The thought of debt gives us the ick. For many, debt is a regular reality. You open a credit card, do your best to pay the monthly minimum payment, and still end up in a sticky financial situation.
In this article we will break down just how common carrying debt is and provide you with simple and manageable ways to take on your debt.
Credit Cards are Tough
Newsflash: Paying the minimum payment on your credit card bills won’t allow you to stay debt-free.
A minimum is what you pay by your bill due date in order to avoid being charged a late fee. It’s appealing, because it’s a low number and it still feels like you’re paying something. Can’t be too bad, right?
While paying the minimum might seem like an appealing way to hold tight on your monthly payments, it’s not a good way of keeping debt-free. A minimum payment will pay part of the bills, but it will increase your interest rate, and soon enough, you’ll owe more money than you did before.
You’re not alone
Get this: New York Federal Reserve’s Quarterly Report says that Americans as a whole owe $890 billion to their credit accounts...
We’ll give you a second to take that in.
The good news is, you’re not the main character here – there’s others out there just like you.
Does that mean it’s okay to let yourself go into debt? Of course not. But it does mean there are plenty of options available to make it easier to reach debt-free. So, before your credit score plummets, start fighting and get a repayment plan in order.
How to Start a Repayment Plan
Let’s check out two common methods to pay off your debt: the debt snowball method and the debt avalanche method.
The Snowball Method: Tackling the Smallest Debt
Picture a snowball at the top of a mountain. It starts small, right, but by the time its got traction it’s a force to be reckoned with.
Good news, there’s a way to apply this concept to your debt.
The debt snowball method is all about making small changes first to gain momentum. Let’s say you have three credit cards you have to pay off, the method will tackle the card with the smallest balance, and finesse its way up to the bigger cards.
Imagine you have:
- $4,000 loan with a 15% interest rate
- $500 loan with a 2.5% interest rate
- $250 loan with a 1% interest rate
The snowball method will eliminate the third card with the smallest debt, getting it out of the way and letting you get ready to take on the bigger fish.
Then, like a snowball, as you make extra money and eliminate debts, your payments will pick up speed until the bigger and bigger amounts are paid off.
The Avalanche Method: Targeting the Highest Interest Rate
Never mind a snowball, why not just shake up the whole mountain? True to its name, the avalanche method looks to do just that.
Opposite of the snowball methods – in this, you pay off those loans with the highest-interest rate. Rather than chipping away and working up, this method is focused on getting rid of the big things first, and saving you money in the long run. With the same options:
- $4,000 with a 15% interest rate
- $500 with a 2.5% interest rate
- $250 with a 1% interest rate
The avalanche method will target the first card. Once you have enough extra money, it will get that debt out of the way, clearing the field for the other smaller loans. Easy enough.
Which do you choose?
When it comes down to picking between the two, it’s a matter of personal taste. By looking at the yuck and yum of both, you can determine which is best for you.
Advantages Of The Debt Snowball Method
- The snowball method is great for keeping your chin up. By chipping away at the smallest payments, it gives you a clear show of your progress. If you’re feeling down about your payments, it’s a quick way to give you a vibe boost.
- The snowball method is fast and momentous. By clearing out those small payments, you can work your way up to the bigger, more hefty debts, and save some extra cash.
Snowball Method Cons
- Though it’s good for speed, this method often ends up more expensive in the long run. By leaving your biggest debts, you leave the debt with the highest interest rate, meaning the numbers keep climbing.
The Advantages Of The Debt Avalanche Method
- By taking away the highest debt first, you’re getting rid of your interest rates, and saving yourself money over time.
- Though it won’t seem as fast, by cutting off your interest, you’ll get through your debts faster.
Avalanche Method Cons
- Unlike the snowball method, you won’t see as much visual progress. It will take longer to pay the highest debts than it will the minimums, and thus, it’s easy to lose motivation.
All to say: Pay off your Debt
The debt avalanche and debt snowball methods might be different, but they’re just two means of getting to the same goal: debt payoff. At the end of the day, it comes down to a matter of personal taste. Luckily, both are meant to keep your debts in order, and help you pay off those pesky fees.
As you start to make a payoff plan, remember – you’re not alone. The financial world can be overwhelming, but there are resources to help you.
When you get back to your baseline, remember, keep your credit in order by paying as much as you can each month, not just the minimums. For those who want to build credit without the risk of a credit card, EXTRA offers just that. We’re the first company that allows you to build credit without having to open a credit card.
While the financial world is tough, it’s nothing you can’t handle. With enough time, you’ll be able to get the snow moving and kill that debt.