3 COMMON DEBT PAYOFF STRATEGIES
Debt repayment can be daunting when you fall behind the payoff structure and you are deemed delinquent. You can also accrue huge interests on your balance and face a poor credit score. To eliminate such horrific consequences, there are various strategies that can be employed. These primarily depend on how fast you want to pay off the debt and the disposable income at hand.
A solid debt management plan comes in handy in steering ahead of debt repayment. Prudent to doing so, one needs to have adequate means to consistently be able to meet the agreed obligations. This should withstand unexpected emergencies to avoid being eliminated from the plan.
- Paying the minimum amount
This method involves paying the least amount expected to avoid being marked as unworthy of credit and to keep you from being delinquent. While this is a conservative strategy, its biggest disadvantage is the fact that interest keeps accruing for the outstanding balance. As such, your debt is further amplified by the interest making it more difficult to finish paying your debt.
This conservative approach is preferred where the disposable income is low and you are not in a hurry to finish your debt repayment.
- Paying more than the minimum amount
This aggressive method employs use of excess cash to repay debt. As such, the debt payoff is put on a fast pedestal as the outstanding debt gets depleted faster. There are various ways to pay off more than the minimum required amount. These include: snowball method, avalanche method and debt fireball method.
- The Debt Snowball Method
This settles debt by dedicating excess funds to the smallest debts first. Excess funds are obtained once expenses have been fully catered for and the remainder is allotted to repayment of debt.
For this strategy, a list entailing all debts owed is made. This does not constitute interest for the debts and is ranked from the smallest to the largest outstanding balance. The maximum payments are made to the smallest debt with other outstanding loans receiving only the minimum amount. This is religious done until all debts are subsequently cleared.
The crown on the jewel with this approach is that its easy to quickly pay off debts as you are motivated by the smaller loans that are cleared. This follows the analogy of a snowball. As it rolls down, it keeps growing to a bigger snowball. With the strategy, the balance is handled from the smallest and once this is one, it grows into a bigger snowball.
- The Avalanche Method
Unlike the debt snowball method, the avalanche strategy clears off the debt with higher interest rates first. A list is made in order of interest rates. Thereafter, the maximum amount is dedicated to debts with the highest rates and the minimum payment to those with low rates.
This method is quite effective as it looks into the huge benefits derived from getting rid of high interest rates. Once the repayment of the expensive debt is accomplished, the excess funds is allotted to the remaining balances, accelerating the payments further.
- The Fireball Method
This approach is a perfect combination of both the avalanche and the snowball method. The rationale behind this is that debts that you are more inclined to, are paid off faster leaving the debts that are somewhat desirable for future payments.
First, a classification of debt is made into two broad categories; bad and good debts. Bad debts involve debts that have interest rates of more than 7%. These are major dips in your pockets and reduce your net worth significantly. Good debts have interest rates that are lower than 7%.
The prime focus is on bad debts that are listed from the lowest to the largest. Excess funds are then channeled to bad debts that have the smallest outstanding balance. This is made after making minimum payments to all the bad debts. Once the smallest debts have been fully catered for, the smaller one is then repaid. The convention is to do away with all the bad debts first then move onto the good list.
This strategy proves to be satisfactory as it places more weight on the debt that has detrimental value to the individual and eliminates it leaving the good debt. With recoveries made from the bad debt, the money can be harnessed towards a worthy investment.
- The Balance Transfer Credit Card Method.
This involves use of credit cards with zero interest to pay off your debt. As such, you move debt from a high interest credit card to a low interest rate one. The duration for the zero-interest rate is limited to a period between six months to two years. The amount of debt balance you can transfer depends on your credit score and forfeiting the payment during the zero-interest duration leads to interest charges.
There is no conventional method in debt repayment. One can choose among the aforementioned strategies based on their current finances, overall preferences and credit scores.