Choose your own adventure: 4 strategies to get of debt
What we'll cover
Difference between “good” and “bad” debt
Deciding which method of paying off debt could be best for you
A variety of strategies to help you work toward a debt-free life
Debt comes in many shapes and sizes. Sometimes you take on debt purposely, other times it creeps up on you, slowly or all at once. But no matter how or where it comes from, most can agree: Debt can be stressful and reducing it isn’t always so simple.
There’s no “right way” to reduce debt, but by exploring different strategies, you’re sure to find one or more that can work for you.
With this method, list your debts in order by amount. Every month, make all your minimum payments, then put any funds leftover in your budget towards your smallest balance. As each debt gets crossed off the list, those funds now go toward paying off the next lowest debt. This method lets you harness the momentum of each small win.
The snowball can be a great way to reduce debt and boost motivation, but it may not right for everyone. For example, if your highest balance also has super high interest, it could cost you more to tackle that one last. Luckily, you have other options, such as avalanche, debt consolidation or debt management.
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The goal of the avalanche method is reducing total interest paid. To make this strategy work, pay the minimum balances on each debt and put any extra income toward the balance with the highest interest rate. Once that’s paid off, you’ll direct those payments to the balance with the next highest interest rate — and so on.
The avalanche strategy is an effective way to minimize the costs of paying down debt. But you might find it takes a while to fully pay off the first balance, leading to frustration or lack of motivation. For this method to work, it’s important to trust the process. Or you can try one of the other strategies here: snowball, debt consolidation or debt management.
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It’s tricky to manage debt from multiple sources with varying rates. Consolidating debts into one monthly payment can help. You may be able to do this with a credit card balance transfer or a debt consolidation personal loan. Homeowners might also consider tapping into equity with a home equity line of credit (HELOC) or cash-out refinance . By doing so, you’ll not only have to manage just one payment, but you may be able to reduce your interest rate. too.
If you aren’t eligible to consolidate your debt, will face high fees or won’t lower your interest rate, you might try other debt reduction methods such as snowball, avalanche or debt management.
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If debt becomes unmanageable, a professional credit counselor or a debt consolidation company may help. A debt relief program may help you negotiate more time or better rates, manage or consolidate your debts or pursue debt settlement. However, it’s important to know debt settlement is typically a last resort, as it can damage your credit score.
Debt management not for you? You may want to try one of the above strategies: snowball, avalanche or debt consolidation.
Reducing debt may feel like an uphill battle. Committing to a strategy, staying focused and knowing you aren’t alone can help. With persistence and an eye on your target, you’ll see the debt you once viewed as a mountain turn into a molehill.