NerdWallet's Smart Money Podcast - From the archive: "How can I pay off my debt faster?"

Episode Date: January 6, 2020

We'll be back in a few weeks, so here's an episode from our archives that can help you tackle your holiday debt. In the meantime, send us your money questions! Call or text the Nerd Hotline at 901-730-6373, or email [e-mail]. Talk to you soon!

Hey nerds, Sean here. While we're on hiatus, here is an episode from our archives for you. We know a lot of folks are beginning to assess their holiday debt, so hopefully this episode helps you with that. We'll be back in a few weeks with new episodes. And in the meantime, please send us your money questions. You can email them to podcast at nerdwallet.com, or you can text us or leave a voicemail on our nerd hotline at 901-730-6373. That's 901-730-NERD. Talk to you soon and enjoy the episode. Hello and welcome to NerdWallet's Smart Money Podcast, where we answer your money questions in 15 minutes or less. I'm your host, Sean Piles. Before we dive into this week's question, I have a brief announcement.

It is with a heavy heart that I have to tell you, dear listener, that our beloved Dayana Yoakum has moved on to bigger and better things. She will be missed immensely, but fortunately, we have loads of other nerds chomping at the bit to answer your personal finance questions. In this episode, I'll be talking with NerdWallet All-Star Liz Weston. That's me. All right, Sean, what's this week's question? Our question comes from Diane. She says, Hey, nerds. I'm having some trouble with my debt.

I owe around $7,000 on a few credit cards, and I have an $18,000 car loan, and it feels like I'm never making any progress. How can I pay off my debt faster? Paying off your debt can be a really tricky and a really emotional process. So thanks, Diane, for coming to us with your question. That's one big step toward taking control of your debt. Also, you really came to the right place, Diane. Sean here is our resident debt nerd at NerdWallet. Yeah, I've been on this beat for a few years now. And in that time, I've gone through credit counseling, I've attended bankruptcy court, and I've even interviewed this beat for a few years now. And in that time, I've gone through credit counseling. I've attended bankruptcy court.

And I've even interviewed debt collectors and medical bill negotiators, all with the goal of helping give the best advice I can to those who are struggling to manage their debt. So in other words, he has a really weird idea of fun. But he is a man. He's the debt man. So tell us more. Yeah, happily.

So I'm also a columnist for NerdWallet's Millennial Money series with the Associated Press, where I dabble in debt topics as well. And as I mentioned in our episode on student loan refinancing, I'm currently chipping away at my own mound of student loan debt. Yep. Sean has been there, so he's the guy to help you out, Diane. I've lived it. So on this episode of NerdWallet's Smart Money Podcast, Liz and I are going to talk through the three steps to get a handle on your debt. And at the end of the episode, we'll give you the takeaway tips to help you speed up your debt payoff. All right, let's get to it. Okay, Sean, what's the first step someone who's serious about paying off debt should do? Well, first, I think that folks should understand they're not alone in the process here. Carrying debt is really common, even though a lot of folks

might not admit it. And it can be unavoidable. That is so true. For the longest time, wages weren't keeping up with the rising cost of living, especially if you were lower income. And now that median incomes are finally going up, there's still a lot of costs that are rising at faster than the inflation rate. So housing costs, college costs, medical costs, all those things are going up faster than the cost of living. And that can make it really hard to make ends meet. Then when you do have that bill, say you get a medical treatment and you have something that you have to pay, otherwise they won't give you further treatment, you put it on a credit card. And unfortunately, that saddles you with debt. And then it creates a whole spiral here. And it's really tricky. A lot of people just get

stuck in the system and people shouldn't beat themselves up about it. I could go on and on about this, but we only have 15 minutes here. Okay. So what's the first actionable step someone can take? Okay. So it might sound obvious, but first and foremost, you need to understand your overall money picture. That means how much money you're bringing in monthly and how much money you have going out monthly. So a budget. Yeah, basically a budget. And as our avid listeners will know, we're big fans of the 50-30-20 budget here at the NerdWallet Smart Money Podcast. So after you have your budget sorted out, dig deeper into your debt. I suggest making a spreadsheet on your computer

