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4 Tips for Paying off Debt

4 Tips for Paying off DebtAmericans have a love/hate relationship with debt. Credit cards and cheap financing allow us to enjoy perks we wouldn’t normally be able to afford. Yet, as the numbers below illustrate, this convenience and access can quickly get out of control. 

Nationwide, total household debt is now approaching $13 trillion — an amount that has steadily risen over the past four years.That’s just the consumer side.When the Great Recession began in 2007, corporate debt was less than $5 trillion. Roughly a decade later, it has swelled to over $9 trillion. 

Even the government isn’t immune, with the national debt currently standing at $22 trillion

Clearly something needs to be done. 

Why Out-of-Control Debt Matters

The two most important components of any loan are: 

  • The principal — which is the amount being borrowed 
  • The interest — which is the “cost” of borrowing that money 

For most people in debt, it’s the interest that gets them (even if they don’t realize it). 

Here’s why. 

Imagine you buy a computer that costs $1,000. You pay for it with a credit card that charges 10 percent in interest. If you make minimum monthly payments of around 4 percent, it’ll take you 80 months to pay down the entire balance. 

Because of all that interest, your $1,000 computer ends up costing a whopping $2,474.91. You can check the math yourself using this free Loan Calculator

Again, something needs to be done. 

Strategies for Getting out of Debt

Many Americans are tempted by quick-fix solutions such as: 

  • Debt consolidation 
  • Home equity loans 
  • 401(k) loans 

The moment you involve a third party, there are extra fees along the way. After all, these middlemen have to generate a profit from their services. They typically make that off you — the person they’re supposed to be helping. 

You’re better off bringing everything in-house as much as possible. 

Below are some tips to get you started. 

1. Cut Spending Immediately 

The most important step involves eliminating all necessary expenses. This includes: 

  • Canceling subscriptions 
  • Shopping for generic brands 
  • Eating out less (if ever) 
  • Delaying major purchases 

The goal is to have enough money every month so you can at least make the minimum payments on all of your outstanding balances. If you ever miss a payment, your interest rates will grow. This will only make it harder to get out of debt. 

Click Here to Learn When to Use Cash vs. Credit

2. Use Balance Transfers

If you have access to a credit card with a low interest rate, consider transferring some of your balances. Many cards even offer 0 percent intro APR. Although this rate is temporary, it allows you to reduce your interest charges while paying down the loan balance. 

3. The Avalanche Method

If your goal is to minimize interest payments as much as possible, the Avalanche approach can help. 

After making minimum payments on all of your balances, put any extra money into whichever debt carries the highest interest rate. Once that loan is paid, move on to the balance with the next highest interest rate. 

This is the cheapest and fastest way to service debt over the long run. For many Americans, it’s also the hardest since it’s more challenging to track your progress over time. 

If you’re worried about losing steam, check out the next tip. 

4. The Snowball Method

With this debt strategy, you make minimum payments on all your outstanding loans. Any extra money goes to the smallest balance. Once that loan is repaid, move on to the next smallest balance. 

This approach is slightly more expensive than the Avalanche method, but it’s easier to stay motivated since you’re able to wipe out individual loans much faster. Plus, you can see this progress unfold. 

Whether as a consumer or business owner, getting out of debt is the first step toward true financial independence. 

Topics: Small Business Tips, Awareness, Consumer Education

Welcome to the BluePay Blog!

Whether you're a small business, an enterprise corporation, a financial institution, or a software partner, we have created a series of blog posts to help you and your customers, learn more about the complex nature of payments. Take a look to learn how payments can help to simplify your business operation, and may even help to grow your revenue.

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