10.07.2024 By Amy Miller, AFC®

Debt Repayment Strategies

Let’s talk about Debt and how to tackle it.

 

Most of us are carrying some type of debt and, in our current economic environment, many of us struggle to find a way to pay it off. Knowing what’s best and which debts you should focus on first can be tough. 

At America Save, we believe that paying down debt IS saving so we’re breaking down some common payment strategies to help you get a clear view of your finances and make a realistic plan to pay it off!

Lowest Balance – The Snowball Method

This method involves paying off the account with the smallest or lowest balance first. All available funds would be paid on this debt while paying the minimum due on all others. Once the smallest has been paid in full, the funds allocated would be paid to the next smallest balance, along with the minimum you were already paying. Repeat this until you reach the last account and apply all the funds until paid off.  

Highest Interest Rate – The Avalanche Method   

The approach targets accounts with the highest interest rates and fees first. The same payment method applies with the snowball – paying all available repayment funds to this account while making the minimum payment on all others and then moving on to the next highest interest account.

Balance Transfers

This method moves debt from a high-interest-rate credit card to a lower-rate card.  Preferably, to an account with a much lower rate or one with 0% interest for a set timeframe, known as the introductory period. Typically, 6-18 months.

During the introductory timeframe, the account is not charged interest, allowing all payments to go toward the principal balance. When considering this option, it’s important to evaluate your ability to repay within the introductory timeframe and compare fees and interest rates that may be charged after the period ends and how they will be calculated if the balance isn’t paid in full to determine if it’s the right repayment method and account for you.

Consolidation

Consolidating or combining accounts into one loan with a fixed or set term, rate, and monthly payment can help cut down on the amount due each month, lower the overall amount paid in interest, and help pay down debt faster.

However, these accounts are typically unsecured, which can result in higher interest rates than some other loans and make them a little harder to qualify for. You’ll want to compare it to your current card’s rate before moving forward. This method also requires some discipline. To work successfully, you must resist the urge to use the old accounts if left open.

(Changing old spending habits can be tough, it takes focus and dedication, but YOU CAN DO IT! Check out our 4 key mindset changes to make when paying off debt to get a few tips that can help you along the way)

Debt Management Plans

These plans will consolidate your debt into one payment and cut your interest rates, sometimes by half or more. They can help pay down debt faster than other methods, however, these are mostly used for credit card debt, not student loans or medical debt, the contracts can be binding for 5 years or more and will hurt your credit report and score.

Although there are many reputable debt management companies out there, there are just as many that use predatory practices and have unrealistic terms that leave many consumers in a worse situation than before.  Unfortunately, only around half of those who enter into these contracts can meet the terms and complete the program. 

Debt management plans can be beneficial in some cases, but it’s important to understand how they work and the full terms of the plan before entering into a contract.

We believe an informed saver is an empowered saver! Ready to get started? Check out powerpay.org to see how one of these methods could work for you.

 

____________________________

Let America Saves be your partner! Take the America Saves Pledge and choose debt reduction as your goal. We’ll send you tips, tools, and resources to keep you motivated and on track. Your future self will thank you!

 

Need a little more inspiration? Listen to Episode 2 of our podcast, Think Like a Saver, where our team discusses paying down debt.

CHECK OUT OTHER SAVINGS JOURNEYS FROM SAVERS JUST LIKE YOU

SHARE YOUR SAVINGS TIP OR STORY WITH US

If we feature you in our newsletter, you get $50.

You May Also Be Interested In...

Take the America Saves Pledge

Make a pledge to yourself and create a simple savings plan that works.

Connect to a Campaign

Connect with a local America Saves campaign for one-on-one help and to learn more about savings initiatives and events in your area.

Sign-up for ASAW

America Save at Work is a hub of information and resources to help employers promote financial wellness for their employees.

Partner News & Updates

Join the America Saves email list to receive information about engaging content and events throughout the year.