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Debt Pay Off Strategies

Debt can feel overwhelming, and often it could affect more than just your finances—it could impact your emotional and physical health. Especially if your total debt includes multiple credit cards and other loans. Regardless of the type of debt you have, it could all be tackled the same way. One step at a time.

Step 1. Make a budget. You’ll need to know exactly how much extra money you can put toward your debt. Check out our blogs on Zero-Based and 50/30/20 budgeting to learn more.

Step 2. Choose a debt pay off strategy. In this blog, we’ll cover strategies you can use to achieve financial freedom.

Debt Avalanche Method (aka Debt Stacking)

This debt elimination strategy focuses on paying off your highest interest debt first. Here’s how it works:

  1. List your debts in order of highest to lowest interest rate.
  2. Make minimum payments on all of your debts.
  3. Put as much money as possible towards the account with the highest interest rate.
  4. Once that account is paid off, take that “payment” money and apply it to the next debt on your list.
  5. Continue this process until all debt is paid off.

Since you’re paying off the debt with the highest interest, not only will you free up extra cash to pay off other debts faster, you’ll save by paying less on interest. With this method it may take a while to gain momentum, but once you do it will feel like an avalanche of accomplishments.

The possible downside? Generally, it may take longer to see progress since the highest interest may have a large balance. To help keep yourself motivated, especially in the beginning, remember to celebrate mini milestones. For example, if your highest interest debt starts at $10,000 – celebrate when the balance drops below $9,000 and so on until it’s paid off.

If you prefer built in wins, the next method might be the option for you.

Debt Snowball Method

For this method, you’ll pay off debts from the smallest amount to the largest. Here’s how it works:

  1. List your debts in order of smallest to largest balance.
  2. Make minimum payments on all of your debts.
  3. Put extra money towards the credit account or loan with the lowest balance.
  4. After the account or loan is paid off, funnel that money to the next smallest debt.
  5. Continue this process until all of your debts are paid off.

The Snowball method is great for those that like to celebrate wins. By paying off small balances, you’ll be able to celebrate several wins early on. Plus, you could improve your credit score faster since your overall utilization will decrease along with the total number of accounts with outstanding balances.

The downside? You could pay more interest over time since your smallest balances may have lower interest rates. However, you have options to help lower those interest rates by consolidating debt. To learn more about debt consolidation, check out one of these blogs:

As Yolo County’s only local credit union, we are committed to helping our members and community achieve financial success. Our Achieve platform has a host of great playlists to help you learn how to make smart financial decisions for you and your family. Also, be sure to check out our Game of Debt-Free Life as a fun way to visually track your debt payoff over time.

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