By: Laura Depta CTW Features
Everyone wants to be debt-free, and there are ways to achieve that goal more quickly. But there also are different types of debt, and efficient repayment can require more sophisticated strategies than simply paying everything off as swiftly as possible. It takes a plan.
For instance, consumers generally can save the most money by taking a more aggressive approach with debt carrying high interest rates. Rates are usually highest with credit cards, moderate with student and car loans and lowest with mortgages.
Credit Card Debt
After analyzing data from sources including the New York Federal Reserve and U.S. Census Bureau and conducting a proprietary survey, financial site Nerd Wallet found that the average amount of credit card debt per household is $15,355, and the average consumer spends $2,630 on credit card interest per year.
Balance transfers can help lower interest rates, but the key to accelerated credit card repayment is not simply lowering rates or making larger payments. It’s about budgeting and tempering payment with savings, according to Kathryn Bossler, a financial counselor with GreenPath Debt Solutions in Detroit.
“There’s a reason you’re in debt in the first place,” Bossler says. “Maybe part of the reason is because you don’t have enough regularly going into a savings account for when stuff happens, like you blow a tire or the washing machine breaks.”
According to Bossler, the terms are what to watch out for with car loans – they can range from three to even eight years. The way to efficiently handle a car loan is to choose a term that makes sense based on your plans for use.
“In general, cars depreciate faster than you pay them back,” she says. “If you are someone that’s going to want to turn it in quickly, and you’re going to owe more than it’s worth, you might want to work on paying that one off faster.”
Based on data from the Institute for College Access & Success, debt-carrying graduates from public and non-profit colleges owed an average of $28,950 in 2014. Most students are automatically put into a 10-year repayment plan, according to Kayla Talbert, program manager with the Office of Financial Education at Montana State University, Bozeman.
If graduates can afford to make the standard payments, eliminating student debt in half the time is fairly straightforward and can save quite a bit in interest dollars. Talbert used the loan repayment calculator at studentaid.ed.gov to provide an example based on a hypothetical $29,000 loan with a 5 percent interest rate at 120 payments.
“The payments would be at $308 per month, but [students] actually pay $7,911 in interest over the life of the loan,” Talbert says. “But if you cut that in half and pay it off in five years instead of 10 years, your payments are $547 and you only pay $3,836 in interest.” Talbert also suggests honing in on specific loans. “Find the loan that has the largest balance with the highest interest rate and put any money besides the minimum [toward that].”
Of all types of debt, Bossler calls mortgage debt the healthiest, and she doesn’t necessarily recommend trying to pay it off in half the time.
“There are advantages to having a mortgage,” she says. “I’m not a tax expert, but usually homes do grow in value, so it becomes an asset, and also there are the tax deductions to consider for a mortgage and home ownership.”
According to Bossler, a 30-year mortgage is the most common. For those looking to shorten that time frame, rate-and-term refinancing is an option, but it might not be ideal depending on each unique financial situation.
“Really, the strategy if you’re going to pay your mortgage off is just to make sure you’re paying it off as efficiently as possible so you’ve got the best loan that you’re able to get.”