Now that you know how to budget, the next thing on your mind should be how to pay off debt. Of course now you have money saved for an emergency and have a nice plan for every dollar you make. If you have high interest debt it will continue eating away at your future earnings. There are two popular methods for paying off debt. Each method has it’s own approach and should be used depending on your particular situation. The first method is called the Debt Avalanche. With this method you focus on paying off any higher interest debt first to maximize every dollar paid off. The second method is called the Debt Snowball which prioritizes balances. This method works when you have many little balances that you can make small accomplishments on. Now, what method works for you?

Debt Avalanche Method

The Debt Avalanche works to an extent. For example if you have 30k in student loans @12.99% and 2k in credit card debt @5%. It will take you much longer to pay off the student loans all while holding the small credit card balances. In the end you will end up paying less in interest but it won’t feel like you are making a dent into the debt at all. This method works best when you have many open accounts all with semi-equal balances. Look into each account, find the one with the highest interest and pay that one first. Continue doing this and sort all your accounts by interest rate. In the end you will maximize paying less in interest all while lowering your overall debt.

Debt Snowball Method

The Snowball Method has it’s pros and cons as well. In the above example paying off the 2k in credit cards will feel amazing and you won’t have any more minimum payments. You can then proceed to give that “minimum payment” as an extra payment to the student loans. If you have semi-equal balances across your credit cards and you pay off the card with the smallest balance, you might end up paying more in interest. This shouldn’t matter though because the Debt Snowball completely ignores interest rates. It’s supposed to be more about the accomplishment you get from meeting small goals. When you pay off your first card you will see the progress, which will then motivate you into paying your next card. The Debt Snowball works great because how a snowball gets bigger when you roll it, your payments to the higher balances will get bigger and bigger too. And in no time you will have paid off all your cards and debts.

Lowering Your Interest Rate

Did you know that credit card companies will lower your interest rate? All you have to do is ask them. Assuming you have a good standing account with no late payments, they should have no issue lowering your interest rate a little if you just ask. If you have a good standing account you are one of their best customers! This can save you hundreds of dollars a year all with making a small call and politely asking if they can lower your interest rate.

Balance Transfers

Some cards will offer promotions for transferring your balance. For example if you have a Balance Transfer credit card and they can accept most of your higher interest balances, paying a 3-4% fee will be nothing compared to what you can save in interest that year. Sometimes they will have a small “pay no interest on transfers for a year” promotion. Keep an eye out in your mailbox or email they send these offers to good standing accounts. Keep in mind this doesn’t work with accounts held in the same bank. So if you have 2 high balance Chase cards they won’t accept transfers to each other. Use them to your advantage and most importantly, USE THEM RESPONSIBLY.

Debt Consolidation

I would only recommend this if you absolutely know you are not going to spend a single dollar on those credit cards again. If seeing empty credit cards again will tickle you into bad spending habits then this is not for you. This can be beneficial in the long run since you will only have to worry about 1 single payment. Paying off all your cards with a personal loan is kind of like the snowball method, except you still owe the balance. It just gives you that sense of accomplishment that you are taking the next step into being debt free.

Remember Good Debt and Bad Debt

Remember the difference between good debt and bad debt? Some things shouldn’t be included into your payoff plan. For example I wouldn’t include things like a mortgage into a debt payoff plan, especially if you got a low interest rate. There are better places to park your money. Always remember you are allowed to shop around and refinance! Getting yourself a lower rate again can save you hundreds if not thousands of dollars a year in interest alone.

Keeping Good Spending Habits

The biggest step into becoming debt free is not going back to old habits that got you there. Remember to keep budgeting and continue making minimum payments on all your other cards that aren’t going to be snowballed/avalanched. Credit card payments are basically a second budget. You worked hard to build it so don’t give up now! If you have a lot of debt, don’t give up! It’s going to take time but you can eventually be financially free.

Thank you for reading and see you next Sunday,
– Pablo