Getting out of debt can seem like an impossible task, especially if you have accumulated thousands of dollars in high-interest credit card debt. Developing a debt repayment plan, however, makes it much easier to reach your goal.
Before you can develop a plan, you need to know exactly what you owe. Make a list of your debts, including the amounts and interest rates. Having this information in front of you will help you choose a debt repayment method that works well.
After listing their debts, most people choose to either “snowball” or “avalanche” their accounts.
With the snowball approach to debt, you organize your accounts by how much you owe. Then, you focus on repaying the account with the lowest amount. Once you settle that account, you move on to the next one on your list until you’re free of debt.
With the avalanche approach, which is also called “debt stacking,” you organize your accounts by interest rate. You focus on repaying the account with the highest interest rate. Then, you move on to the next account until you have settled all of the debts.
The avalanche method will save you the most amount of money while you repay your debts. By focusing on high-interest accounts, you eliminate the debts that cost you the most money.
You can see this by comparing different interest rates. If you owe $1,000 to an account with a 20 percent interest rate, you will spend $221 in interest by repaying the debt over 24 months. If the account had a 6 percent interest rate, you would only pay $64 in interest over 24 months.
If you want to save as much money as possible, then the debt stacking is the better approach for you.
The snowball method doesn’t maximize your savings. It can, however, keep you motivated to repay your debts.
Paying credit card bills isn’t exactly a fun thing to do or think about. It becomes much more invigorating, though, when you see your account balances reach zero. Perhaps it will only take you a few weeks or months to eliminate one of your debts. You can use that momentum to stay focused on bringing your other accounts to $0.
If you have anxiety about tackling debt, then the snowball approach is probably better for you because it will keep you motivated and help you build confidence. If you’re truly in over your head, you can explore a reputable debt relief company to help dig you out. This review of National Debt Relief vs. Freedom Debt Relief will get you started.
No matter which method you choose, it’s important to make a repayment plan that keeps you on track. Without a plan, it’s unlikely that you’ll ever reach your financial goals.
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