Step 2 of
Reducing the cost of your debt
While some debt may be good (like a mortgage), other debt isn’t. High interest loans like the kind you pay when you get a payday loan, or that you carry on a credit card, make it harder to get out from underneath your financial burden.
So, a good way to begin getting control over your debts is to see if you can reduce the interest rate you’re paying on your most expensive loans.
Reduce the cost of being in debt
- Identify your most expensive debt: Look at all the outstanding loans you have and their interest rates. Find the highest rates and single these bad boys out.
- Pay off if you can or get a better rate: If you’ve got loans that you’re paying over 20% on and you have the money to pay them off, do it. If you don’t have the money, you’re going to want to reduce the interest rate you’re paying on these loans by transferring their balances to a lower interest rate loan.
- Negotiate your rates: Many people don’t realize that they can get on the phone with their credit card companies and negotiate terms. If you’ve been a good customer and are thinking of leaving for another credit card, speak to the folks at your credit card and ask them if they can do better than they’re doing now.
- Consider peer to peer loan networks: Over 70% of people borrowing on peer lending networks like Lending Club are using their loans to pay off their expensive credit card debt. If you can replace your 18% credit card balance with 12% on Lending Club, you’ve just brought down your monthly bill.
Dave Ramsey is a preacher in the church of getting out of debt. In his most famous book, Total Money Makeover, Ramsey recommends creating a debt snowball. While many financial coaches would tell you it makes sense to begin paying off your most expensive debts (those with the highest interest rates), Ramsey takes a different approach.