or grab a pencil and paper and write out each of your debts. List the current balance, the interest rate, minimum payment, and loan term if you have one, like Diane would on her auto loan. You might not know this stuff off the top of your head, but you can call your lender or you can check your account online and see these details. It really helps to know them. Now, step two. This is the choose-your-own-adventure part of the debt journey. Here, you find your debt payoff path. Okay, so what options do people have? Well, a lot, actually. Everything from DIY methods to debt management plans at a non-profit credit counseling agency to bankruptcy. But we'll focus on just a couple. Since Diana's paying off

debt from a few different credit cards, I think that she should look into the debt snowball method. With this strategy, you focus on paying off your debts from smallest to largest. Keep making the minimum payments on all of your debts, at least the minimums, but funnel as much extra as you can toward your smallest debt first. Then, once that one's paid off, you roll that amount into the next debt, and so on. Now, you can technically save more money by paying the highest interest rate debt first. I think it's called the debt avalanche method. But the debt snowball is really popular. Yeah, and for good reason.

The small wins from paying off your debts can keep you motivated and make you actually feel like you're accomplishing something. I also got to throw in a plug here. We have a debt snowball calculator that can show you how your debts would fit into this method. You can find a link to that on our show notes post at nerdwallet.com slash podcast. That's very helpful. I wonder if Diane might be a good candidate for a 0% balance transfer offer. She'd need excellent credit to get one of those, but what she would do is transfer her balance from the higher rate card to one with a 0% interest rate. And that way, 100% of her payment would go towards paying down the principal.

If she could get one of those cards and if she could really accelerate her payments during that promotional period, she could get out of debt a lot faster. Yeah, that's a really good point. And kind of related to that, Liz, I'm wondering if you think that Diane would be a good candidate for a personal loan to pay off her credit cards. Would that help her pay off her debts faster? Yeah, it's entirely possible that it could. Personal loans are a really good option because they have fixed interest rates and fixed payments. So that makes sure that you get that debt paid down over time.

The downside to a personal loan is you do need at least good credit typically to get one. And if you are not careful, you wind up running up more debt. In other words, you've got this debt paid off in your brain. You think, oh, this is great. I've transferred my debt from my credit card to the personal loan. In your brain, it feels like you've erased the debt. So you wind up doing the same stuff and running up more debt. The other downside is that if you're not careful, you can wind up staying in debt a lot longer. If you get a personal loan and you stretch it out for too long, you wind up paying more interest over the long run.

So I would say if she has good credit and can get a personal loan, I wouldn't make it more than maybe three years with that kind of debt that she has. And hopefully she can get it paid off faster. And so it almost comes down to doing the math and seeing, okay, if she went with a zero APR card, here's when she would be out of debt. With debt snowball, here's when she would be out of debt. With a personal loan, see when she would be out of debt. Just kind of do the math and then figure out what would help her meet the goal of paying it off faster. Yeah, and she needs to consider herself as well, because people who are super disciplined, those 0% cards can be great. You don't want to use them to kick the can down the road, you know, and just make payments. With personal loans, it's kind of built in. You have

to make the payments every month. So you're definitely paying it off over time. Yeah. And then maybe freeze those credit cards, cut them up, make them so you can't rack up more debt on that card. That could be really helpful, too. Another thing I'm wondering about, what about her auto loan? That's a good question. So again, Diane's goal, paying off her debt faster. Depending on her credit score, she could possibly refinance her current auto loan and get a shorter loan term. That would likely mean a higher monthly payment, but all toward the effort of paying it off faster, the higher monthly payment means that you have less time to pay off the $18,000 loan. It would really come down to whether or not she

