How To Pick the Best Debt Payoff Strategy for You
With consumer prices and inflation making it difficult for Americans to pay off debt, delinquencies on mortgages, auto loans and credit cards are rising, as are minimum payments.
Experts recommend building an emergency fund before paying off your debts, but you’re going to have to attack that financial albatross eventually.
Ramit Sethi, author of the bestseller “I Will Teach You To Be Rich,” took to his site to address how to best settle your debts.
Research Your Options
Many turn to debt consolidation to corral money owed, wherein you take out a new loan to pay off several credit card accounts. If you can find a loan with a cheaper interest rate than your credit cards, consolidating can also make managing your finances easier because you only have to make one monthly payment.
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If you have fair to exceptional credit, you may be able to benefit from a balance transfer deal. Many credit card providers provide initial 0% annual percentage rate (APR) periods on balance transfers, which typically last between 12 and 21 months, according to CBS. By switching your high-interest credit card balances to a card with a 0% initial APR, you might save a lot of money on interest and possibly pay off your debt sooner.
However, when it comes to debt, an overwhelming number of financial experts recommend using one of two comparable, but not identical, payoff strategies: the debt snowball and the debt avalanche.
“Whether you prefer mathematical efficiency or psychological momentum, you’ll learn exactly how to implement your chosen strategy and avoid common pitfalls on your path to becoming debt-free,” said Sethi.
Debt Snowball
What is the debt snowball method?
Using the debt snowball method, you pay off debt by starting with the smallest balance and working your way up to the largest, building momentum as you do so. The minimum payment you were making on the smallest debt is carried over to the next smallest debt payment once it has been paid off in full.
Why should you choose the debt snowball approach?
According to Sethi, you should try the debt avalanche strategy if:
To stay motivated, you need to see progress.
You like a more direct, uncomplicated method.
If you don’t see any improvement, you’re inclined to give up.
“Paying off a $500 credit card balance before tackling larger debts might not save you the most money, but it creates powerful psychological wins that keep you motivated,” said Sethi.
Debt Avalanche
What is the debt avalanche method?
The debt avalanche method (also known as debt stacking) is a debt-payoff approach in which you pay off your debts in the order of highest to lowest interest rate, regardless of balance. By eliminating the loans that are costing you the most in interest, the debt avalanche strategy aims to increase your long-term savings.
Why should you choose the debt avalanche approach?
According to Sethi, you should try the debt avalanche strategy if:
You are motivated to see the largest financial benefit.
You are comfortable tracking figures.
You can focus on long-term goals without requiring instant wins.
“Think of it like a cascade — as each debt is paid off, your payment power grows stronger for tackling the next one,” said Sethi.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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