By Kate Ashford
You've made the bold decision that now is the right time to reduce your balances, but the next hurdle is figuring out how to pay off credit card debt in a way that suits your lifestyle and finances. If you're wondering how to get out of debt and are considering your options, explore the debt avalanche — also called the debt ladder — and learn how it could benefit you.
Last year, Jen Smith and her husband paid off $53,000 in debt. It's a herculean accomplishment, and it happened because they made a plan: tackle the highest-interest debt first, followed by the next-highest, continuing to make payments until they were debt-free.
"We started with my loan, even though it was double the size of my husband's, because my interest rate was 6.5% and his loans are all less than 4.5%," says Smith, 27, who lives in St. Petersburg, FL. "We calculated it would save us around a thousand dollars to do it this way."
As it happens, Smith's approach has an official name: the debt avalanche.
The debt avalanche is the practice of ranking debts by interest rate and paying each off by starting with the highest-interest debt first. This approach may help you save the most money overall, and is often recommended by financial advisers as the best way to pay off debt.
"The plus is, of course, paying less interest," says Beverly Harzog, a credit and consumer expert and author of The Debt Escape Plan. "You're going to be attacking the most toxic part of your debt first."
Kick-start the process by making a list of all of your debts, including interest rates and minimum payments. Next, rank them in order of the amount of interest they're charging. Make the largest payment you can on the debt with the largest interest rate while making the minimum payments on everything else. Once the highest-interest debt is paid off, add that monthly payment to the minimum payment on the next-highest-interest debt, continuing until each debt is paid.
The debt avalanche approach works with all types of debts, from credit card balances and auto loans to student loans and mortgages.
You might have also heard of the debt snowball, which is an approach that involves tackling your smallest debt first, and then focusing on the next smallest balance after you pay that one off. For some people, the mental boost of paying off one balance keeps them motivated to continue paying off the remainder of their debts.
Although the debt snowball may have a psychological advantage for some borrowers, financially it may cost more money than the debt avalanche. That's because your largest debt could also be the one that costs you the most in interest charges — and with the debt snowball, that would be the balance you attack last. In some circumstances, the debt snowball could keep you in debt longer and cost you more money.
The debt ladder is a logical approach for many individuals, according to Liz Weston, a NerdWallet columnist and author of Deal With Your Debt. "It is the way that saves you the most money and gets you out of debt the fastest," she says.
That said, if your highest interest debt is also one of your largest, it can be hard to stay motivated while you're paying it off. "You have to be the type of person who can do the math and stay the course, and not everybody's like that," Weston says.
If you prefer the quick psychological boost that could result from paying off debt fast — even if it's your smallest, lowest-interest-rate debt — the snowball may be the better plan for you. In the end, the goal is to pay off all of your balances, and you have to go with the method that works best for you. "It's important to pick the one that makes you feel the best while you're going through this," Harzog says. "That's the right choice."
Related: What Is the Debt Snowball Method?
If you're choosing the debt avalanche, you're already saving money over the debt snowball, but it's possible to save even more as you pay your balance down. If you have good credit, for instance, you may have the option to transfer some balances to a low- or no-interest credit card. That could help you save money on interest as long as you pay off the debt before the introductory rate runs out.
A low-interest personal loan may also help make the debt avalanche less expensive, assuming you make on-time payments and follow other terms and conditions. You'll also have a regular payoff amount every month and a definite payoff date, which some borrowers may find appealing. "You can pay off the debt over time in sort of a structured way without having to rely on willpower," Weston says. Pay attention to the loan terms and note if the low interest rate expires after a promotional period.
To make the debt avalanche work, you must be disciplined. "It's best for those who can keep reassuring themselves that, 'Yes, I'm making progress,'" Weston says.
There are a few ways you can stay motivated during your debt payoff strategy. One approach is setting interim goals so you can congratulate yourself along the way. Little rewards for hitting milestones — such as when you've paid off 25%, 50%, and 75% of your debt — can help you feel like you're making progress and keep you on course. "Don't do something expensive, but do something nice for yourself," Harzog says.
Post your progress somewhere you can see it. Set up a pie chart in your kitchen and color in a piece of the pie every time you pay off a chunk of your debt. "I had a white board and I started writing down the new balance every month," Harzog says. "Do something visual so you can see what's happening."
It's also important to make a debt payoff plan that feels manageable for the long term. Like a strict diet, putting yourself on a too-aggressive payoff schedule can backfire and make you fall off track. "Everything we know about behavior psychology is that if you try to demand too much change in a short time, you're likely to not reach your goal," Weston says. That means finding a balance that's realistic — so while eating out five times per week could be too much, for example, deciding to cook every night may not work, either.
For Jen Smith, focusing on the money angle of things helped keep her head in the debt payoff game. "Every time I purchased something, I would think about my interest rate and it would force me to consider if what I was buying was worth 6.5% more," she says. "I also liked thinking about the money we were saving by getting the highest interest debt out of the way first."
"Just having an order to go about it is half the battle," Weston says. "Once you have a plan and can work on it, you're going to start to make progress."
The important part is to make the decision that you're ready to be debt free, and then to make a reasonable plan — and stick to it.
Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, and Parents, among others.
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