Budgeting, Uncategorized

Getting Out Of Debt: Two Strategies To Consider

So you found yourself with a bit of debt. Maybe it’s from student loans, maybe it’s credit card debt from emergency car repairs that couldn’t be put off, or maybe you went a little crazy with holiday spending this year.

If you are in debt to more than one creditor (e.g. you’re carrying a balance on multiple loans or credit cards), there are two main strategies that you can use to tackle your debt. Each one requires you to look at your accounts and determine how you want to prioritize paying them off.

Before we look at the strategies, let’s assume that your debt looks like this:

Credit Card A – $874 balance with 25% interest

Credit Card B – $2,341 balance with 22% interest

Student Loan 1 – $10,501 balance with 6% interest

Student Loan 2 – $766 balance with 2% interest

 

The Snowball Strategy

The Snowball Strategy prioritizes paying off those accounts with the lowest balances first.

Using this strategy, you would focus your debt pay down efforts on the accounts you’re closest to paying off, while continuing to make smaller payments on your other debts. Eventually, you would pay off all of the smaller balances and be left with only one larger debt to finish paying off.

In the example above using this strategy, you would pay off your accounts in this order:

 

1. Student Loan 2 – $788 balance with 2% interest

2. Credit Card A – $874 balance with 25% interest

3. Credit Card B – $2,341 balance with 22% interest

4. Student Loan 1 – $10,501 balance with 6% interest

The benefit of this method is largely psychological – prioritizing those debts that you are closest to paying off means that you’ll see $0 balances faster. This can be encouraging and help you keep up the momentum of paying down your debt!

 

 

The Avalanche Strategy

The Avalanche Strategy prioritizes paying off those accounts with the highest interest rates first.

Using this strategy, you would focus your debt pay down efforts on the accounts to which you’re paying the highest rate of interest, while continuing to make smaller payments on those accounts with lower interest rates.

In the example above using this strategy, you  work on paying off your accounts in this order:

 

1. Credit Card A – $874 balance with 25% interest

2. Credit Card B – $2,341 balance with 22% interest

3. Student Loan 1 – $10,501 balance with 6% interest

4. Student Loan 2 – $788 balance with 2% interest

The benefit of this method is financial – prioritizing the debts with the highest interest rates means that you will pay less in interest overall.

 

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