While it's best to refrain from going into debt, sometimes incurring debt can be unavoidable. Attempts to pay off the debt can be difficult. On the latest episode of PennyWise, producer/editor Ambre Moton is joined by WalletHub's Jill Gonzalez shares tips on the best ways to pay off debt.
Read more on WalletHub here!
About this program
Nat Cardona is host of PennyWise as well as Lee Enterprise's true-crime podcast Late Edition: Crime Beat Chronicles. Lee Enterprises produces many national, regional and sports podcasts. Learn more here.
Jill Gonzalez is the spokesperson for WalletHub. Her appearances as a Wallet Guru include Wall Street Journal Live, Yahoo Finance Live and ABC News New York. Her take on consumer finance issues has been featured in publications such as The New York Times, Washington Post, CNBC Online and Kiplinger.
Episode transcript
Note: The following transcript was created by Adobe Premiere and may contain misspellings and other inaccuracies as it was generated automatically:
Sometimes incurring debt just can't be avoided. It can, however, be a struggle trying to figure out how to pay it off. Welcome to Pennywise, the Enterprise Enterprises podcast. I am Ambre Moton, producer and editor of the show filling in for Nat Cardona. Jill Gonzales from Wallethub is joining me today to talk about the best ways to pay off debt.
Jill, thank you so much for being here for the podcast.
Thanks for having me.
We going to be talking about the five best ways to pay off debt. So I guess overall, like what's the first step that people should take towards paying off debt?
So the best way to really pay off debt is definitely a multi-pronged approach so that you're ready for your future once you don't have this debt anymore. So look at your spending patterns. Get current on your payments, lower your interest rates. All of that starts with stopping the bleeding by making a budget.
We definitely hear about that a lot. You mentioned lowering interest rates and I know I hear about that all the time, but how can that actually be done?
Right. So lowering your interest rates on your debts is going to lower your costs overall. So the first step here is trying to lower your interest rates by consolidating your debt or by negotiating with lenders. You know, if you actually call up your lenders or sometimes you can use the chat little feature on, you know, their website or app.
I think calling is probably still the best way. A little more time consuming, but worth it 80% of the time. If you ask your lender, hey, I want a lower interest rate or I'm considering, you know, opening up a new card, jumping ship, something like that, then they'll negotiate with you and you should be able to get that interest rate lowered.
That won't decrease your balance, but it can at least slow it or even stop it from increasing.
That's really good. You know, I've heard that you can do it. And I fully admit I have never attempted, but to hear that statistic about how many, you know, the chances of it actually happening, that is going to motivate me, I think, to actually do it my own life.
Exactly. Yeah. Take take the risk. Women, what have you got to lose?
Right. Worst case, they say no. And I'm still making my regular payments with my regular APR. Right. But I feel like I've always been told to have an emergency fund. But, you know, how can someone do that if they're also struggling with debt?
Yeah. So when we talked about budgeting, so part of your budget and, you know, our first step here is going to be budgeting for saving. So that's going to become your emergency fund. So that's something that we need. You know, setbacks happen all the time. We just came off of a huge pandemic. A lot of people lost jobs.
There were a lot of emergency health issues. So, you know, there are setbacks that happen all the time that even if you pay your debt off, can send you right back to it. So any safety net that you have can keep you afloat just enough to avoid erasing all your debt. Pay off progress that you made. So ideally, one day you'll be able to have six months to a year's worth of income as an emergency fund.
But, you know, take small steps and start with just budgeting for any type of saving in your step. Number one.
I like that. That makes it sound a lot more manageable than when you say taking steps to do it, start doing it as opposed to, you know, you need to have six months immediately. You know, I think that hearing that it's kind of intimidating for people when they're struggling.
Exactly. And that's kind of the key here. I mean, that's why we started off with saying stop the bleeding, because I think sometimes people get so overwhelmed, they're like, I don't want to look I don't even want to look at my savings right now. I want to look at my credit card bills. I don't want to look at my, you know, banking app.
But that really is number one. You got to know where you stand on each of your balances. And you know what? You can afford to pay off. Now, what you're working to pay off later, but stopping the bleeding and just, you know, making it more manageable is the first step, right? Baby steps.
So if someone has a balance on multiple credit cards, which I think is a lot more common than most people think, what's the best strategy for dealing with that?
So this is what I refer to as the island approach. And for all of us in debt, I know it's hard to think about Hawaii and ever being able to go there, but for the purposes of this, think of Hawaii. Think of your debts and your credit card, your separate credit cards, as you know, interconnected islands, each kind of having their own approach.
And then we're going to use the snowball effect. So kind of the opposite of Hawaii did pay them down. So I understand. And rank your dad's and pay off the highest rate balance first. So say you have three credit cards and the one with the lowest balance might be $1,000. The one with the lowest balance I would do that might be 800.
But the difference is that $1,000 balance has an interest rate of 20% and your $800 balance has an interest rate of at 26%, which is actually the average right now, which is the highest it's ever been. So you want to rank that highest rate balance first because that is costing you the most money over time. So instead of sprinkling any extra cash you have on hand across all of your credit cards, focus any extra cash on that one with the highest balance and pay the minimum, do the minimum bills on the other.
And then once you've paid off that highest rate balance first, then you can move on to the next highest rate balance. So that is really going to be the cheapest and the most efficient way for you to pay off your debt. There's something to be said for tackling the smallest island first as well. I mean, if you do have a balance that is $100 and you know that you can tackle that, it might be worth the psychological payoff for you to do that.
And that's just a different approach. It's not the least expensive approach, but maybe you do need that to even get in to this mindset of paying off debt. And hey, you can mix them up. Maybe you need to do that to dip your toe into debt, pay off, and then you switch to the bigger island and then you get to the middle one.
So it can definitely be whatever works for you and whatever motivates you.
So there's no real wrong approach. It just might be financially smarter to pay off that highest rate balance first.
Exactly. That's going to be the least expensive.
I like that. So what other debt solutions can people explore if they maybe aren't able to be completely or feel that they're being completely successful with the tips we've already discussed?
Yeah. So this will really depend on the size of your debt. There is what's called debt settlement that typically happens directly with your lender. So you pay a portion of what you owe as a lump sum. If you're already in default, it's usually unavailable and then any amount forgiven will probably be taxed as income by the IRS. So that's good to keep in mind.
But essentially you're paying off what you can pay off and hopefully getting the rest forgiven. That's debt settlement that happens directly with your lender. And then the other option is bankruptcy, which is not necessarily the end of the world. There is chapter seven, Chapter 11. The bad news is it does really tank your credit score. You're going to have to work on that after this.
And basically, it either restructures your debt with a 3 to 5 year payoff plan. That's Chapter 11. Then that's usually the most common, or it discharges all of your unsecured debt with chapter seven. And that's a little bit harder to essentially get approved for. But Chapter 11 bankruptcy, especially after a pandemic, especially in the midst of sky high inflation, is a lot more common than people think.
I know a lot of people tend to think of bankruptcy as kind of a scarlet letter when it comes to finances. So it sounds like it's something if you if you desperately need it, but maybe not look at it as your first choice.
Exactly. Right. So, you know, hopefully when you do these other steps, you know, budget, lower your interest rate, rank your debts, then, you know, if none of this is working and you've exhausted other options, bankruptcy is certainly there.
I really appreciate everything that you've mentioned. You know, is there anything else you just kind of wanted to add?
So if you need more help on any one of these things, you know, there's a guide that wallet hub to, you know, really get into budgeting or really get into the island approach the snowball method, the avalanche method, all of which we, you know, briefly mentioned here.
