Here’s an interesting statistic: According to NerdWallet’s Annual American Household Credit Card Debt Study, the average American household is spending $6,658 in interest payments annually — fully 9% of the average household income. Sure, that’s not all credit card debt, which is among the most financially dangerous debt to have, but among households with debt, the average credit card balance owed was recently $15,355. It can seem like an impossible task to rid yourself of debt. But it can be done. Here are five smart ways to go about it.
1. Cut the cable cord — or at least shave it
Beth McKenna: Most folks are going to have to cut back on spending to free up money to pay off debt. Be bold and go for a big cutback, knowing it doesn’t have to be permanent: What’s your largest monthly bill that isn’t a necessity?
For many people, their largest monthly bill is one for pay-TV (cable or satellite). The average monthly cable bill in the U.S. hit a record high in 2015 of about $100, while the average pay-TV bill was nearly $125. Cable bills have increased at least four times the rate of inflation since 2011, and there’s no end in sight for rate hikes.
Thanks to high-speed Internet, streaming options such as Netflix and Amazon.com‘s Prime Video make it easier than it’s ever been to cut the cable cord or at least shave it, by replacing your pricey expanded cable package — which likely has a gazillion channels you never watch — with a slimmer bundle that contains at least some of your favorite channels. (If that beast doesn’t exist, be on the lookout for it to appear, as these offerings continue to roll out.) Netflix’s basic service runs $9.99 per month, while Amazon’s Prime costs $99 per year— or $8.25 per month— and also includes other goodies such as free two-day shipping.
Besides freeing up money, cutting down on TV watching will free up a lot of time for most Americans. If you have kids, having them spend less time being passively entertained by TV will benefit them in intellectual, emotional, and physical ways, according to countless studies.
2. Work the debt snowball
Brian Feroldi: I’m a firm believer that financial advice personality Dave Ramsey has developed the best process for helping the average person to become debt-free. Ramsey instructs his listeners who are in debt to list all their debts from smallest to largest. Once that task is complete, pay the minimum amount on all debts and put all excess capital toward knocking out the smallest debt first. Once that debt is completely paid off, focus on the second-smallest debt, and keep repeating this process until you are finally debt-free.
Believe it or not, mathematically speaking this is actually not the smartest way to pay off debt. (For a smarter way, keep reading.) However, Ramsey has found that when you focus on the smallest debt first, you start to see results from your actions quickly. This provides a fast feedback loop that proves your process is working, which makes it far easier for you to stay motivated enough to see this process through all the way to the end.
Depending on your starting point, using the debt snowball could take anywhere from a few weeks to a few years to complete, so staying motivated enough to finish is by far the most important factor involved if you really want to reach your goal. That’s why I’m a believer that working the debt snowball using this method is the best way to go.
3. Focus on interest rates, and consider consolidating
Matt Frankel: I like Brian’s strategy of paying off smaller debts first, but don’t forget to consider the interest you’re paying. Specifically, if your smaller debts have lower interest rates than your larger ones, it doesn’t make good financial sense to pay them in size order.
One of the smartest and most effective ways to get out of debt is to make sure as much of your money goes to paying down your principal, not interest. If you have high-interest credit card debt, it may be a good idea to transfer your balances to a card with a 0% introductory APR while you aggressively pay them off. My favorite example is the Chase Slate, which has a 15-month 0% APR period, and doesn’t even charge a fee for balance transfers completed within 60 days of opening the account.
Or, if you need more time, you might consider a consolidation loan. Peer-to-peer lenders have made this option more accessible and are likely to charge lower interest rates than your credit card issuer. A home equity loan or line of credit can be another good option— as of this writing, banks are offering home equity lines of credit with APRs of less than 7%, which can save you lots of money over most credit cards’ interest rates.
The more of your payments that go toward the principal, the faster you’ll get out of debt. So get rid of your high-interest rate debts first.
4. Look into loan forgiveness
Brian Stoffel: Today’s graduates are part of the first generation to bear a huge financial burden upon leaving college. But they may be able to get at least some of this debt forgiven — typically by agreeing to work in some type of public-service role.
If you are a teacher, you can get up to $5,000 in federal loans forgiven if you teach for five full and consecutive years at a high-needs school and are not in default on any of the loan payments in the first five years after graduating. And if you’re a teacher looking to get even more debt forgiven, there’s a $17,500 program for math, science, and special education teachers.
Teachers, however, aren’t the only profession to benefit from loan forgiveness. In fact, anyone who works full-time for 10 years at a federal, state, or local government; a non-profit that qualifies for 501 (c)(3) tax-exempt status; or a qualifying non-tax-exempt non-profit that provides a public service is eligible. If these folks have made all of their student loan payments for 10 years, the balance of their loan can be forgiven! For more information on such programs, see an earlier article I completed on the subject here.
5. Give up the plastic
Selena Maranjian: One effective tactic as you work to rid yourself of debt is to give up plastic. Stop carrying those tempting charge cards in your pocket or purse — and pay with cash whenever possible. Studies have shown that we tend to spend more when we use plastic. Why? Well, we feel the pain, the loss of money, less when we do so. You might think twice before spending $5 on a coffee or some other treat if you only have a $10 or $20 bill in your pocket, but if you have a charge card with a $20,000 credit limit, what’s $5?
Some folks in debt will go as far as cutting their charge cards in half and throwing them away. Others will just leave them in a desk drawer. A more creative in-between solution is to freeze your cards in water and keep them in your freezer. That will make it hard for you to whip them out for an impulse buy.
You will likely miss the convenience of credit cards — and the helpful monthly statements that can show you just where your money is going. But there are upsides to spending with cash, too. For starters, your purchasing patterns will be harder to track. Your card isn’t likely to be stolen and misused if you’re not carrying it. And you’ll be kinder to small businesses by paying with cash, as they won’t have to pay merchant fees to the charge-card company if you don’t pay with plastic.