You've resolved to pay off your debt. There are several strategies you can use to reduce your debt. The key to finding the right one is to look at your spending habits and financial situation.
The snowball method
The snowball debt repayment method works well for those who want to see quick results. It is especially beneficial for those who would like to focus on reducing the number of creditors quickly. In the snowball method, you'll pay off creditors one at a time, paying off the creditor that you owe the least to first. Once that debt is paid off, you move on to the next creditor to whom you owe the least to.
This method provides quick satisfaction and also helps you gain control over your debt more quickly.
The downside is that you may spend more money in the long-term tackling your debt. That is something that the next debt-payback method addresses.
The avalanche method
Under the avalanche method, you again tick off your creditors one by one. However, instead of initially targeting the creditors to whom you owe the least, you target the creditors that are charging you the highest interest rate.
If you carry a balance on three credit cards, pay off the one that comes with the highest interest rate first. The reason? You could save a significant amount of interest by paying down your high-interest-rate cards first.
On the downside, this method will not produce positive results as quickly as the snowball method. However, you will reduce the debt that is costing you the most money first. Over the long-term, you'll save money.
For some debts, making payments every two weeks makes financial sense. This works best for longer-term loans such as your home mortgage or your auto loan, but first check with your financial institution to confirm they offer this type of product.
Under this method, instead of paying your full mortgage or car loan payment each month, you pay half of it every two weeks. That might not sound like much of a difference, but look at the impact over the course of an entire year. If you make bi-weekly payments, you'll end up making 26 payments in a year. That comes out to the equivalent of 13 monthly payments.
By going to a bi-weekly payment schedule you will make one extra payment each year. That can reduce the number of years it takes to pay back a mortgage loan or auto loan. More importantly, it will decrease the amount of interest you'll pay over the length of your long-term mortgage or car loan.
Making additional payments
You can reduce the amount of time it takes to pay off debt by making additional payments according to your schedule. This may be an excellent option for consumers who are in a financial position to make these payments such as those who regularly receive bonuses or commission checks. When these consumers acquire a bit of extra money, they might be able to make an additional payment to their credit card, mortgage loan or auto loan company.
For instance, consider if you owe $2,500 on a credit card and have an interest rate of 18 percent and only pay the minimum payment each month of $62.50. It would take you 62 months to pay off your debt. During this time, you will have paid $1,346 in interest.
However, if you had that same debt with the same interest rate and you instead pay $150 a month, it would take you 20 months to pay off your debt. You would pay $398 in interest during this time.
What works for you
These are just some of the several debt-reduction strategies that you can use to pay back your creditors. Before relying on one of these strategies review your household finances. Also, before beginning any debt-repayment plan, determine exactly how much you can afford to pay each month to reduce your debt.