Comparing the Different Methods of Paying Off Debt
Debt can adversely affect your life in many ways. If you have multiple payments on various debts to make each month, you’ll have less money available to save. You’ll also end up paying interest on those debts. Furthermore, your credit score will be negatively affected, and you may find it more difficult to secure needed financing in the future. Although it can be difficult to get rid of debt, it’s not impossible. There are two main methods of paying off debt: the avalanche method and the snowball method.
The Avalanche Method
The avalanche method is also called “debt stacking.” It targets the high-interest debts first to reduce the amount of money you’ll pay overall. First, make the minimum payments on all of your debts each month. Then, identify the account with the highest interest rate. This will likely be a credit card. Beyond the minimum monthly payment, pay as much extra as you can toward that account.
After you have paid off the account with the highest interest rate, identify the account with the next highest interest rate. Add its minimum monthly payment to the amount that you had been paying toward the old account that you just paid off. Pay that total amount to the new account that you’re targeting. Once that account is paid off, focus on the one with the next highest interest rate, and so on.
The Snowball Method
The snowball method may be right for you if you want to quickly improve your credit score or see small successes right away. First, make the minimum monthly payments on all accounts. Then, put as much extra as you can toward the account with the smallest balance. Once that account is paid off, you can target the account with the next highest balance.
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