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Debt repayment: Tried and true strategies to pay down your debt

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Whether it’s a credit card for everyday purchases or a loan for a house or car, debt products are everywhere in the world of personal finance. While there is a lot of cautionary tales surrounding getting into debt (for good reasons), these products can also be a tool to help you reach your financial goals. It’s important to remember to stay organized and only take out what you can manage and pay back.

Episode notes

In this episode, we are joined by Katie Griffin (Supervisor of Community Education) and Sara Bickers (Community Educator Lead) and will cover:

  • The difference between “good” debt and “bad” debt.
  • The popular debt payment strategies (snowball, avalanche and consolidation) and how they might apply to your situation.
  • What to look out for if you’re considering a debt management plan or debt settlement.
  • Katie and Sara’s favorite debt repayment tips.

Transcript

Brent: [00:00:00] Welcome everyone to the Sound Cents Podcast. I'm your host, Brent Sabati and today I'm joined by Katie Griffin, our supervisor of community education, and Sara Bickers our community educator lead. Katie and Sara welcome to the podcast.

Katie: Thank you so much for having us.

Sara: Yeah, thank you.

Brent: So on today's episode, we're talking about one of the most important foundational skills in personal finance, debt and debt repayment.

Now debt is something that can get out of hand really quickly if you're not on top of it, and it's very important for people to learn about. So, in your [00:01:00] own opinions Katie, why don't you lead us off with why it's important to be able to manage your debt?

Katie: So debt is something that can pile up very quickly and that can create a lot of stress.

And that stress can so easily impact all other parts of our lives, our mental health, our physical health, you know, let alone how it can impact our financial situation. And there is a difference between good debt and bad debt, but if any of it becomes more than what we can manage, our focus turns to trying to deal with that in a way from other goals and things that we want to work towards and save for.

Brent: You know, those are really important things to learn and it's really easy to see how debt, if it gets out of hands, can really derail your long-term goals and visions. But we use a lot of different debt or financial products that are related to debt in our day to day lives. So, Sara, can you talk to us a [00:02:00] little bit more about the difference between debt, what's considered a good debt and what could be considered a.

Sara: Yeah, absolutely good debt. It's affordable. It's part of your budget, and it helps you work towards those goals you've set and the values that you have. Bad debt, it does the opposite. It can be overwhelming, stressful, as Katie mentioned, and it takes away from those goals that you have and what your values are, and it may involve putting your wants in front of your needs.

Brent: So along those lines, if you have good debt and bad debt, what are some things that you should be doing to help pay down those debt? If you do accrue some balances and you're having a hard time, what are some of the most popular strategies and what are strategies you like to recommend to people?

Katie: Yeah, so there are different strategies based on whether or not we feel in control of the situation. So if we do feel like that we can manage our debt without involving a third party, there are three main strategies to [00:03:00] pick from. Now before you pick which strategy that you're gonna go with, you have a little bit of pre-work to do, and that involves getting organized.

So the very first step is to look at all of the debt that you have and figure out what the total amount owed is, what the interest rate is, and then what your minimum monthly payment is. Next is to look at your budget and figure out how much extra beyond the minimum monthly payments that you have room for to put towards that debt repayment.

Now the three strategies we have. First one is the snowball method. With the snowball method, you are organizing all of your debt in order from the smallest amount owed to the largest amount owed, and you're gonna make your minimum monthly payments on everything, but then anything extra that you have is going to go towards that smallest debt owed.

And once that is paid off, you can [00:04:00] mark it off the list and then everything that you had going towards that smallest debt then rolls down into the next debt in line. So still making all your monthly payments, but now all this extra is going towards that next debt on the list and you just work through it.

 This method is really good for folks that like to have that visual and be able to check things off of a list very quickly. So you're gonna get through those smallest steps, uh first, most quickly and be able to check 'em off, and that can be really motivating for folks.

The next method is the avalanche method.

So with this strategy, you are organizing all of your debt from the highest interest rate to the lowest interest rate. And same thing as snowball, you make all of your minimum monthly payments to everything, and then anything extra you have goes towards that highest interest rate debt. Once that one is paid, then everything going towards that then rolls down to the next debt in line.

[00:05:00] Now this strategy can actually save you more money. The reason for that is because you are eliminating that highest interest rate debt first. So it can be a little bit harder to stick with because it might take a little bit extra time before you can cross that first debt off of your list. So this is a good strategy for folks that are driven by saving money and are okay with it being a while, you know, before you can kind of check that first one off.

The third strategy is consolidation. So with consolidation you are changing what your debt looks like and you also want to be mindful of what you consolidate, cuz you might not need to consolidate everything that you have.

So say for example, you have five credit cards that all have a high interest rates, and then you have a personal loan with a low interest rate, it might only make sense to consolidate the five credit cards. [00:06:00] And when I say consolidate, that means that you're taking out another loan to pay off those five credit cards and that new loan is that total amount of what you owe on the credit cards, but now you have a lower interest rate and you just have that one payment that you're making.

So only do what makes sense. You know, if you have those five cards and then another personal loan that already has a low interest rates, then might wanna only consolidate the credit cards, leave that other personal loan alone because already has low interest rate, might not make sense to consolidate that with everything.

And then you just have those fewer payments and lower interest rate for those high interest rate items.

Brent: So it sounds like whether you're going for the snowball approach, avalanche method or debt consolidation, some of the common themes there is one, making things a little bit more simple and manageable in the sense of trying to decrease how many payments you have to keep track of, as well as trying to see if you can save money on interest.

Am I getting that right?

