How To Pay Off $5,000 in Debt
Carrying around credit card debt can feel like spinning your wheels if you’re struggling to pay it off. Since credit cards are an open-ended type of debt, there’s no definitive timeline as to when you’ll pay them off. Here are options for paying off $5,000 in debt.
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How to pay off $5,000 in debt
If you’re only making minimum payments on debt, especially debt from credit cards, it can take a long time to pay off and you may end up spending a lot in interest. This is why, if you have the flexibility in your budget, it’s better to pay more than the required minimum each month.
You can do this by creating a budget to pay off debt. Prioritize which debts to pay off first, evaluating your income and choosing a budget strategy. If you don’t have the flexibility to make larger payments on your current income, there are ways to make extra cash to pay off your debt faster.
6 fastest ways to pay off credit card debt
There are multiple strategies to choose from when it comes to paying off credit card debt. You just have to pick the one that works best for your budget and current financial position.
Debt avalanche method
The debt avalanche method is a budgeting strategy that involves paying off debts with the highest interest rates first. This strategy is advantageous to borrowers since it can help them save money on interest.
Debts with the highest interest rates also tend to have the largest balances, so it can take longer to pay down on these balances. This could put a damper on the motivation for some borrowers while other strategies might offer quicker results.
Debt snowball method
Instead of focusing on debts with the highest interest rates, the debt snowball method instructs consumers to pay off the smallest balances first. After you pay off your smallest debt, you move on to the next smallest, and so on.
While this can provide faster results and quick wins, this may cost you more in interest because you’re prioritizing the smallest balances rather than the highest annual percentage rates (APRs).
Debt consolidation loan
A debt consolidation loan can help you pay off $5,000 in credit card debt much faster because a personal loan comes with a predetermined end date. Debt consolidation loans allow you to combine multiple debts into one loan. Some lenders will even send your loan funds directly to your former creditors.
Consider the pros and cons of debt consolidation loans. They’re generally best for consumers with good credit who can qualify for low APRs. You can use a debt consolidation loan calculator to determine whether this may be a good fit for you.
Balance transfer credit card with 0% APR
If you have credit card debt, you can move it to a new card with an intro period of no interest. These are known as balance transfer credit cards with 0% APR. They allow you to put money toward your balance rather than interest.
This option may be best for those with high-interest credit card balances that they’re struggling to pay off or those who are juggling debt on multiple cards. However, you may need good credit to qualify for this option.
Debt management plan
If you’re struggling to keep up with minimum payments, you may be able to qualify for a debt management plan (DMP). This is a strategy offered by credit counselors. When a credit counselor enrolls you in a DMP, they can negotiate with your creditors to potentially secure lower interest rates and lower monthly payments.
Credit counseling typically comes at a low cost since many counselors work for nonprofit organizations. Credit counseling won’t impact your credit score, but you won’t be able to use any credit cards registered with your DMP.
Bankruptcy is a last resort for consumers who can’t pay off their debt and have tried all other avenues of repayment. While bankruptcy can severely impact your credit score and can make it difficult to take out new debt in the future, it can also serve as a fresh start.
There are two common types of bankruptcy for consumers: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is a liquidation option for consumers. With this route, consumers can get all of their debt discharged, though they may have to give up some assets. Chapter 13 bankruptcy is a repayment option and best for those with consistent income. Those who choose Chapter 13 get placed on a three- to five-year payment plan, but won’t have to liquidate any belongings.
What to do after you pay off $5,000 in debt
Once you’ve accomplished paying off your debt, take steps to avoid landing in a debt pitfall again. Here are some steps to take once you’ve said goodbye to your debt.
- Build up your savings. Instead of spending what you make, focus on bulking up your savings account and start an emergency fund. Keeping savings on hand can help you avoid taking out debt should you run into unexpected costs.
- Don’t close your credit cards. Once you’ve paid off your credit cards, you may be tempted to close them to avoid future overspending. However, it’s a much better idea to keep your old credit card accounts open since it can help keep your credit utilization ratio and, thus, help out your credit score.
- Avoid the temptation of overspending. As this may have gotten you into debt, it’s best to instead focus on budgeting and money management. Tightening your belt when it comes to spending and keeping to a budget can help you stay out of credit card debt.
- Budget for “cheat” purchases. Just as saving money is important, so is making room in your budget for occasional splurges. Instead of throwing it on a credit card, make room in your budget and treat yourself every once in a while.