You’ve probably been told that when it comes to debt, it’s best to avoid it altogether. And if you happen to find yourself owing money, the best way to get rid of it is to pay off your loan(s) as quickly as possible.
While that makes sense mathematically, it’s easier said than done.
While the numbers vary depending on the source (and some have improved as we hunkered down during the COVID-19 pandemic), American adults are deeply in debt—to the tune of nearly $93,000 on average. Indeed, credit bureau Experian reports Opens in new window that in 2020, the typical mortgage balance exceeded $208,000, student loan debt (aided by a federal moratorium on payments) averaged nearly $39,000, and car loan balances approached $20,000. And even though household credit card debt ($5,300) has fallen during the pandemic (and average credit scores have improved), “drastic plastic” continues to burn a hole in Americans’ wallets. You can see how easy it is to feel overwhelmed!
What to do when you want to dump your debt but aren’t quite sure how? Here are two simple strategies to consider.
Avalanche method: Schedule rational payoffs
With the avalanche method, you list your debts from highest interest rate to lowest, and make minimum payments on all except the highest-rate debt. On that pricey balance, you’ll pay the minimum along with any extra money available. This method saves you the most money in the long run because you’ll pay off the most expensive debt soonest.
Here’s an example featuring monthly payments to four hypothetical accounts:
Avalanchee Method: Monthly payments
|Credit Card ||Balance ||Interest Rate ||Minimum Payment |
|Card 1 ||$500 ||26% ||$50 |
|Card 2 ||$2,500 ||18% ||$10 |
|Card 3 ||$1,000 ||15.07% ||$40 |
|Card 4 ||$1,000 ||12.82% ||$40 |
Using the avalanche method, you’d make the minimum payment on credit cards 2, 3 and 4. That amounts to $90. You would also pay $50 for credit card 1 ($140 total), plus any additional money left in your budget. If you had budgeted for $200 per month to pay off credit card debt, you’d be able to throw $110 at card 1, thus reducing your balance to $390.
Let’s say you’re able to apply $300 a month toward paying off the cards instead. The cards would be paid off in a little less than two years, and you would’ve paid a total of $849 in interest.