If you’re juggling multiple debts, it can often feel overwhelming — especially as interest continues to accumulate. The longer you keep debts open, the more interest you pay over time, which is why it's important to find a debt repayment strategy that works for you and your unique financial situation.
There are three distinct strategies to settle outstanding balances: the debt avalanche method, the debt snowball method, and through debt consolidation. Let’s take a look at each one so you’ll have an idea of where you might be able to channel your payments in order to make the biggest impact on what you owe.
Debt Avalanche Method
The debt avalanche method involves making minimum payments on all of your outstanding accounts, then using any remaining money earmarked for your debts to pay off the bill with the highest interest rate.
This method has two simple steps:
- Pay off your highest interest rate balance first.
- When a credit card balance is paid in full, apply its monthly payment to the balance with the next highest interest rate.
Using the debt avalanche method will save you the most in interest payments and generally works for those with significant amounts of debt. The downside is that it requires a constant amount of discretionary income that can be applied towards debt and it can take longer to get your first debt closed. If you want to see just how much interest you can save using the debt avalanche method, check out this online calculator.
Debt Snowball Method
The debt snowball method involves making minimum payments on all your outstanding accounts, then using any of the remaining money earmarked for your debts to pay off the bill with the lowest balance.
This method has two simple steps:
- Pay off your lowest balance debt first.
- When a debt balance is paid in full, apply its monthly payment to the balance with the next lowest balance.
This method is great for people who thrive on small victories to stick to a debt repayment plan, or if you have large monthly payments spread out amongst multiple smaller loans. If you want to see just how much interest you can save using the debt snowball method, check out this online calculator.
Debt Consolidation
Personal Loans
If you’re a military servicemember in ranks E-5 to O4, a CAP Loan might be the right solution for you to close out $5,000 worth of high-interest debt. At a rate of just 1.5%, it could potentially save you a lot of money in interest down the line. You get five years to pay it back and there’s no credit check, no collateral required, and no penalty for prepayment.
If you’re considering a large debt consolidation loan, be careful. Consolidating multiple debts means you will have a single payment monthly, but it may not reduce or pay your debt off any sooner than if you’d kept the accounts separate. A reduction in your monthly payment may come from a lower interest rate, a longer loan term, or a combination of both, which may mean you’ll pay more in interest over the life of the loan. By understanding how consolidating your debt benefits you, you will be in a better position to decide if it is the right option for you.
Balance Transfers
Transferring debt from one credit card to another can be a great way to save money on interest and get out of debt, but it can also be a slippery slope into more debt if you’re not careful. If you find a card with an introductory 0% APR offer, make a plan to pay off your debt during the promotional period and avoid making any new purchases with that card until it’s paid off.
Also, be mindful that while the introductory interest rate may be 0% for a short period of time, most cards charge you a transaction fee upfront to conduct the balance transfer. Usually, these fees are around 3-5% of the balance you are transferring, which can add up quickly. For Example, if you transfer $5,000 and the balance fee is 3%, $150 is immediately added to your outstanding balance.
While each of the strategies above are helpful ways to get out of debt, one method might fit into your financial plan better than the others and be easier to stick with. No matter which method you use, getting out of debt is a step in the right direction and can bring you that much closer to financial freedom.