Start the New Year with a Plan to Reduce Your Debt

November 2022

<p>Start the New Year with a Plan to Reduce Your Debt</p>

Even as the American economy climbs back from the global pandemic’s financial impact, families are still feeling the effects of the 2020 downturn and subsequent inflation during the ongoing recovery. It’s not surprising, then, that many people accumulated more credit card debt in 2022 while managing the higher costs of everyday goods and services. Total consumer debt in the U.S. surpassed $16.5 trillion, and the average American consumer’s debt – including home mortgages – is now nearly $96,400.

Heading into 2023, you can make moves to stabilize your household finances, manage your budget and still put money toward savings by developing a plan to reduce – or even eliminate – your debt.

Begin with the Basics

Tackling debt can be overwhelming. It helps to know just where you stand, so you can discover the best step-by-step plan for your financial situation.

  1. Gather your debt information and collect it in a document, whether it’s an old-fashioned notebook or a computer spreadsheet. Write down each balance, monthly payment amounts and due dates, and interest rates. Viewing your debt as a whole and being able to see its component parts will help you understand where your money goes and shape the most effective approach to paying off your debts.
  2. Lay out your monthly budget in detail. All incomes and expenses should be accounted for: mortgage payments, car loans, rent, utility bills, groceries and the minimum payments on things like credit cards. Don’t forget to include your discretionary spending.
  3. Look at payoff methods and see how each might work for you. For instance, the debt avalanche method – also known as debt stacking – is a strategy where you prioritize the debt with the highest interest rate first. This one’s likely a good fit if you have multiple high-interest credit cards or other debts to pay off. You can find a KeyBank guide to the debt avalanche approach here. Another approach is debt consolidation, which involves combining two or more debts into one singular payment – and we’ll get more into that shortly.
  4. Set goals. Once you have a complete understanding of your debts and how much money you have available to put toward paying them off each month, you’ll be able to establish goals to help stay on track. You could aim to have one of the debts paid off by a calendar date, for instance, by putting a little extra toward it. Or you could set a savings goal for an emergency fund or a future vacation. Sticking to a plan deserves a little reward.

Considering Debt Consolidation

Consolidating debt is widely considered one of the most effective ways to reduce and eventually eliminate debt – so let’s take a deeper dive into the benefits and process.

When you consolidate debt, you’re combining several existing debts in order to give yourself a single payment instead of paying multiple recipients. There are numerous benefits to this, including:

  • Streamlining your finances. You’ll have fewer bills to pay, simplifying your budget and reducing the odds that you forget a payment in the shuffle.
  • Quicker repayment. Instead of your monthly payments going toward multiple interest rates, you’re putting more toward paying down the principal each month.
  • Lower interest rates. Consolidating debt often means you’ll be paying less interest on the larger total balance.
  • Improved credit score. You can expect to see this increase as you make payments on time and avoid taking on more debt – two factors credit reporting agencies use to determine credit scores.

How to Consolidate Debt

There are several good means available for consolidating debt – explore them and see which is right for you.

  • Credit card balance transfer. You can often find 0% introductory APR interest rates on a new card when you transfer the balances from other debts. It’s important, though, to remember to close out those credit lines so that you don’t wind up adding to your debt.
  • Personal loan. An unsecured loan with a fixed monthly rate gives you a locked-in plan for a set monthly payment and a payoff date. KeyBank offers solutions that won’t require collateral and don’t include fees for originating the loan or paying it off early.
  • Home equity. Home equity is the difference between your home’s current market value and the balance of your mortgage. By borrowing against the equity in your home with a fixed rate and term, you typically receive interest rates lower than those on credit card debt. A home equity line of credit can give you access to credit based on this equity.
  • Mortgage refinance. This method involves leveraging the equity in your home for a cash-out refinance, allowing you to use the difference to pay off high-interest debt. A refinance will impact your monthly mortgage payments, depending on your home’s market value and your mortgage payoff balance.

Take the First Step

Debt consolidation helps you take control of your money and gives you the flexibility to adjust your spending and saving habits to reach your goals. Get started with KeyBank’s Personal Debt Consolidation Calculator, or connect with us for a Key Financial Wellness Review®. It’s a good way to start the new year, and a great move toward a brighter financial future.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

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1-800-KEY2YOU® (539-2968)

Clients using a TDD/TTY device:
1-800-539-8336

Clients using a relay service:
1-866-821-9126

Schedule and Appointment

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Talk to a Branch Manager in your neighborhood.

Schedule an appointment now