The start of a new year can be a good time to take stock of where you are financially as you assess your priorities. One step in this process is to take an inventory of the debts you are carrying and at what interest rates. That way, you can become more fully aware of exactly where your hard-earned cash is going each month and perhaps make some headway in paying it down.

If you carry credit card debt from month to month, you arent alone. On average, Americans were living with about $6,271 in revolving credit card balances in 2020, which typically have higher interest rates than other kinds of debt including home mortgages, and student and auto loans.

Revisit Payment Deferrals

Dan Herron, a certified financial planner with Elemental Wealth Advisors in California, says when you take an inventory of where you owe money, its important in 2021 to consider things many of us may not have experienced before COVID-19, such as payment deferrals on credit cards.

Because of the damaging financial impacts the global health pandemic waged in 2020, by July of last year, some 26% of U.S. residents reported they had already taken part in some type of payment deferral, according to one national study.

If thats the case for you, make sure you have a plan for getting back on track and understand explicitly what the lender expects of you. Remember, a deferral is not the same as loan forgiveness and the money will still have to be paid back at some point.
If you need to start making payments again, Herron says, talk with your (housing) lender or credit card issuer, to see if you can restructure the payments to make it more affordable for your cash flow purposes.

Transfer high-interest debt to a lower interest rate

Whether or not you feel you have too much debt or not, interest rates are at historic lows and likely to stay there for a while. Its a smart move to lock them in, particularly for your longest term debts like mortgages, car loans and some student loans. (Be careful with the federal ones. Dont refi into a private loan if you expect you will want to take advantage of federal repayment provisions like Income Based Repayment or Public Service Loan Forgiveness.).

Whats the best way to go about it? First, consider a consolidation of certain debts (such as those high-interest credit cards) into a form of debt with a lower interest rate. There are several ways to do this. One is to utilize a balance transfer offer on another credit card, which allows you to move credit card debt from one card to another.

Make sure the card receiving the balance has a lower interest rate — 0% is best, of course, but anything significantly lower than what you have now will likely help. A couple things to keep in mind: There are typically fees of about 3% for a balance transfer and these teaser rates are generally limited to between 6 and 18 months. Be clear that youll pay off enough debt in that time at the lower rate to make up for paying that fee.

Read the fine print and know the date when interest begins to accrue again.

You can also check with your bank or credit union about other lower-interest loan options for example a personal loan, or a HELOC, where you use home equity to consolidate credit card debt. Both can help you save substantially. Just be sure you put those credit cards on ice so that you dont end up in a hole thats twice as deep.

Choose a strategy to pay down debt

Once youve lowered your interest rates as far as possible, its time to pick a debt-repayment strategy that you can use in the months and years going forward to dig out.

The avalanche and snowball methods are the most popular debt-payment methodologies. For the avalanche method, you prioritize the highest interest rates first and pay down those debts. That way, you minimize the total amount of interest you pay.
For the snowball approach, you pay off the smallest loan amounts first, gaining momentum to stay on track. (Just FYI, we prefer the avalanche because it saves more money but you should pick the one that works for you.) Whichever method you choose to pay down high-interest debt, set up an automatic payment from your checking or savings account to your lender. That will ensure payments are made promptly and you dont lose the lower rate you just earned.

With reporting by Casandra Andrews