Select the Debt Repayment Plan That Is Right for You

You can prioritize your debts and choose how much you should pay each month with a solid plan in order to properly pay them off.

There are many ways to pay off debt, including the debt snowball and debt avalanche strategies. We’ll go over a few common tactics here to assist you determine which would work best for you. Consider your choice for interest rate savings, the amount you can afford to pay each month, and your need for motivation to determine your optimal debt reduction approach.

Money Snowball

Using the snowball technique, you pay off your bills in order of their size, independent of interest rates or other account considerations.

You can swiftly pay off modest bills using this method, moving closer to catching up on accounts. Continue making minimal payments on your other debts while transferring the monthly payment you used to pay off one account to the next. Continue until all of your accounts are settled.

When using the debt snowball method, you would rank your debts from lowest to highest, as follows:

$850 22%
$1,400 18%
$3,600 24%
$5,325 14%

Debt Snowfall

Regardless of the overall balance or monthly payment, you begin paying off your debts with the highest interest rates using the debt avalanche method.

You put your attention on paying off one loan at a time, much like the debt snowball strategy. First, make sure you settle all of your accounts with the required minimum payments. Then, until the highest-interest card is paid off, you would deposit any additional funds as a lump sum into a single account. You would then concentrate on the debt with the second-highest interest rate after that.

The same balances previously indicated would be paid off in the following ways using the debt avalanche method:

$3,600 24%
$850 22%
$1,400 18%
$5,325 14%

List your debt in order of interest rate, using the avalanche approach, from highest to lowest. In accordance with this strategy, you would first pay off the balance with the 24% APR while paying the minimal amount toward the balances of the other accounts.

Consolidating debt

You can pay off all of your bills with one payment by consolidating your debts, which enables you to combine several loans into a single balance. Transferring all of your bills to a single balance transfer credit card can allow you to concentrate on paying off your larger credit card load if your debt is mostly credit card debt or balances that can be paid off using a credit card.

Another choice for combining various credit card accounts is to get a debt consolidation loan. The purpose of this personal loan type is to pay off outstanding debt. The process can also be managed for you by a debt consolidation company, but you can save money by managing the process yourself.

If you consolidate your debt using a loan with a low interest rate, you could be able to save money on interest. Depending on your monthly payment, you could be able to pay off your debt more quickly as well.

Your available credit on your credit cards will reopen once you have consolidated your debt. Avoid using your credit cards while you are repaying your consolidation loan to avoid adding to your debt.

Plan for Managing Debt

If you’re struggling to make ends meet, paying off your debts through a debt management plan (DMP) may be able to save you money on interest and monthly payments. A DMP is a payment arrangement made with your credit card issuers that is often set up by a consumer credit counseling company. It lasts for three to five years.

Once your plan has been approved, you will pay the credit counseling organization one payment every month, and they will divide it up and send it to each of your credit card companies.

While on a DMP, you won’t be able to use your credit cards.

Which Approach Is Best for You?

The way you decide to repay your obligations is a crucial choice, Gianola Financial Planning, LLC owner Jill Gianola told The Balance in an email. She views it as a crucial element in her clients’ ability to successfully return their debts.

Reduce Interest

Long-term savings from the debt avalanche strategy come from paying off your more expensive loans first. On the other hand, paying off sizable debts with high interest rates can take some time, so you might not feel as emotionally satisfied as you would if you paid off your entire credit card balance right away.

According to Gianola, who also co-wrote Single Women and Money: How To Live Well on Your Income, the debt avalanche strategy might be beneficial for you if you’re disciplined, maintain solid records, and have a steady monthly income.

Continued Motivation

The debt snowball strategy is preferred by many individuals because it allows you to pay off lesser obligations more quickly, especially in the beginning. For those who need to see results in order to remain with their strategy, Gianola advises using the debt snowball method even though it is more expensive in terms of interest costs.

These consumers are more likely to maintain their repayment schedules with the snowball method, according to Gianola, even if they may wind up paying higher interest on their loans.

To make it easier for you to gather your credit card information and perform the calculations, we’ve produced a Google Sheets template called “The Balance Credit Card Debt Worksheet.” The spreadsheet not only adds up the debt balances for any cards added to the list, but it also determines your credit utilization ratio, which is a crucial component of credit rating. The worksheet can be used to decide which debt to pay off first.

High Debt Levels

If paying many payments for your debts each month is causing you stress, debt consolidation may be the solution. A loan or credit card with a lower interest rate than the one you are already paying on previous obligations may be available to you provided your credit score is good enough.

Paid debt consolidation services, however, ought to be used cautiously. Scammers have targeted the sector, according to Jim Pendergast, who wrote to The Balance in an email. Senior Vice President Pendergast works for The Southern Bank Company’s altLINE business. Look for reputable companies with recommendations if you decide to use one of these services.

Cost-effective Payments

If you’re having difficulties paying your minimum monthly payments, think about a debt management plan offered by a credit counseling company.

Credit counselors can negotiate payment reductions with your creditors to make them more manageable. Gianola advises against employing other kinds of debt relief firms since they could impose fees that would increase your debt.

A overview of the four repayment options we covered is provided below.

Repayment Strategy Pay debts one at a time, starting with the highest interest rate Pay debts one at a time, starting with the lowest balance Pay debts that have been combined into a single balance Pay debts through a credit counseling agency
What’s Required of You Multiple monthly payments, one for each balance Multiple monthly payments, one for each balance One monthly payment toward the consolidated balance One monthly payment to the credit counseling agency, assuming all debts are included in the plan
Advantages Saves money on interest costs by getting rid of expensive debts first Motivates by eliminating small debts quickly Simplifies debt repayment by combining into one balance, often with a lower APR Creates an affordable and manageable debt plan, often with a lower APR
Potential Downfalls Large debts can take longer to pay Potentially more expensive Low credit score may limit attractive consolidation options Credit cards are off-limits during the plan

The conclusion

The ideal debt repayment plan will ultimately rely on your financial condition.

Now that you are more knowledgeable about different repayment strategies, think about which one will work best for your situation and personality. Choosing a strategy that will work for you will help you achieve your own financial objectives, whether you prioritize saving or need a motivating boost.

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