Debt Repayment Methods: Pros and Cons
Do a quick Google search for “debt repayment,” and you’ll find plenty of suggestions, from the gimmicky (Snowballs! Avalanches!) to the no-nonsense (balance transfers). How do they stack up? Which one is right for you?
In this blog, we’ll take a look at some of the most popular debt repayment strategies out there, along with some of the pros and cons of each one.
The Debt Avalanche
Also known as “debt stacking,” the avalanche method is a great strategy for folks with multiple credit cards. The idea here is to focus on one card at a time and build a payment “avalanche” that gets bigger as your debt gets smaller.
Here’s how it works: Start with the card that has the highest interest rate, and decide how much you can afford to pay each month (this amount will vary depending on factors like your income and other bills, but you should aim to pay as much as you can pay over the minimum). Continue to pay the minimum on any other credit cards you have. Once the card with the highest interest rate is paid off, take the money you were paying on that card, and use it to pay the card with the next-highest interest rate. Rinse and repeat as needed until all of your cards are paid off.
What’s great about the avalanche method: By tackling the highest interest rate first, you can save hundreds of dollars in interest charges over time.
The downside: It might take a while to see progress (especially if the card with the highest interest rate also has the highest balance).
The Debt Snowball
This method is very similar to the avalanche method: Choose one card. Throw as much money as you can at it until it’s paid off, and then take that money and use it to pay the next card. The key difference? Instead of focusing on the card that has the highest interest rate, you start with the card that has the smallest balance, regardless of the interest rate. Continue to pay off your cards in order of balance from smallest to largest.
The good: By focusing on the smallest balance first, you’ll see progress faster. If you tend to have trouble staying motivated, seeing that first zero balance can give you the momentum you need to stay the course.
The not-so-good: The card with the smallest balance may not be the card with the highest interest rate. By focusing on the total balance, you might end up paying a bit more in interest.
The Reverse Debt Snowball
This is exactly like the snowball method, except that you start with the card that has the highest balance. Pay as much as you can until you reach a zero balance, then roll that money into the card with the next-highest balance. Work through the rest of your credit cards in descending order.
The best part: Knocking out the highest balance can give you a real feeling of accomplishment. What’s more, paying off the biggest balance first can make the rest of your cards seem like smooth sailing.
The “meh” part: Once again, it’s all about interest: The card with the highest balance may not be the card with the highest interest rate, so this method can potentially cost more in the long run.
The Snowflake Method
With this unique method, you choose any credit card you want and make a series of micropayments using any “leftover” or “extra” money you have on hand (any money that isn’t set aside for a specific purpose: tax returns, pocket change, the $5 your grandma still sends you for your birthday every year). Unlike some of the other repayment methods on this list, there are very few rules to the snowflake method: You can pay as much (or as little) as you want. You can make as many payments as you want. In fact, there’s only one real “rule” for this method: You have to make each micropayment as soon as the money falls into your hands (before it becomes, say, a cup of coffee or some other random impulse purchase.
Why snowflaking is awesome: It gives you a great reason to hang onto your extra cash or even consider a side hustle. It’s also one of the most customizable debt repayment methods, which is perfect for folks who prefer less structure.
Why it might leave you cold: This method might be a little too freeform for some. What’s more, because of its near-total lack of structure, it might be hard to track this method.
Many balance transfer offers come with a super-low or even zero percent introductory interest rate. If you can pay off your entire balance before the introductory period expires, you’ll definitely save some money – especially if you’ve got a card with a super-high interest rate.
Balance transfer pros: You can potentially save hundreds of dollars in interest payments thanks to the zero (or super-low) introductory rate.
Balance transfer cons: We can’t stress this enough: To benefit from the interest savings, you have to pay off your balance before the introductory period is over. Another consideration: Lenders are more selective about issuing zero or ultra-low interest credit cards. If you’ve got a less-than-stellar credit score, it might be difficult to get a balance transfer.
Debt Management Plan (DMP)
A DMP is a formal plan that can help you pay down your credit card debt. DMPs are arranged through credit counselors. After a thorough review of your financial situation, your credit counselor works with your credit card lender to reduce your monthly payments and/or cut your interest rate. This is a more extreme method, but it can be a much-needed lifeline for folks who aren’t making any progress using other debt repayment strategies.
Reasons to consider a DMP: This is a solid alternative if you are unable to make your minimum payments, if you’ve fallen behind on your payments, or if you’re considering bankruptcy.
DMP drawbacks: Once you’re on a DMP, lenders will typically freeze your credit. Of course, compared to what happens when you declare bankruptcy, this is fairly minor.Need a few more debt repayment ideas? Looking for advice about which option is right for you? The friendly folks at American Credit Foundation will work with you to find the financial solutions that make the most sense for you, your finances, and your unique debt situation.