How to Tackle and Pay Off Various Forms of Debt| Updated: |
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Today’s post is a guest post by Andrew Rombach, a Content Associate at LendEDU – a website that helps consumers, small business owners, real estate owners, and more with their finances. I am happy to have him as a guest poster today.
Switzerland has a lot in common financially with other countries, especially when it comes to consumer debt. Swiss residents deal with three “popular” debts that many consumers face across the globe. What kind of debt? — as if you even needed to ask!
Mortgages, credit cards, and car loans are often on everyone’s minds, but Swiss consumers may find they’re dealing with higher debt levels in those categories compared to other countries. In fact, households in Switzerland were recently found to have the highest consumer debt levels in the world. To put it in perspective, Swiss households have a higher debt to GDP levels than the U.S. did at the height of its housing bubble.
At any rate, dealing with debt is a natural part of being a consumer. It doesn’t hurt to know a few tips and tricks for paying down your credit cards or mortgage. If anything, making decent headway can reduce stress and open up room in your budget. Here are a few ways to pay off credit cards, mortgages, and/or car loans.
Credit Card Repayment Tips
It’s generally a bad idea to carry credit card debt. It often has high-interest rates compared to other debts, and missing payments on a high balance can cost you, to say the least. There are three great ways to chip away at this kind of debt.
Debt Consolidation Loans
Using a debt consolidation loan, you can pay off all or most of your credit card debt. In short, your credit cards are cleared, and you must pay off one loan at a new interest rate and repayment term. Ideally, this new interest rate is lower than your credit card APRs. This effectively transitions your revolving credit card debt to installment debt as well.
There are a few reasons where debt consolidation loans make sense. It can simplify your repayment since you are left with just monthly payment, and applying for a fixed interest rate offers more certainty as well. The greatest benefit is getting a lower APR which would save money over repayment.
Keep in mind that it can worsen your financial situation if you aren’t careful. Try not to be tempted into over-spending on credit again. While your cards are cleared, you still must put in the work pay off the loan.
Balance Transfer Cards
This method requires opening up another credit card and transferring your balance from the first card to the new balance transfer credit card. Similar to the debt consolidation loan, your old card is now cleared, and you are left with a new debt to deal with.
Why bother with opening up a new card? Some credit cards offer an introductory period with low-interest or zero-interest. By transferring the balance over, you may have anywhere from 6 to 18 months to pay off the balance with low-interest costs. This can save you money.
Again, you must be careful with this strategy. The debt doesn’t disappear. You still need to pay it down, so don’t go spending on your old card!
Debt Avalanche Methods
The debt avalanche method is a classic, self-sufficient way to pay off multiple credit cards over time. List out all credit card accounts with a balance, APR, and minimum payment information. Put the higher interest rates towards the top of the list. Each month, you devote any extra cash to a larger payment on the card with the highest interest rate while making minimum payments on all other credit cards. Repeat the procedure until the high-rate card is paid off, then begin again with the next high-rate card.
By prioritizing the high-rate card, you are reducing the most expensive credit card balance. This will save money by reducing interest costs (which is starting to seem like a common theme). Furthermore, you can accomplish this method purely through budgeting, and no new credit applications are required.
While it’s great this can be done through budgeting, it’s also the greatest drawback to this method. Not everyone has the cash to simply make larger payments on a high-rate credit card. It takes diligence and proactivity to stick to this plan.
Mortgage Repayment Tips
For many consumers, their biggest expense is their home loan. Reducing that debt as quickly as possible is a priority for many people in Switzerland. Here are two ways to help you do that.
This tip requires making half-payments on your mortgage every two weeks (or bi-weekly) instead of monthly full-payments. Each year, you will make 13 full monthly payments as opposed to 12 on the standard payment scheduled.
That may seem like only moderate progress. But it can speed up repayment significantly over several decades. Furthermore, it can save money throughout repayment. By cutting into the principal balance more each year, you should reduce interest costs.
The biggest downfall to this strategy is that you might be throwing extra money to your mortgage when you have other high-interest debt. Quickly knocking out debt with the higher interest rate may save more money in the short-term.
Mortgage refinancing is a well-known tool used during repayment. Similar to a debt consolidation loan, you are applying for a brand new loan which is used to pay off the old mortgage. Again, you are left with a new loan, interest rate, and repayment term. Ideally, the interest rate is reduced on the new mortgage.
A lower interest rate can significantly reduce the cost of a mortgage over repayment, considering the length of repayment and high balance. Additionally, you can restructure your repayment term offering more flexibility. You may have the chance to shorten the term, but this may also increase your monthly payment. You should not forget to consider closing costs before refinancing.
They will drive the cost of refinancing as well as any other hidden costs. Do not be afraid to shop around for a different mortgage refinance lender in the space before settling on one particular offer.
Car Loan Repayment Tips
Car loans are another big debt saddling citizens of Switzerland. Want to reduce your debt in this area? Here are two suggestions.
Car Loan Refinancing
We’re back on refinancing. If you bought your car when interest rates were high, then you may want to refinance if rates are lower today. A lower rate can save money on repayment, but the discrepancy must be large enough to justify paying closing costs on a car loan refinancing deal.
To make sure you’re not sabotaging your own efforts to repay your car loan faster, don’t be talked into a longer loan term. Also, be aware of closing costs, application fees, and pre-payment fees. While this can be a great strategy for reducing your car loan debt, read all the fine print.
Make An Additional Monthly Payment
You have the option of sending your car loan lender an extra payment every once in a while. This will reduce your car loan balance more quickly, especially if you get in the habit of sending several extra payments a year. If you ever come into extra cash, get into the habit of putting it towards your car loan.
Like many of the other methods here, this will save money by cutting into the principal balance before interest can capitalize further. Again, you are countering the effects of compounding interest simply by paying more. Furthermore, you do not need to apply for refinancing or other loans to pull it off.
The biggest pitfall of this method is that it requires proactivity and diligence. It may also cost you if there are prepayment fees on your car loan.
Thanks a lot to Andrew for this post! Andrew is a Content Associate for LendEDU – a website that helps consumers, small business owners, real estate owners, and more with their finances. When he’s not working, you can find Andrew hiking or hanging with his cats Colby & Tobi.
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4 thoughts on “How to Tackle and Pay Off Various Forms of Debt”
What makes more sense to you guys…
prioritizing to paying of a debt that has a 4% interest rate or instead keep regular payments and invest cash in stocks (long term)?
Thanks a lot
Hi Peter Pan,
At 4% interest rate, I would prioritize paying it off. Unless maybe you can refinance it at a lower interest rate. What kind of debt is that.
For me, 4% is high enough to warrant paying off. 1% would be fine.
Thanks for stopping by!
It’s a student loan. Thanks for the help. Appreciate it.
Then, I would definitely pay it off first. The only thing I would maybe do first is to start a small emergency fund (1-2 months of expense) if you do not have one and then work on paying the debt off.