PAYING DOWN DEBT

 If you’ve accumulated more credit card debt than you can pay off in a few months, how can you quickly eliminate that debt while minimizing your interest payments? The particular strategy you should follow will depend on many factors, including the total amount of debt, the nature of the debt, your credit score, your income and your financial plans. Because there are so many factors to consider, it’s best to talk to your advisor about the specifics of your situation, but below we share some general guidance.

If you’ve accrued a few thousand dollars in credit card debt, but you will be able to pay it off in 12 to 21 months, consider applying for a credit card with an introductory 0% APR period as well as a 0% balance transfer fee. The length of the 0% APR period can range from 15 to 21 months. If approved for the card, you could transfer your debt to it and pay it off during the 0% APR period, thereby avoiding any interest charges. The money you save can grow significantly, given the power of 

compounding.

However, before applying for the card, consider whether you plan on purchasing a home in the near future or applying for another type of loan. Applying for a new credit card might lower your credit score enough to negatively impact your loan application or the loan interest rate.

If your debt is so substantial that you won’t be able to pay it off during the introductory period on a new credit card, you may want to seek a personal loan with a fixed interest rate. This interest rate is likely to be lower than the variable interest rate on your credit cards, and you can use the loan to pay off all the credit cards.

To choose the most favorable loan terms, you would want to use a debt consolidation calculator to compare different loan term options and the amount of savings each provides. Your advisor can also help you with the back-of-the-envelope calculations and parse your options (e.g., a securities-based line of credit).

Before seeking a loan, speak to your financial advisor about the specifics of your situation. They have likely helped others in the past who are battling debt issues and can help you find an objective way forward. If part of the debt is for medical bills, for example, your advisor may counsel you to first pursue having the medical debt forgiven. Your advisor may also recommend a nonprofit debt relief program, with counselors who will help you devise a debt reduction strategy for a small monthly service fee.

These counselors, along with other trusted financial professionals, can also recommend strategies that may help you avoid future debt problems.

• Speak to your advisor about the details of your debt situation.
• Use online calculators to explore various debt reduction strategies.
• Compare nonprofit debt management program offerings and fees.