Best Debt Repayment Strategies
If you’re struggling with debt, it’s likely that you have a variety of debts to worry about. Secured debts, unsecured debts. High interest, low interest. Fixed, variable. All kinds of different debts with different terms.
Once you’ve made the decision to tackle that debt head-on, however, you need to decide how you’re going to prioritize your payments. It makes a bigger difference than you might think.
Pick a debt repayment philosophy: snowball or avalanche?
The first step to creating your debt strategy is determining your priority: speed or savings? Do you want to be out of debt quickly or do you want to save as much money as possible in the process?
While you probably want both, it's helpful to decide which is more important. And once you've made your choice you can leverage the debt snowball method or the debt avalanche method to achieve that priority.
What’s the snowball strategy?
In cartoons you’ll often see one character stand at the top of a snowy hill and make a little snowball and then set the snowball rolling down the hill. As the ball rolls, it picks up more snow, getting larger and larger the farther it travels down the hill.
The snowball effect in debt repayment is similar. You smart small and get bigger.
Essentially, you make minimum required payments on all of your debts except whichever debt has the lowest balance. You throw all of your debt-repaying might at that smallest debt until it’s paid off. Then you move on to the next smallest balance.
As you pick off these smaller debts, one-by-one, the amount you would have paid towards them is freed up, allowing you to make larger and larger payments against your new smallest balance. The snowball gets faster and faster, ultimately getting you out of debt faster than the alternative.
What’s the avalanche strategy?
Avalanche payments are about making the biggest long-term impact. So instead of focusing all of your extra debt-paying funds on the account with the lowest balance, you focus on the account with the highest interest rate.
Since your monthly interest charges are a large part of what makes debt quite so oppressive, it makes senses to attack the larger interest rates. By bringing those balances down quickly, you save money over the course of your debt repayment.
From a purely financial perspective, the avalanche strategy usually saves you the most money over time. However, the tradeoff is that high interest accounts may take longer to pay off, so you might lose some of those immediate wins that make you feel like you're making progress. Deciding between the two methods may come down to the types of debts you have and which approach will best keep you motivated.
Pick your debt repayment boosters
Strategy alone isn't enough. You'll want to bolster your strategy with practical actions that make it easier to get out of debt.
Create a budget
A well-structured budget is the cornerstone of any successful debt repayment strategy. It helps you track your income and expenses, allowing you to allocate funds toward debt repayment systematically. If you don't already have one, take the time to create a budget.
Consolidate your debts
Debt consolidation involves combining multiple debts into one with a lower interest rate. This can simplify your finances and reduce your monthly payments, making it easier to manage debt.
The key is to make sure that the consolidation option you pick serves your goals. A balance transfer can land you a great interest rate, but that may only be a short-term solution to a long-term problem. A debt consolidation loan could work, but you may not have the credit score needed to get favorable terms.
Negotiate interest rates
Reach out to your creditors and negotiate for lower interest rates. Many creditors are willing to work with you if you're committed to paying off your debt. In fact, a survey found that customers who asked for a reduced interest rate were successful more than 75% of the time. Lower interest rates mean you'll pay less over time, making debt repayment more manageable.
Not able to get a lower interest rate on your own? The average interest rate for accounts on a debt management plan (DMP) is less than 7%. You may want to consider letting an expert advocate on your behalf for better rates.
Read more: Is a Debt Management Plan Right for Me?
Increase your income
Consider exploring additional income sources, such as freelancing, part-time work, or selling unused items. The extra income can accelerate your debt repayment efforts, helping you achieve financial freedom faster.
Work with an expert
If you find managing your debt overwhelming, don't hesitate to seek professional advice. Credit counselors can provide guidance on managing debt, budgeting, and negotiating with creditors.
MMI offers tailored debt relief solutions to meet your unique needs. If you need help getting out of the cycle of debt and interest charges, our debt management plan is proven help clients get out of debt 7x faster than doing it alone. And if you're already behind on your debts and receiving collection calls, our debt resolution plan (DRP) is a low-cost, low-risk path to getting out of debt while repaying as little as half of your original balance.
Read more: Is a Debt Resolution Plan Right for Me?
