Most people resolve to get healthier or to exercise more. This year, try considering making another sort of resolution: getting out of debt.
According to information from the Federal Reserve, the average household has over $15,000 in credit card debt alone. If the household includes home ownership, you can add almost $150,000 in mortgage debt to this amount. If anyone in the household is attending college or is a college graduate, $32,000 is the average amount of student debt that’s owed.
Don’t let those numbers discourage you. There are ways to become debt free and this year is shaping up to be the best time to accomplish that goal. Here’s why.
Because of the Federal Reserve’s move to cut back on certain types of expenditures — you might have heard of this referred to in the news as “tapering” — interest rates are low. Currently, the interest rate on most bank loans is at 3.25 percent and there’s no sign of it increasing this year. That means if you have credit card, student loan, or other debt you want to pay off, now is the best time.
If you feel you don’t have the money available to make a significant impact on your loans, you do have options. One is to use what’s known as the “snowball” approach to debt. Simply put, make a list of your debts, put them in order from the smallest amount owed to the largest, and pay the minimum due on each. If you have any extra money you can put toward your bills (whatever is left over after setting aside for your savings or retirement), use that extra money to help pay down the smallest loan amount. Once that’s paid off, move onto the next loan on the list. Continue this process until all of your debts are paid in full.
An alternative to this is obtaining a loan to pay off your debt. While this might not work for everyone, the low interest rates mean that you can consolidate your debts into one loan. Basically, you would be borrowing money to pay off multiple loans (such as one or more credit cards, a car, and student loans, for example). This would result in having one debt and one payment to make a month, at a fixed interest rate. You don’t necessarily need to risk your home or your automobile in order to secure the loan, either. Unsecured loans are available for debt consolidation. Although these loans have a higher interest rate than their collateral-backed counterparts, you’re not putting your assets at risk.
You can also look at refinancing your existing loans. Depending on your credit score and credit report, you may be able to obtain a much lower interest rate on a car loan, a refinanced mortgage loan, or a private student loan (like Sallie Mae®).
Whichever method you choose, whether it’s creating a budget, using the snowball method, refinancing, or taking out a debt consolidation loan, 2014 looks like it’s the best time to resolve to become debt-free.