Strategies to Pay Down Debt

Strategies to Pay Down Debt featured image

Did the pandemic throw you into financial distress? If you find yourself with more debt now than you’d like to have, we can help. In this article, we’ll cover debt fundamentals and the pros and cons of the most popular debt reduction strategies. So, take a deep breath, grab a cup of coffee or tea, and take the first step toward paying down your debt balance(s)!


What is debt?

The first step to paying down debt is to understand what exactly it is, how you got there, and the ramifications on your credit.

Debt vs. credit

Debt is any money you owe to an institution, such as a bank or loan servicer, or an individual, such as a friend or family member you borrowed money from.

Credit refers to the available amount of money you can borrow at a given time, such as the credit limit on a credit card or personal line of credit, as well as to your creditworthiness, as in your credit score and credit report.

Whenever you apply for new debt, whether a credit card, personal/car loan, or mortgage, your lender will check your credit history and score to determine how much risk they’d be taking on to lend you money.

For example, if you have an open credit card account but don’t carry a balance, you have access to credit but no debt. If you take out a loan to buy a house or vehicle, you have debt but no available credit through the loan.

It’s also important to know that your debt levels affect your credit worthiness. While a mix of past and present account types on your credit report contributes to a good credit score, a high debt utilization ratio (the percentage of your credit limit in use at any given time) can drag down your credit score.

Finally, when you take on any new debt, you’re obligating future income to pay it back. That’s why it’s important to use debt carefully and not commit to more debt payments a month than you can comfortably afford to budget for.


How to get out of debt

Are you finding yourself with more debt than you’d like to have? Debt-to-income ratio dragging down your credit score? While there may not be a quick, overnight solution, these two time-tested strategies can help you make steady progress until you’re debt free.

The Snowball Method

Popularized by personal finance guru and studied by academics, this debt reduction strategy is thought to have the most potential for success, even if mathematically speaking it’s not always the most advantageous. That’s because the snowball method gives you a “quick win” by making minimum payments on all but your smallest balance and throwing as much as you can at that. The theory is that the psychological benefits of seeing results early on will give you the momentum you need to keep going.

How it works:

  • Make a list of your debts in order from smallest to largest balance.
  • Set up automatic minimum payments on all but the smallest balance.
  • Pay as much as you can on the smallest balance until it’s gone.
  • Pat yourself on the back and repeat with the next debt on your list.

The Avalanche Method

This is for people most concerned with saving as much money as possible on interest. Also known as debt stacking, the avalanche method has you list out your debts in order from highest to lowest interest rate. Start with the highest interest rate and pay as much as you can toward this balance, while making minimum payments on everything else, until it’s paid off. Then move to the account with the next highest interest rate and so on.


Is a debt consolidation loan right for you?

Looking for faster relief from burdensome monthly debt payments? Debt consolidation is a third option to consider. While taking out a new loan to pay off existing debt won’t change the amount of debt you have, it could make your finances easier by consolidating multiple payments into one, lowering your interest rate, changing the term length, and/or reducing the amount you spend each month on debt payments.

When it comes to choosing a debt consolidation loan, you have several options:

  • Home Equity Loan: If you have enough equity in your house, you can use it to pay off higher interest debt with a new and more affordable loan.
  • HELOC: Want to use your equity for debt consolidation and something else? A HELOC is more flexible, though it usually comes with a variable interest rate that can fluctuate.
  • Cash out refinance: Similar to a Home Equity Loan, this is a way to get a brand new mortgage on your home and covert some equity into cash to pay off your other debts.
  • Personal loan: If you’re not a homeowner or don’t have enough equity, a personal loan is still a good option if you can get a lower interest rate and streamline your finances with one monthly payment

The most important thing to know about debt consolidation is that it’s only a good option if you can be sure you won’t rack up credit card debt again. Otherwise, you could end up in even more debt than when you started.


What to know about debt relief and settlement programs

Finally, you may be wondering about debt relief programs and how they work. This is not an option we recommend, as it can come with consequences for your credit report and score, not to mention extra fees. However, if you feel you have no other option, here’s what you need to know:

  • Check with Pennsylvania’s Attorney General and Bucks County’s Consumer Protection to make sure the debt settlement company you’re considering hasn’t been subject to consumer complaints.
  • Ask questions such as what services they provide, how much it costs, and how long you can expect results to take. Get everything in writing before signing on with the company.
  • Have a financial professional review your situation first before enrolling in a debt management plan (DMP). The First’s personal bankers can help you with this.
  • Enrolling in a DMP means you’ll make monthly deposits with the credit counseling organization. They will then make payments on your debts according to the schedule they negotiate with your creditors. However, some creditors may not want to agree to lower your interest rate or make other concessions. It’s worth checking with them first to see if you can work something out on your own. If your creditor fights your credit counseling organization in court, it can drag out while your credit score stays low and you continue to make payments.


Pay down your debt with The First!

For more than a century, personal bankers at The First have helped generations of Bucks County residents meet their financial goals. Explore our personal banking services and contact us or visit your nearest location in Warminster, Richboro, Jamison, Langhorne, Levittown, Doylestown, Newtown, Fairless Hills, Wrightstown, Washington Crossing, or New Hope with questions or to start applying for a debt consolidation loan!