(NewsNation) — A new year brings a fresh start and the chance to tackle debt head-on.
To get started, make a list of everything you owe, such as student loans, car loans, credit card debt, your mortgage and more.
If you aren’t sure exactly what you owe, Experian offers a free service to check your credit report, which will show all your debt accounts.
Next to each debt, record payment details by writing down the interest rate, minimum monthly payment and due date.
Add up the minimum payments of all your debts to find the bare minimum amount you need to pay every month to stay current on your debt.
Debt: How to pay it off
There are two common strategies for paying off credit card debt: the avalanche method and the snowball method.
Debt Avalanche Method
In the avalanche strategy, you prioritize paying off debt with the highest interest rate.
Start by listing your debt from highest interest rate to lowest and then put as much money as possible toward the debt with the highest rate.
When the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and repeat.
By focusing on the most expensive loans to carry in the long run, you should pay less over time as the higher-interest loans are addressed first, according to a Wells Fargo explanation of the avalanche strategy.
Debt Snowball Method
When it comes to debt-reduction strategies, personal finance author and media personality Rachel Cruze recommends the “debt snowball method” over the avalanche method.
Paying off small debts quickly can feel rewarding. Using the snowball strategy, you could see progress quickly and may be a better fit, helping you stick to your debt management goals.
This is how it works:
Regardless of the interest rate, prioritize your debts in order of smallest balance to largest balance. Then figure out how much you can afford to put toward the monthly minimum payment for your smallest debt. Do this after paying the minimum payments on all of your other debts, so as not to incur any penalties.
With the debt snowball method, quick wins can help you shift your behavior toward a debt-free lifestyle.
“The benefit of this method is that you’ll pay off your smallest balances more quickly, which can be motivating and act as a springboard toward paying off more of your debts,” according to an Experian report.
Additional ways to tackle debt
Once you know how much you owe, finding available margins is a crucial tactic for eliminating debt, as emphasized by Cruze.
Finding available margins means identifying extra money in your budget that can be put towards paying down your debt faster.
In one of her YouTube videos, Cruze emphasized the following actions to find available margins:
- Cut unnecessary expenses
- Increase your income
- Sell belongings you no longer need
- Pause investing
- Adjust your tax withholdings