Katie: Absolutely. Debt can be [00:07:00] really, really stressful and it can feel overwhelming. So the sooner that you can try to get organized with everything and get things under control, that'll help with managing some of that stress. Cuz you know, you have a plan in place, you have things laid out in order to get everything taken care of,

Brent: Katie, another follow up question. Taking a step back at the beginning, you kind of mentioned that there's a little bit of homework to do before you start paying down your debt as far as figuring out what's your total amount owed and interest rates and things like that. So how do people find that information?

Where can they go to get those different pieces of information on what they need to do to pay it down?

Katie: Yeah, that's a really great question. So, if you have a login to go online whether it's a credit card or a loan, all that information you should be able to find within your online login.

So if you have a credit card and you login to the website to make your payments, all that [00:08:00] information will be found there, like in that profile that you have. And same thing if you have a loan, if that is through your financial institution, you should be able to log in to your online banking of that financial institution.

Find that information in the account details. If you don't have online banking, that is totally fine. Just give that creditor a call. You know, whether it's your financial institution or a credit card company, whoever it is, give them a call and they will absolutely be able to provide all that information for you over the phone.

Brent: Awesome. So we all know, like you mentioned before, debt can be really challenging to pay down and debt can stretch a person's budget, make it hard for their month to month expenses. It can affect your credit score and we know that it's not an easy thing to manage. So if someone is having a hard time paying off their debt, what other options do they have, to explore to really get them going, to help them solve this financial issue?

Sara: Yeah, if they're struggling to pay [00:09:00] off their debt and they're having a hard time doing it themselves, there are two types of debt repayment assistant programs out there. They're known as debt management programs and debt settlement programs. Debt management programs help by distributing payments and potentially negotiating lower interest rate.

With the debt management program, there may be an initial hit to somebody's credit as those lines close, but they would rebuild the credit through continued payment history. Debt settlement programs work by attempting to get creditors to settle for being repaid less than the total debt originally owed.

They send cease and desist, debts may go to collections, and then they hold off on making payments until a settlement is reached. With debt settlement the missed payment history could have a negative and long term impact on your credit, and settling for less than owed could show up as a red flag on your credit report.

You could also owe income tax on the difference between what is owed and what is finally being paid. If someone's [00:10:00] unsure where to start with debt repayment, they can meet with one of our free financial coaches to figure out what strategy or what program is best for them.

Brent: So it sounds like both with the debt management program or the debt settlement options, there's some other factors and consequences that you do have to consider.

 So would you say it's fairly safe to say that those should be options you look at after you've exhausted the different repayment strategies or at what point should a person look at that?

Sara: Yeah, that's a great question, Brent. A lot of the times there are lots of pros and cons to consider with debt repayment and how it's gonna impact their credit. So I would say that's very much a case by case basis. Each individual is going to know how much they're capable of managing or not managing on their own.

 So they should consider the pros and cons of all of the options they have available to them.

Brent: That's great advice. And if someone deems that it is kind of their best option to go down this path, [00:11:00] what are some tips for communicating with the creditors if you're going through these different programs?

Katie: My first piece of advice is don't wait.

You know, the sooner that you reach out to them, the more that they will be able to help. They want to help just as much as you want to get out of whatever situation that you might be in. So don't wait until however many months have passed. Just the moment that you know that you need to reach out might need some help.

Go ahead and give them a call and start working something out with them. And also share the whole story. You know, the more that they know about your story and you develop that relationship, the more that could potentially help your situation that you're in.

And lastly recommend staying calm, you know, recognize that the creditors, they aren't the bad guys. You know, they are there to help and they know that this can be an uncomfortable conversation for someone to [00:12:00] have. You know, money is a very sensitive topic for a lot of people, but they'll be able to work with you better if you do remain calm and polite throughout the whole process, and just know that they are there to help you.

Brent: So when you're talking with these creditors and asking for assistance, Should you be asking for anything in particular or what is a good way to start that conversation?

Katie: I would start out just sharing what's going on and you know, if you're having trouble making payments, you know, share that with 'em.

Hey, this is my situation right now. I'm really struggling to make this payment every month. What are my options? And then they'll take it from there. Help explore what the options are to try to help the situation.

Brent: That's great advice. And as we wrap up here, I always like to ask one last question.

So Katie and Sarah, what is your personal favorite debt repayment [00:13:00] tip or strategy?

 

Katie: The tip that's helped me the most over the years is just staying organized. Throughout my life, as I've taken on debt, paid debt, gone through, different life events, the more organized I am, the less stressful I am, and the more I feel like I can manage things and stay on top of it before it does become something that gets out of hand.

Sara: I think the tip that I would like to share is to know yourself. It's hard to look at the different repayment options out there and note that, yeah, avalanche might save you more in the long run, but if it's something that's really hard for you personally to stick to and you know you're not gonna stick to it, there are other methods, like the snowball method that might be a better choice for you.

Katie: Yeah. And meeting with like a financial coach, something like that can really help. Having that outsider's perspective, look at your unique situation and see, okay, which [00:14:00] option might be best suited and work through it together that way.

Brent: Awesome. That's all really great advice and really great tips for people looking to learn how to pay down their debt in maybe a more effective manner.

So that's all the time we have for today. Thank you so much, Katie and Sara for joining us on today's podcast, and we look forward to catching you next time on the Sound Cents podcast.

Sara: Thank you, Brent.

Katie: Thank you. [00:15:00]

PLEASE NOTE: The information presented in this episode is intended to be used for informational purposes only and should not be considered advice. Consult a financial, tax or legal professional to see if the information provided in this episode is suitable for your situation.  

 

Information stated is current as of the time of recording and may be subject to change in the future. 

 

Third party products and services mentioned in the podcast are done so for informational purposes only and should not be considered endorsements or affiliations unless stated otherwise. 

 

Any opinions of guests or third parties on the podcast are strictly their own and do not represent Ent Credit Union.  

 

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