Individuals incur debts for various reasons such as funding house expenses or managing life crises. Regardless of your unique situation, debt is challenging to overcome, primarily due to interest rates. However, you are not alone in this journey. Do you utilize any specific debt repayment methods?
According to Reuter.com, household debt surged by $1 trillion the previous year, marking the most significant rise in total debt since 2007, as per the New York Fed’s quarterly household debt and credit report. The overall debt balance now exceeds its 2019 year-end mark by $1.4 trillion.
Managing multiple debts simultaneously can be complex, and it’s often challenging to determine which debt to prioritize when planning repayments. To identify the most suitable debt-repayment approach for you, consider your affinity for saving on interest and your monthly payment capacity.
DEBT REPAYMENT STRATEGIES
DEBT SNOWBALL
The debt snowball strategy currently allows to pay debts starting from the smallest to the largest amount, enabling swift clearing of minor debts and thus promoting progress in debt reduction. The basic idea is to clear one debt and subsequently roll over that monthly payment to the next debt while maintaining minimum payments for other debts.
This strategy operates as follows:
Make a list of debts from the least to the most substantial, regardless of interest rates.
Pay the minimum amount for all debts, excluding the smallest one.
Allocate as many funds as possible towards the smallest debt.
Continue this process until every debt has been fully paid.
DEBT AVALANCHE
The debt avalanche method proposes clearing the debt with the highest interest rate first, followed by debts with decreasing interest rates. This approach can be useful in digging out from a pile of debts and reducing heavy interest charges.
The process of this method is as follows:
Note down all your debts.
Order debts from highest to lowest interest rate.
Plan your budget. This step helps you to figure out how much to allocate toward debt each month.
Once the highest-interest debt is paid, focus on the debt with next highest interest rate. Maintain this strategy until complete debt repayment.
DEBT CONSOLIDATION
Debt consolidation combines multiple debts into one single balance, enabling you to clear all your debts with a single payment. This method is particularly advantageous if you mainly have credit card debts or other balances that can be paid off through credit card debt consolidation.
Forms of Debt Consolidation include:
Home equity loans – Homeowners can use a home equity loan, which could be a second mortgage or a refinance of a first mortgage, utilizing their home equity to clear debts.
Unsecured personal loans – These loans secured from banks or credit cards do not demand collateral, hence often carry a higher interest rate.
Balance transfer credit cards – these allow the consolidation of debt to a single credit card often attracting a low introductory APR.
DEBT MANAGEMENT PLAN
If you’re struggling to meet bill payments, utilizing a debt management plan (DMP) can provide some relief by reducing both interest and the monthly payment amount. DMP is an agreement for 3-5 years with your credit card providers, managed by a consumer credit counseling agency. You make a single monthly payment to the counseling agency, who then distribute it among your creditors. Credit counselors and credit card companies have longstanding agreements to assist DMP clients.
DEBT SETTLEMENT
Debt settlement implies that a creditor has agreed to accept less than the full amount owed as complete payment. It also indicates that collectors cannot continue to pursue you for the money, and there’s no risk of being sued over the debt.
However, debt settlement carries several risks:
It can severely impact your credit score.
Reaching a settlement can be a lengthy process, often spanning 2-4 years.
It can prove to be expensive.
SUMMARY
While it is crucial to prioritize your debt repayment strategies, it’s equally important to consider other expenses. Before focusing on becoming debt-free, ensure your fundamental living expenses are covered, and you’re not exceeding your monthly budget during the repayment process.
If you’re feeling swamped by debt, it’s vital not to:
Withdraw money from your retirement savings for repaying unsecured debt. This is financially disastrous.
Borrow money from workplace retirement accounts lightly.
Make decisions under the pressure of collectors, as this could lead to actions that may not be beneficial in the long term. Instead, research your options carefully and select the one that suits your circumstances the best.