can manage that in her budget. And that's something to consider here as well. Which brings up a really important point. The smart way to pay off debt is all about balance. You can't have payments so high that you're struggling to afford the rest of your life. You also don't want to be draining your savings completely to pay off debt. You need a little bit of cushion there in case bad things happen, a little emergency fund. So trying to pay off debt, very important, but you don't want to go at it with such a rate that you can't afford anything else in your life. Yeah. Or also just not enjoy your life. I like to say that there's no promise of tomorrow. Maybe that just helps me enable some bad spending habits, but then there's something to be said about enjoying a night out, getting a good dinner, not going into debt, not going to

the fanciest restaurant, but making sure that you do have that balance here. So you don't get so bogged down and paying off your debt that you can't enjoy anything else. And people who have experience with dieting will know that if you try to go too far, if you try to be too restrictive, you're going to wind up binging. You can't sustain that. So it's all about sustainability and balance. And another thing I need to mention here, there's something to be said about knowing when you'd benefit from some assistance. If you're barely covering your monthly expenses and treading water on your debt, I suggest calling up a nonprofit credit counseling agency. These organizations offer free money management and debt help,

and they also offer what's called a debt management plan, where they set you up on a three to five year plan to pay off your debt, where your credit card interest rates are often cut in half or sometimes even more. It's pretty awesome. Okay, so we've talked about the first two steps, knowing your money and looking into payoff options. What's step three? Basically, it's just seeing your plan through and course correcting as needed. As Diane knows, paying off your debt can be a real slog, but giving the process some structure and keeping yourself focused can help enormously. It also really helps to have an accountability partner, somebody who knows what you're doing and can support you so that when you don't want to do it, you have someone looking over your shoulder to remind you,

hey, this is important. You said it was important. So how about keeping to your goal? And then you're kind of stuck doing it. Otherwise, you're going to face some pretty bad social shaming, maybe. I had this with my boyfriend, really. I struggled to save for a long time. And so I just had to say, OK, I'm putting in this amount into my savings account every

month. And at the end of the month, here's my balance. And he basically say, all right, fine, sure'm putting in this amount into my savings account every month. And at the end of the month, here's my balance. And he basically say, all right, fine, sure, better do it. And then I did because I didn't want to say, oh man, I didn't meet that. Even though he saw me going out to eat three to five times a week. So it helps. It makes a big difference. It really does. And I've seen people, you know, even start blogs to keep themselves accountable. So there's a lot of ways to do this. There's something to be said about just vocalizing it and getting it out there. It makes it so that

you have to do it actually. That's great. So with all that said, let's get to our takeaway tips, speedy debt payoff edition. Okay. For those carrying credit card debt, look into 0% balance transfer offers. You need a high credit score to qualify, but you're paying down only the principal and that can really speed your payoff. Next up, this might sound a little silly, but get creative. In NerdWallet's How I Ditch Debt series, we profiled folks who paid off enormous sums of debt in really innovative ways. And they're pretty entertaining stories too. I really like reading those. Okay, lastly, know when you might need some outside help. If your monthly debt payments, including your mortgage or rent, are greater than 40% of your income and you're having a hard time managing your payments,

talk with a credit counselor and maybe a bankruptcy attorney to get a better understanding of all your options. And a quick note about bankruptcy here. While we aren't debt counselors or bankruptcy attorneys, we do know that it can be sometimes the best solution to help you resolve your debt and move on with your life. Some people have their debts discharged in just a few months, and within a year, credit scores can begin to rebound. Yeah, it's sometimes the best of bad options, so you want to at least consider it if you're really struggling. Right, it's better than being hounded by debt collectors and spending years of your life paying off debt that you're not going to be able to get over anyway. Exactly. That is all we have for this episode. Do you have a money question of your own?

Turn to the nerds and call us or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more info on this episode. And remember to subscribe, rate, and review us wherever you're getting this podcast. And here's our brief disclaimer, and review us wherever you're getting this podcast. And here's our brief disclaimer, meticulously crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we're not financial or investment advisors.

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