Now that you know what is on your credit, checked your credit score, and called your creditors, let's talk about paying debt down. There are a couple of different ways to accomplish this potentially monstrous task. You can either use the snowball method or the avalanche method. In this post, I will explain how they work so you can make the best decision based on your circumstances.
Lining Up Your Debt
If you have been following the steps in "The Importance of Credit" series, you should have a list of all your debt whether it is handwritten, in a spreadsheet, or in an app. Everything except your mortgage should be listed. Don't discriminate! Car loans, student loans, personal loans, credit cards, all of this has to go! Can you imagine not having any payments? Just the thought is overwhelming! Once you pay off debt, you can invest more, save more, have more money to spend on things you love! There are a variety of tools you can use to automatically put the debts in order depending on what method you use. They typically come in the form of an app or excel template. I highly recommend these tools because they can also give you a month-by-month pay schedule and tell you a projected date you should be debt free by. With both methods, you only pay the minimum payments on all debts except for the one you are focusing on. All extra money gets applied there.
This method involves putting the debts in order from highest interest rate to lowest. Like an avalanche, you start with the highest and work your way down until you are done. The benefit of using this method is you will ultimately pay less in interest than the snowball method. If you have a lot of high interest credit card debt, I recommend this method otherwise it will be hard to move the needle. It will seem like a hamster wheel!
If you have low interest debt like student loans and sometimes car loans, you should use this method. The snowball method entails listing your debt in order from smallest balance owed to largest. Financial experts recommend this method because it plays on your psyche. It gives you immediate, small wins to help keep you motivated. This is the method that I currently use. I started with $81,439.69 in debt. It was a combination of student loans and a car loan. I am currently at $68,665.39. Every time I pay off a debt it is satisfying and I get motivated to do more. With the avalanche method, you could be stuck paying on one debt for a while so it could be discouraging as if you aren't making any progress, you are!
It doesn't matter what method you choose to use, just start! The debt isn't going anywhere unless you do something about them. No more paying only the minimum and just scraping to get by! If you are struggling to just make the minimum payments, call the creditors and negotiate or find a side hustle!
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