Understand Your Debt Relief Options
These tested pay down methods should be your first step.
Debt Snowball Method
The debt snowball method is one of the easiest to understand options out there, and it is also one of the most effective. It really only requires that you pay off your lowest-balance credit cards first, while continuing to make minimum payments on your larger debts. Once the smallest debts are paid off, you move on to the next lowest. To get started, follow these steps:
- List all your credit card debts, beginning with the lowest amount owed. If two debts are roughly the same, the one with the higher interest should be listed first.
- Pay the minimum payment on all credit card debts.
- All extra cash should be directed to paying off your smallest debt load. Pay the minimum payment, plus as much extra as you can until that debt is paid off.
- When you pay off a card, roll the old minimum payment and any extra cash into the payment for the next lowest.
- Repeat this process (snowballing) until you’ve paid off all your debts.
See this in-depth explanation of credit card debt payment options.
The Debt Avalanche Method
This method is similar to the debt snowball method, but there are some key differences. It’s also called the “debt stacking” method. Instead of focusing on the balances of your credit cards, you’ll focus on the interest rate being charged. This is the best option for those who have very high-interest credit cards. Of course, you’ll continue to make minimum payments on all cards throughout the process. Note that this method can include other debts, such as mortgage payments, car loans, and the like.
- List all of your credit card debts, beginning with the highest interest cards and moving to the lowest. If two cards have roughly the same interest, the smallest debt should be paid first.
- Pay the minimum amount plus any extra money you have on your highest interest debt until it is paid off.
- When you’ve paid off your highest interest debt, roll that minimum payment and any extra money into paying off the next highest, and so on.
- Continue this process for all of your debts, rolling the minimum payments and any extra cash available into the next lowest debt until you are debt-free.
The Milestone/Chunk Method
This particular method doesn’t carry the same financial benefits that the debt snowball and debt avalanche methods do, but it can help those with a lot of credit card debt get some perspective. Often, the thought of paying off tens of thousands of dollars in debt is incredibly daunting. That can sap your momentum. Instead, break your debt up into chunks, or set milestones. Here’s an example:
Suppose you owe $25,000 in credit card debt. That’s a big number – one that most of us would happily avoid thinking about. However, if you break that into chunks, it becomes easier to deal with. For example, rather than $25,000 in a single amount, try thinking about paying off your debt in $5,000 chunks – you’d only have five milestones to reach before you were completely free of credit card debt.
With this method, you get more peace of mind about your debt payments, and you can incorporate it with other methods, too.
The Debt Snowflake Method
The milestone/chunk method is a great option to combine with the debt snowflake method. Where the snowball and avalanche methods require that you budget for additional cash to pay down debt, the snowflake method is a little different.
In this scenario, you’ll take small amounts of cash that you discover during the month and pay those amounts toward your debt. For example, instead of buying that $7 cup of coffee every day, you could put that money toward paying off credit card debt. Just skipping your costly cup of joe each morning for a month could give you an estimated $210 extra per month (based on $7 per cup), or $2,555 per year.