Save On Interest With This Debt Repayment Strategy
Congratulations, you’ve made the decision to pay off your debt and to stop handing over your hard-earned money to interest each month! At America Saves, we consider paying down debt to be saving because:
- You can save money on interest and fees,
- You can build your credit score, and
- Eliminating debt builds your net worth.
Another way to look at #1, saving money on interest and fees, is that this approach to paying down debt saves you money now. When you take on debt to pay for a service or a good, "You're paying for the privilege to pay something off over time," says Robin Saks Frankel, Forbes Advisor, and Personal Finance Expert. That might soften the blow or help you afford a necessary big purchase, but it also makes the item more expensive.
"All the money that you're paying towards interest payments, if you didn't have to pay that money to begin with, that would be money in your pocket or put toward something else," Saks Frankel advises. If you're not even sure how much debt you have or which cards are carrying balances, you can check your credit report for free at www.annualcreditreport.com.
So if you want to save money now by paying less on interest and fees, follow these simple steps:
Gather all your debts.
Don't just try to go off memory here. Review your bank statements and use the Spending and Savings Plan tool to ensure you don't leave anything off. Write yourself a list.
Assess interest rates.
As you're writing your list, write down the principal balance you owe and the interest rate next to each debt. If you got a Truth In Lending Act form (aka TILA) with the loan, it might also be called the "APR."
Determine which debts, if any, have prepayment penalties.
Do not skip this step! If you can't find it in the paperwork or don't know, call the creditor and ask them. ("They have to tell you!" Saks Frankel wants savers to remember.) If a debt has a prepayment penalty, write down how much it is.
Re-write your list.
At the top of your list should be the debt with the highest interest rate with no prepayment penalty. For those debts with a prepayment penalty, prioritize them last or keep them on a regular repayment schedule (some mortgage payments, for example).
This list is your new debt repayment strategy! To save money on interest and fees, your best course of action is to Pay off your highest interest debt first.
Keep making your payments to all of your debts, of course, but the debt that is number one on your list should get a little extra. To accelerate the process, consider getting a side hustle if you have the ability. Otherwise, any time you have a windfall (like a tax refund or bonus) or get a raise, the number one debt on that list should get some piece of that money.
Want support and accountability while reducing your debt? Take the America Saves Pledge and choose "Debt Repayment" as your savings goal. America Saves will send you tips, resources, and tools to encourage and motivate you along the way.