillion! Just to put that into perspective the national debt was 3 trillion in 1990 and increased to 6.4 trillion in the fourth quarter of 2002. In 2009 the debt increased to 12.77 trillion dollars in the fourth quarter. We’ve since then doubled the national debt. My skin crawls thinking what the national debt could be in 10 years based on what I’ve been seeing. As a community we must create a plan and find the resources needed to help us get out of debt so that we can invest more in ourselves and gain financial independence.
We hope you found this information helpful. If you have any other questions, please feel free to share them in the comments section below and we will do our best to answer them. Also, be sure to share this blog post with your friends and family – the more people who know about how to get out of debt, the better! Check out my other blog 6 Debt Traps to Avoid.