Paying down debt is an important step in the path to financial flexibility and freedom. It can also be overwhelming, especially if you're juggling several payments at the same time. Which debts should you pay off first?
There are several ways to prioritize your debts, and the right method depends on your goals and your unique financial situation. Today, let's take a closer look at a few common debt repayment strategies.
With the debt avalanche method, you focus on paying off the debt with the highest interest rate first, while making the minimum monthly payments on all other debts. Once you pay off the debt with the highest interest rate, you move on to the second-highest interest rate debt, and so on.
The debt avalanche method can help you save more money and pay your debts off faster. This is because the longer interest accrues on a balance, the more you'll owe and the longer it can take to pay it back.
However, this method can be a little intimidating if your highest-interest rate debt also has the highest balance. Here's where the debt snowball comes in.
The debt snowball method involves prioritizing your debt by balance, instead of the interest rate. With this method, you focus on tackling the debt with the smallest balance first, while continuing to pay the minimums on your other debts. Once you pay off the smallest balance, put the money you were paying on that debt toward the next smallest balance. As you pay off each debt one by one, you'll build momentum, like a snowball rolling down a hill.
While the snowball method may not save you as much money on interest fees as the debt avalanche method, it's known to be highly effective. The idea is that celebrating small wins helps you stay motivated during your debt repayment journey!
If you're struggling to stay on top of your debt payments, another option to consider is debt consolidation. This means taking several loans and combining them into a single loan or line of credit with one monthly payment. Your new debt may come with a lower monthly payment or a lower interest rate—or both.
It's important to remember that debt consolidation is a tool for reducing debt, not a cure-all for money trouble. It's best to create a clear repayment plan and stay disciplined to avoid taking on more debt.
Get help getting ahead of debt
No matter the method you choose, what matters most is that you start paying down your debt and stay focused. Every time you make a payment, you're one step closer to financial flexibility and freedom. That's a great feeling!
If you need a little extra help getting ahead of debt, Wright-Patt Credit Union is here to help in a caring, compassionate and confidential way through our partnership with GreenPath Financial Wellness. Together, we'll create a plan to help you get ahead of debt and borrow smarter so you can reach your financial goals.