If you’ve run up big credit card bills or taken on too much other debt, here are three smart ways to start chipping away at your balances.

Pay off your highest-rate debts first.  While making the minimum monthly payments on all your debts, pay extra on your highest-rate debt until you eliminate your outstanding balance. A debt reduction calculator can help you figure out which debt to pay off first and how much to pay monthly towards all your loans.

Once you’ve paid off your highest-rate debt, shift that fixed monthly payment to your next highest debt. With these steady payments, you’ll pay down your debt more quickly and save a bundle in interest.

Consider paying off a high-interest rate loan in one shot.  If you’ve built up some relatively high-interest rate debt, like a credit card balance of several thousand dollars, think of ways to raise money to pay it off all at once.

Or consider dipping into any savings you have, since the interest you’re paying on your credit card is costing you a lot more than you’re earning on your savings account.  Either way, commit to not rerunning up your debt and concentrate on building or rebuilding your savings account as soon as possible.

Cautiously consider consolidating your loans.  If you have high-interest debt, such as large outstanding balances on several credit cards, look into combining them into one lower-rate credit card or loan. Make your not-for-profit credit union your first stop, and avoid high-interest rate consolidation loans from finance companies.

Then make your best efforts to redirect the money you’re saving in interest toward paying down the loan principal.  Meanwhile, don’t run up new bills or you could end up even deeper in debt than you were before.

If you’re a homeowner, another option is to consolidate your debt into a home-equity loan. This may seem like an attractive option since the interest on the first $100,000 borrowed is generally tax deductible. However, you may be swapping short-term debt for long-term debt, which means you’ll end up paying a lot more in interest over the long run.

What’s more, you’re putting your home on the line. So if you go this route, get serious about repaying the loan as soon as possible and commit to not running up additional debt.
 

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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