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Paying Off Debt — What You Need to Know

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We’re all familiar with the overwhelming feeling of keeping up on payments — whether it’s credit cards, student loans, mortgages, car leases or even all of the above at once. Debt is often a necessary tool that can increase your quality of life, but if it causes stress, it's time to reduce or remove your dependence on it.
Learn how to take the anxiety out of debt and ultimately clear it from the books.

What are some mistakes we make with debt? 
It’s safe to say that most consumers use credit cards for almost anything. Whether it’s for an unexpected large expense or your daily coffee run, debt keeps racking up. Although many of us can confidently say our finances are in order, you might be surprised to find out exactly what you are doing wrong as you handle your debt and finances.

Some common mistakes we all make include:
  • Bad budgeting and spending habits. Bad spending habits are often due to having an impractical budget or no budget at all. Without a budget, you don’t know how much you are actually spending. Building a budget can be difficult, but after you have organized your finances, you will have better control of your money. You can download a budget app to get started. Your bank or credit union may also offer a money management tool as part of their digital banking solution.
  • Closing established accounts early. Closing established accounts prematurely can hurt your credit score. The longer you keep and maintain your oldest account, the stronger your credit history will be. When you pay down credit card debt to a zero balance, be sure to keep the account open to increase your credit availability.
  • Not knowing the rates and terms of your debt. If you don't know the details about your debt, you don't know how much interest you are paying. You can easily correct this mistake by looking at your monthly account statement and tracking how much you pay in finance charges.
  • Handling debt on your own. Whether you think you can tackle your debt on your own or you are hesitant to ask family for help, you can take advantage of other assistance. For instance, you might contact a nonprofit credit counselor at the National Foundation for Credit Counseling. Credit unions also often offer confidential and free financial wellness counseling and other resources to their members.
Make a plan that works
Don’t let debt discourage you from finding a way out! Before you begin paying debt, look at your finances and determine your monthly income and expenses.

Then consider strategies like these:
  • Snowball vs. avalanche. The snowball and avalanche strategies are both effective but are designed differently. Both target one account for quicker payoff by making additional or larger payments while paying the minimum monthly amount on all the other accounts. The snowball strategy targets the lowest credit card balance first, and the avalanche strategy targets the debt that has the highest interest rate.
  • Save or pay? When it comes to saving money or paying debt, saving money might make more sense. However, you might notice that interest rates on savings accounts or certificates of deposit are lower than loan and credit card interest rates. If you have money in a savings account at the bank and you also have a bank loan, you are likely paying more in interest than you earn. Therefore, it might make better sense to pay off your debt.
  • Set up an emergency fund and pay debt. While it may be difficult to set aside an emergency fund and pay off debt at the same time, the reality is that you should. It is recommended to save at least enough to cover three months of expenses. But start small, say with $100, and work your way up to three months of expenses. If you can accumulate an emergency fund, you’ll have that money to pay for expenses rather than charging your card or taking out a loan.
  • Refinance or debt consolidation. Refinancing debt is effective when the new rate is lower than your current rate or when you extend the repayment term. However, while extending the term reduces the monthly payment amount, your overall interest through the life of the loan could end up being higher. Debt consolidation is another way to combine multiple payments into one, possibly with a lower interest rate, and reduce your monthly payments. If you consolidate credit card debt, be sure not to use your credit cards.
Need support while paying off debt? 
Power Financial Credit Union is here to help you reach your financial goals. You’ll find a variety of financial resources, such as our debt consolidation calculator, that can help you take control of your finances. Members also have access to a complimentary Money Management tool to help with budgeting and savings goals. We even offer free one-on-one financial wellness reviews where we help members look for opportunities to save money and assist in the creation of an emergency fund. To date, we have saved members more than $5 million in fees and interest during these confidential sessions.

PFCU has been supporting South Florida members with financial resources and education for 70 years. Contact us online or visit any of our full-service branches across South Florida to learn more about saving money and turning your financial goals into realities.