When you've accumulated debt across multiple loans and credit cards, paying off your balances can seem very distant and daunting. The first thing you want to do is remain optimistic. You can do this! With your new go-get-'em attitude, the next thing you want to do is strategize a practical repayment plan that is going to work for you.
The two most popular strategies both involve making the minimum payments on all of your accounts while aggressively paying down one account at a time. The difference is how each plan chooses to prioritize the accounts that get paid down first:
The Debt Snowball method involves paying off your smallest balances first to create momentum and encourage you to keep slaying those debts. This strategy empowers you to stay on track by helping you view your debt as more manageable and less intimidating every step of the way:
- At the onset, you're going to be paying off cards as quickly as possible, since you're focusing all of your extra money on the smallest balance you owe. If you're paying on five accounts every month, but can completely pay off two of them within a year, you can cut the number of bills you have to keep track of almost in half! Juggling fewer payments can reduce stress and your larger balances will be easier to cope with when they're the only bills you have to worry about.
- Each time you pay off a debt, you have one fewer minimum payment to make. As you whittle away at your smaller debts, you can take the money that was going toward your minimum payments and fold it in to make larger payments on your larger balances. If you have five debts and each one has a $25 minimum payment, by the time you're tackling your largest debt, you'll have an extra $100 to put towards it every month.
The debt snowball plan helps you build confidence and positive repayment habits by prioritizing the "easy" debts first. Having a few victories under your belt could be just what you need to pump yourself up to tackle your largest debts.
The Debt Avalanche method involves paying off your balances with the highest interest rates first. This plan prioritizes efficiency and aims to be the indisputably cheapest and fastest way to get out of debt.
- Paying your highest interest balances first saves you money. There's no getting around the fact that high interest costs you, especially when you carry a balance long enough for your interest to compound. When this happens, the interest you've already been charged gets added to your principal balance, so you'll be charged interest on it.
- Paying your highest interest balances first saves you time. The longer it's going to take you to pay off your debt, the more you will benefit from the avalanche. When you don't pay off your high interest debts first, they will continue to accrue and compound interest, increasing faster than your lower interest debts would in the same amount of time. Depending on the details of your personal financial situation, not only can the snowball cost you thousands in interest, it can also cost you months of repayment.
If saving money is the only motivation you need, think about trying out this strategy.
Which plan is right for you?
From a strictly financial standpoint, the debt avalanche technique is always going to cost you less than the debt snowball would. Nevertheless, the time and money you stand to save by using the avalanche does you absolutely no good if you can't maintain the motivation to follow it through to the end.
Take a hard look at your personal financial situation and be very upfront with yourself. If you find it easy to defer instant gratification in favor of future benefits, then debt avalanche is probably going to be the repayment plan for you.
But if you find it difficult to stay focused on long-term goals, and especially if you've had a hard time paying down large balances in the past, debt snowball can be a great way to build responsible repayment habits through small, manageable steps.
Don't forget that you have flexibility.
If you're feeling especially confident with the snowball method, you can always choose to tackle your highest interest rate next, even if it isn't the next smallest balance. And if you start to feel yourself slipping, you can always refocus on your smallest balance again.
Another tool that can help you navigate repayment is using a balance transfer offer. If your credit has improved since you received your first line of credit, you might be eligible to transfer those old, high interest balances to a new low-interest card. Just make sure that you fully understand a balance transfer offer before you decide to apply.
Whichever plan you choose, use it to the extent that it's useful to you, and know yourself well enough to acknowledge when it isn't working. Your ultimate commitment is to paying down your debts, to yourself and to your future.
About the Author: Laura Ross has been a Member Support Specialist at Credit Karma since December 2013. She can usually be found riding bikes around town late at night, communing with animals and eating sweets.
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