Make Paying Off Debt Easy With 3 Simple Tips

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In tough times, paying off debt in order to get control of your finances may seem nearly impossible. As hard as it may be, though, debt has the potential to spin you into a downward spiral from which your finances may never recover. Coming up with a viable strategy to get your debt paid off can mean the difference between financial security and living paycheck to paycheck for the rest of your life.

If you're like many people, though, you may have no idea how to figure out a realistic strategy for paying off debt. Fortunately, by following some simple guidelines, you can get yourself on the road to getting yourself out of your debt hole and putting yourself in a position where you're calling the shots with your money. Here are three tips to follow as you put together a game plan for your financial future.

1. Know your enemy.
If you've never realized why paying off debt is so important, just take a look at the companies that lent you the money in the first place. For Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and a host of other card-issuing banks, credit cards are a huge moneymaker. Card companies make money from all sides of a transaction, taking a cut from the merchants where you shop and collecting interest from you on your outstanding balances, often at outrageous interest rates. They make it easy to carry huge balances, offering minimum payments that keep up with finance charges but can leave you spending years or even decades before you get your debt paid off in full.

Payday loans can be even more brutal. EZCORP (Nasdaq: EZPW  ) and other providers make money not just from interest but also from transaction fees, which can add up quickly when the term of each loan is only a few weeks.

One smart way to manage debt is to play lenders against each other. With credit cards, you can often get balance-transfer offers that give you low interest rates for an introductory period. Use those offers to your advantage, and you can shave hundreds of dollars off your monthly payments. Then, when they expire, try to get another offer before higher rates kick in.

2. Put your money where it'll do the most good.
Debt management is like hospital triage. You have limited money, so you have to use it where it's most needed. If you focus on paying off debt from the lenders that charge you the highest interest rates, you'll get yourself out of the downward spiral a lot faster. Even if you only have an extra $100 per month, paying down a credit card charging 25% instead of a student loan charging 5% can save you roughly $120 in interest charges over the course of a year.

3. Trick yourself into avoiding new debt.
As hard as it is to get rid of your existing debt, it can be even harder sometimes not to rack that debt back up again after you've successfully paid some of it off. To help, you may want to consider some alternatives that will keep you on the straight and narrow.

Prepaid debit cards can be fraught with extra fees and other costs, but the one thing they won't let you do is carry a balance. With reputable institutions including JPMorgan Chase (NYSE: JPM  ) and American Express (NYSE: AXP  ) offering prepaid cards, increasing competition should help pull fees back into line over the long run. If you have trouble resisting the temptation to spend money you don't have, a prepaid card can help you by setting a limit you can't break.

Don't wait!
Whether you're making your first attempt at paying off debt or have tried unsuccessfully in the past, these simple tips should give you a decent starting point from which to mount an offensive. It's never a cakewalk, but getting rid of your debt is the first step toward creating a promising financial future for yourself.

Once you have your debt paid off, you may want to profit from the lenders that profited from your problems. Bank of America has a lot going for it, but it also faces plenty of challenges. Learn all about it in the Fool's premium report on Bank of America, in which our top banking analysts look at prospects for the company. Click here and get your report today.

Fool contributor Dan Caplinger thanks his parents for helping him avoid the debt trap. You can follow him on Twitter @DanCaplinger. He owns warrants on JPMorgan Chase. The Motley Fool owns shares of Citigroup, Bank of America, and JPMorgan Chase. Motley Fool newsletter services have recommended writing a covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is always easy.

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  • Report this Comment On October 12, 2012, at 7:06 PM, lucasb232 wrote:

    From my experience I can say, there are financial calculators which show you in detail how to payoff mortgage early. The calculator which I use is " Smart Loan Calculator Pro " which is available in app store for 2 bucks. It is awsome. It is not for one time. It is life time useful smart calculator. Give it a try. I guarantee, you would thank me after you download and check it. After checking this, I realized how easy to payoff martgage early.

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