How Should I Pay Off Debt?

Let’s be honest. Everyone today has debt. But when it spirals out of control, it can be devastating. If you feel as though your entire life exists only to pay debt, then you may need help on how to manage it. Have no fears because you have options. And you just need to figure out which are best for you.

Should I Pay the Original Creditor or Wait Until my Debt is Transferred to Collections?

If you have not gone to collections yet, it is in your best interest not to. Going to a collector will hurt your credit score—and the recent FICO changes mean that it will hurt your credit score even more than it would previously, Market Watch reports. But that does not necessarily mean that you need to pay off the creditor in full.

You can always ask the creditor for a settlement which is lower than the original loan amount. Creditors may be willing to settle your debt for a fraction of what you owe. But FICO just updated its credit scores — here’s how to improve yours you may have to pay the negotiated amount in full in a shorter amount of time and/or at the time the settlement is made.

Can I Pay Off Debt With a Credit Card?

It exclusively depends on the type of debt that you have. Mortgage payments and student loans are types of debt you cannot pay with a credit card. Also, you cannot pay one credit card off by using another credit card. Even in those instances where you can pay off debt with a credit card (such as a debt  collection agency), it is not wise to do so because it will not reduce the amount of debt you owe.

Alternative Payment Options for Your Debt

Looking for alternative ways to make paying off debt more reasonable?  Check out a few options below:

• Home loans — If you are finding it difficult to keep up with monthly payments then consider refinancing your home loans to reduce the monthly payments.
• Student loans — If you have student loans, you can apply for an Income Based Repayment plan under the government’s Student Aid Program, which aims to lower monthly payments and eventually forgive your loans.
• Credit cards — Did you know that it is possible to settle credit card debt for a percentage of what you owe?  You can negotiate a deal if you approach it with some knowledge and determination, says The Balance. Another option is consolidating your credit card payments into a personal loan if the terms are favorable, Business Insider explains.

The longer you have any type of debt, if you are incurring interest, then you will pay more the longer you have a balance because you will pay both principal (original loan amount) plus interest.

Paying Secured vs. Unsecured Debt

Secured debt is debt that is backed or secured with some collateral. This reduces the risk associated with lending the money to you in the event you are unable to repay the loan.  Mortgages and car loans are secured. Many people are interested in paying off secured debt before unsecured debt in order to not have their assets seized due to lack of payment. If you do not pay your mortgage then your house could be foreclosed. If you do not pay your car loan, then your car could be repossessed.

Student loans are considered unsecured debt. Unsecured debt is not secured with collateral and therefore lack of payment does not necessarily mean that your assets will be seized. However, lack of payment on unsecured loans will still impact your credit score negatively and you will have to answer to your creditors. When prioritizing which debt to pay, paying secured debt first is essential.

Tips for Paying off Debt Faster

So, you have debt and are making monthly payments. But let’s look at other life changes and tools available to help you pay off your debt sooner.

• Best practices. Spending less on discretionary expenses will allow you to have more money to put towards your debt monthly. One way to determine how much cash you can free up would be by creating a budget.  Budgets allow you to know what money you have coming in and what money you have going out.
• Financial tools. Calculators and other financial budgeting tools will give you information on how much you need to save every month to start paying down your debt faster.
• Credit cards. Credit cards can be used to resolve some debt, but it is crucial to recognize that it is only going to buy you a small amount of time. If you have a significant obligation like a medical bill, it may be better that you negotiate with the creditor instead of using a credit card.
• Sell the house. In this case, you may be able to clear off a large amount of your debt immediately by selling your home.  However, make sure selling your home is going to save you money long-term compared to renting property.
• Investing. It can give you more money to spend on your debt, though you need to be prudent and careful. All investing comes with some level of risk.
• Earning extra income. Sometimes, people will get a second job until they can become debt free. A second job can alleviate a lot of your financial worries, at least temporarily.
• IRS refund. Every year, many people get a significant amount of money back from the IRS. Using this towards debt is a great way to start the year in the right direction.

There are many options for paying off debt sooner. But if you do not have any income then  managing your debt can be a bit more challenging.

What if I Am Unemployed?

If you are unemployed, you may not feel capable of continuing to pay towards your debt or getting it under control. But there are still some things for you.

• Refinancing. You may be able to refinance your mortgage loan at a lower interest rate, so that payments are more bearable. If you have ten years remaining on your mortgage, you can refinance for 20 and cut your payments nearly in half.
• Loan forgiveness. If you genuinely cannot pay your loans without hardship, there is usually some method of loan forgiveness open to you, according to Credit Karma. Take a look at your options with your creditor. Debt forgiveness may be challenging receiving if you do not have proof of income.

Do not forget that you may also be able to apply for unemployment in order to receive some source of income.

What Happens If I Don’t Pay?

Not paying your debt can lead to severe adverse actions such as foreclosure and repossession. You will see your credit score go down, and you may be unable to procure additional credit / loans in the future. Furthermore, you will likely see other effects such as not being able to rent or even pass a background check for a job, due to your credit score.

Learn more about your options in our How-to Super Guide to Pay Off Debt.

Start Little by Little

Debt can feel inescapable, but there are many options available for you. Debt forgiveness, debt consolidation, refinancing and debt calculators are some financial tools that you can use to help you overcome your debt.

Whether it is to bolster your income with a second job or start investing more prudently to offset your debt payments, you should be able to find a way to build net worth again. The first thing you need to do is to review all of your debt and understand how much you owe. Then create a budget in order to know where your money is going so that you can begin telling it where to go.