Smart ways to pay down debt

The Federal Reserve cut interest rates on Wednesday for the first time this year, providing some relief to consumers facing high borrowing costs on credit cards and other loans. Still, it can be a tough road ahead for many consumers, regardless of their income, as they strive to make a dent in their debt payments. 

To break the cycle of debt, experts say,  it helps to understand the conduct that led to the debt. 

Often, “it’s tied to emotional spending,” said Jack Howard, head of money wellness at Ally Bank. She said that overspending can stem from either scarcity or abundance, as well as a lack of understanding of one’s own finances. 

If you’re struggling to pay down credit card and loan balances, the first step is to understand how much debt you owe and the behaviors that got you there, Howard said. 

Once you have a list of your debt and the interest rates on those balances, consider these three strategies to help shrink your debt:

Create a budget, understand your monthly income, and track your expenses. 

“Whether you are a school teacher, or a firefighter, or an executive working in a consulting firm, 50% of Americans today don’t have a budget,” said Mike Croxson, CEO of the NFCC, an organization of non-profit credit counseling agencies. “Have a budget. Understand what you can afford to pay, what you cannot afford to pay.”

Be ruthless about cutting out unnecessary expenses. Limit food delivery services and consider low-cost ways to spend time with friends, like volunteering together or going for a hike. 

“You want to have that connection, but it’s often tied to dollars, so thinking of creative ways to still have those experiences without spending a lot of money,” Howard said.

Use the cash you save by cutting out expenses to pay down debt.

You can often negotiate a lower interest rate from credit card lenders. Most cardholders — 83% — who asked for a lower rate in the past year received one, according to a recent LendingTree survey. 

Pay more than the minimum and automate the payments to ensure they’re made on time.

A balance transfer may be a good option if you can pay off the debt within the introductory 0% annual percentage rate offer, which usually lasts from 12 to 21 months. You must also pay a balance transfer fee, which is typically 3% to 5%.

Howard also recommends building your emergency cash reserves so that you’re less likely to use a credit card for unexpected expenses. “Instead of using the credit card, we’re going to that emergency fund to help fill in those gaps,” she said.

As the Fed cuts interest rates, borrowers with variable-rate private student loans may automatically get a lower interest rate. Federal student loan rates are fixed and only reset once a year on July 1, so most borrowers won’t be immediately affected by a rate cut.

For private and federal loans, making more than the minimum payment can save you money in interest and can be key to reducing the debt, experts say.

Also consider refinancing private loans to a lower rate to make payments more affordable. Experts usually don’t recommend refinancing federal loans into a private student loan, however, because federal loans offer borrowers more protections.

Although it is more challenging these days, borrowers with federal loans may still be eligible for an income-driven repayment (IDR) plan. An IDR plan bases your monthly student loan payment amount on your income and family size. For some people, payments on an IDR plan can be as low as $0 per month. 

To avoid defaulting on your federal loan payments, go to studentaid.gov to find a repayment plan that works best for your budget. 

Student loan debt “can be so overwhelming, the amount, that people become paralyzed by it,” Howard said. “Shift from feeling paralyzed to understanding the numbers and having an action plan to pay it off.”

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