Have you resolved to pay off debt in 2023? If this sounds like you, you’re probably wondering where to start and the best method for tackling your debt.
The answer is simple: it’s all about looking at your goals and spending habits.
The Snowball Method
If you want to see quick results, the snowball debt repayment method might be for you. Using this method, you pay off your debt one at a time, putting extra payments toward your lowest balance first. The goal is to get your small bills out of the way first. Once you pay off that first small bill, you take the money you were using for that payment and roll it into your next lowest balance.
This method provides quick and clear satisfaction. You’ll feel a sense of accomplishment every time you tick a creditor off your list. The snowball method also helps you gain more control over your debt quickly by reducing the number of creditors you have.
The drawback here is that you will spend more money in the long-term to accrued interest. That is something that the next debt-payback method addresses.
The Avalanche Method
With the avalanche method, you also tackle your creditors one by one. However, instead of targeting creditors you owe the least first, you target those with the highest interest rate first.
For example: if you've maxed out 3 credit cards, pay off the one with the highest interest rate first. You'll save a significant amount of interest by paying down high-interest rate cards first.
The downside is that this method will not produce results as quickly as the snowball method. However, you will reduce the debt that is costing you the most money and save more in the long-term.
For some debts, making payments every 2 weeks makes sense. This works best for longer-term loans such as your home mortgage or your auto loan.
Under this method, instead of paying your full mortgage or car loan payment each month, you pay half of it every two weeks. That might not sound like much of a difference, but the impact over the course of a year is significant.
By making bi-weekly payments, you make one extra payment each year. That can reduce the number of years it takes to pay back a home loan or auto loan. Even more importantly, it will decrease the amount of interest you'll pay over the length of your loan.
Making Additional Payments
You can reduce the amount of time it takes to pay off debt by making additional payments. The best news? You can make these extra payments according to your schedule! This is an excellent option for consumers who regularly receive bonuses or commission checks.
For example: say you owe $2500 on a credit card with an interest rate of 18% and only pay the minimum payment of $62 each month. It would take you 62 months to pay off your debt. During this time, you will have paid a whopping $1346 in interest.
However, if you had that same debt with the same interest rate and you pay $150 a month, it would take you 20 months to pay off your debt. You would pay $398 in interest during this time and pay off your debt 42 months earlier!
Want to see what paying extra will do to your debt? Click here to use one of our loan repayment calculators!
Use What Works for You
These are just some of the debt-reduction strategies that you can use to pay down your debt.
Before relying on any one of these strategies, make sure to take an honest look at your budget and spending. You need to determine exactly how much you can afford to pay each month before beginning any debt repayment plan.
If you’re looking for a convenient way to track your finances and keep track of your debt, our free money management tools in online banking have you covered. Our tools give you the power to monitor and manage your accounts – even from other financial institutions!
If you’re struggling with debt or don’t know where to begin, our partners at GreenPath Financial Wellness are here to help Horizon members, free of charge. Their certified financial counselors will take the time to understand your current situation. They’ll help you create a personalized plan to get you on track to achieving your financial goals and crushing debt. Click here to get started.