Your 2021 Debt Repayment Strategy

Jan 25, 2021 4:28:10 PM

From credit cards and student loans, to home mortgages and more, the average American has over $90,000 in debt. Paying off debt can feel like a mammoth challenge, but it doesn’t have to be! This year, develop a debt repayment strategy and commit to paying down the money you owe. Here are a few key steps to get you started.

Step 1: Set Your Goals

Before you develop an in-depth debt repayment plan, take a moment to write down your goals. A goal might be, “pay off all my debt within three years” or, “improve my credit score so I can be approved for a good mortgage.”

An important part of establishing your priorities will be figuring out how much money you owe. HUECU has a number of financial calculators online to help you figure out what you owe and how long it will take to pay off your debt. You can also view your credit score online, and assess if improving this number needs to be a goal.

Step 2: Choose the Right Approach

There are two key approaches to debt repayment: the snowball method and the avalanche method.

The snowball method means focusing on the smallest amount of debt and paying this off first, before moving on to bigger challenges. With this strategy, you would firstly cover minimum monthly payments, and then make extra payments on the smallest loan whenever you can. Once the smallest loan is fully paid off, you would move on to the next highest debt, and so on.

The avalanche method, on the other hand, entails paying off your highest interest debt first. Similar to the snowball method, your first priority is making monthly minimum payments; but after that, you’d use any additional funds to tackle whichever loan has the highest interest rate. When that loan is paid, you would move your extra payments to the next high-interest-rate debt.

Both strategies have their advantages. With the snowball method, you can more quickly remove entire loan balances – and their interest payments – from your to-do list. Then again, the avalanche method means clearing away bigger interest payments faster, which can be especially useful if you are tackling one loan with significantly higher interest than the rest.

Step 3: Make Every Cent Count

When it comes to debt repayment, a little goes a long way. If paying down debt is a goal for 2021, put every penny you can into payments!

For example, if you’re paying off a $10,000 loan at 7% interest and you make monthly payments of $200, you’ll have your loan paid off in 60 months and pay a total of $1,858 in interest. But, if you can add just $50 per month, you’ll pay off your loan in 46 months with $1,421 in interest, reducing your total interest paid by over $400.

Step 4: Know Your Options

Remember that you’re not alone. Your financial institution has expertise and tools to help you manage debt – so if you need help, ask for it! Depending on your situation, it may be possible to get an interest rate reduction, loan deferment, a loan forbearance or extension, or to consolidate multiple loans into one monthly payment. If you do work with your credit union or bank on debt repayment plans, be sure to keep a paper trail including notes on your conversations and the names of people you’ve spoken with, just in case you need to refer back to this.

Another debt repayment option is refinancing, which means taking out a new loan that combines your current private and/or federal loans into one new loan balance, usually with a lower interest rate. Refinancing can lower your monthly payments, or simply reduce the hassle of making multiple payments every month. There is typically no application fee and no pre-payment penalties when refinancing.

Before refinancing, consider what your new interest rate will be. Getting a lower interest rate is great, but check if it’s fixed, hybrid or variable. A hybrid or variable rate means your interest could rise after an initial period. Also, check on the benefits of your current loans versus a refinanced loan, as you may lose or gain specific advantages such as flexible payment terms. Of course, your credit score may impact your refinancing options. If your current score is significantly higher than when you took out the original loan, you may be able to refinance now and get a better interest rate.

Step 5: Look Into a Debt Management Plan

With a debt management plan, you’ll pay a small fee to join a program and receive a plan to help you pay down your debt. A debt management plan will normally reduce your interest rate on debts and provide financial counseling to help you reduce what you owe more quickly and with less interest paid.

Costs vary by state; in Massachusetts, the cost to join a plan is capped at a maximum of $75. Do keep in mind that debt management is not the same as debt settlement, which means paying a large one-time sum to settle debt. While debt settlement can be costly and have a significant negative impact on your credit, a debt management plan will have a net benefit effect on your credit by helping you to better manage what you owe.

One example of a debt management plan is GreenPath Financial Wellness’s program, which is estimated to help members pay off unsecured debts 40 months sooner and save over $30,000. HUECU members get access to GreenPath as a benefit of Credit Union membership, so get in touch for more information.


Check out our upcoming workshops for more tips on paying off debt, plus other great financial advice!