Why Should I Be Making More Than the Minimum Payment?
Making the minimum payment on your loans or credit cards can be extremely tempting, especially if you find yourself low on funds each month. In the short term, it may seem like the more financially savvy option. However, paying more than the minimum can actually set you up for financial success in the long run.
How? Well, first and foremost, larger payments can give your credit score a boost. When you pay more than required, you are decreasing your debt-to-income ratio (DTI). Your DTI is the ratio of your total debt compared to your total income. As your DTI decreases, your credit score will increase. This improves your chances of getting a good rate on a credit card, a mortgage, or another loan in the future.
Second, making more than the minimum payment helps you pay back your debt faster and for less than you would if you paid only the minimum. While paying the minimum will keep you in good standing with your creditors, it will take several more years to pay off your debt balances–and your lenders will continue to charge you interest on the remaining balance until it is paid in full. That extra bit of interest can add hundreds and even thousands to your overall debt. Paying more in the short term can save you money in the long term.
“This all sounds great,” you may be thinking, “but I don’t know if my financial situation would allow me to make more than the minimum payment!” Though it may look like your budget doesn’t have any wiggle room, several strategies can aid you in finding the extra money to put towards your debt. For particularly tight financial situations, we recommend revisiting and reworking your budget; trying the Snowball Method; trying the Stacking Method; finding other sources of income; or pursuing debt settlement.
#1: Tighten Up Your Budget
You may be a bit tired of reading it, but it bears repeating: If you don’t have a budget, you need one! Whether that takes the form of a digital spreadsheet or a piece of paper, taking the time to figure out where you stand in terms of expenses, debts, and income lays the foundation for strong financial habits in the future.
However, after you’ve established your budget, it’s important to figure out where you can tighten it up. Go through your spreadsheet or paper line-by-line and put your spending into categories such as “Eating Out” or “Entertainment.” This will allow you to see where you’re spending your money—and where you can cut back. For example, if you find yourself eating out too frequently, try buying food in bulk and meal-prepping for the week ahead. Similarly, if you’re spending a lot per month on TV subscription services, try checking out DVDs of TV shows and movies from the library. Some libraries will even allow you to access their collection online! The money you save by cutting back here and there can then go towards increasing your monthly debt payments.
#2: Try The Snowball Method
When you have multiple debts and you’re trying to pay off all of them at once by making minimum payments, it can be easy to lose motivation when there isn’t much of a dent in any of your balances. We know that seeing a balance reach zero is an encouraging milestone on your debt-free journey—if you’re the kind of person who needs this kind of motivation, consider starting by paying off the debt with the smallest balance first. This method, known as the Snowball Method, asks you to list all of your debts from the smallest balance to the largest. You put any extra money you have towards paying off that smallest debt and make minimum payments on the others. Once the first debt is paid, you move on to the next smallest debt, and so on. By the time you work up to your biggest debt, you’ll be more motivated than ever to get rid of it!
#3: Try The Stacking Method
Alternatively, you can prioritize your debts based on the interest rate. Similar to the Snowball Method, the Stacking or Avalanche Method asks you to list your debts—but this time, you’ll put them in order of interest rate from highest to lowest. You then prioritize the debt with the highest interest rate and put all of your discretionary income towards it while also paying the minimum on your other debts. Using this method, you’ll end up paying the least amount of interest while also paying off your debts faster.
#4: Look For Other Sources of Income
According to Falling Into Freelancing, 28% of Americans actively pursue a side hustle to make extra money, and 62% of them are putting that money towards bills. If you’re looking for a way to increase the money you have to pay off your debt, a side gig may be the perfect way to get out of debt faster! The key is to find something you are passionate about pursuing and turn that into your side gig. For example, if you love photography, consider offering your services as a wedding or event photographer. You’ll not only make more money, but you’ll also have fun doing it.
#5: Pursue Debt Settlement
If you have $15,000 or more in debt to pay off and are struggling to make your minimum payments, you may want to consider debt settlement. Debt settlement occurs when your creditors agree to resolve or “settle” your debt for less than you originally owed due to financial hardship. When you settle your debt, you are paying a reduced lump sum amount to your creditors instead of a monthly payment towards your balances.
Though you can pursue debt settlement on your own, your best option is to hire a qualified, experienced company to negotiate with your creditors on your behalf. While enrolled in a debt settlement program, you’ll be making one affordable monthly program payment instead of making minimum payments to your creditors directly. Your program payments are placed in an FDIC-insured savings account that you own and once enough funds are saved, will be used to make settlements to your creditors. This, combined with a team of experts negotiating on your behalf, means that your debt can be settled quickly and for less than you initially owed.
More Than Just the Bare Minimum
At ACCS, we understand that everyone’s path to debt relief is different: What works for one consumer may not work for another. That’s why we offer Custom Debt Relief Plans! Our team of debt specialists will examine your financial situation, take the time to listen to your needs, and show you how much our program can save you. Together, we can give you control over your finances and start you on your journey towards financial freedom.