Debt Repayment Planning

Getting out of debt starts with figuring out where things stand by listing out all of your debts.

Include the name of each company or lender, current account balances, monthly minimum payments, due dates, interest rates, and any notes like if the account is getting charged fees or if the lender has notified you of their intent to sue. You should also include past due bills.

After listing the debts, you can examine which method will work best for you to repay the debts. All methods require making at least the minimum payments on all debts so you do not incur fees or penalties. These methods are just different ways to prioritize where you send extra payments beyond the minimums.

• Snowball Method: Make the minimum payments on all debts, then allocate all remaining free cash flow to the debt with the smallest balance until it is fully repaid. Once that debt is paid off, shift the free cash flow to the debt with the next smallest balance. This method can help build confidence by getting some debts fully repaid sooner but takes longer to get totally out of debt than doing the avalanche method.

• Avalanche Method: Make the minimum payments on all debts, then allocate all remaining free cash flow to the debt with the highest interest rate until it is fully repaid. Once that debt is paid off, shift the free cash flow to the debt with the next highest interest rate. This method gets your debts repaid more quickly than the snowball method but can feel less rewarding psychologically.

• Consolidation Loans: Combine multiple debts into one loan to simplify your finances. This can be a good option if you have high-interest debts and qualify for a lower interest rate. But taking on new debt to repay old debts can create a debt cycle, so be careful and intentional. Take it slow, do not act in a panic and rush into the first offer you may qualify for. Be cautious of fees or unfavorable terms. Consolidation loans only help if they truly lower your borrowing costs, you avoid running up new debt afterward, and you stay consistent with payments, paying extra when you can.

You may end up choosing a hybrid approach rather than strictly following one of these debt repayment methods. A common hybrid approach is to first repay all past due bills, then any debts with a balance under five hundred dollars, then repay remaining debts using the avalanche method.