There are different ways to pay off your credit card debt. Most of the time, the main concern is the high interest that these cards usually add to your balance. The higher the interest is on your debt, the longer it will take for you to get out of your debt situation and the more money you will waste in the long run. The interest amount benefits no one but the creditors. Instead of making them rich, you may want to deal with that so you do not waste any more money.
You have a lot of options when it comes to debt relief and debt avalanche is one of them. If you have the income to support your payments and your basic expenses at the same time, this can be something that you may be able to use. It all revolves around restructuring your payment plan by ranking your debts according to priority.
There are two ways that this can be done: debt snowball and debt avalanche. In a previous article, we discussed how debt snowball method prioritizes the debts with the lowest balance. On the other hand, debt avalanche puts the debt with the highest interest rate first on the list.
Benefits of paying off the high interest debt first
So what exactly is the benefit of paying off the high interest debt first?
One the most prominent reason is you are actually reducing your overall debt payments by removing the high interest debt first. Of course, you can always try to negotiate your credit card interest first. But if that does not work, you need to focus on eliminating the high interest debt before you take care of the rest.
Most cards will keep on adding the interest amount to your balance as long as you are carrying it over to the next month. The interest amount that is added to your debt will be based on your interest rate and the balance from your previous billing. Unless you pay down your debt, you will be wasting money by paying high interest too.
When you concentrate on your the debts with the biggest interest rate, that means you will put in the most money into this account. That will help lower your balance faster and in effect the interest amount that you will end up sending to your creditors – which is another benefit to the avalanche method. Most of the time, debt avalanche allows you to get rid of your credit obligations more quickly.
How to pay your debts using the avalanche method
Usually, people who use the debt avalanche method does not have the luxury of a debt expert so you may want to pay attention to the step by step process that will be discussed in this part of the article. You may want to use a debt avalanche calculator for this or you can do the math on your own.
Step 1: List your debts according to priority.
Start by listing all your debt obligations. Ideally, you want to put everything here but you also have to consider the credit accounts that charge prepayment penalties. Try to call the creditors and ask them to waive these charges or you can just put them at the bottom of your list. The important task that you have here is to place the debt with the highest interest on top. This will be your priority debt. Place the next highest on the second spot and continue until you have ranked your debts accordingly. While important details like the account info, current balance, minimum payments, interest rate and the due date. Total the minimum payments and that should indicate the minimum debt payment fund that you need to raise.
Step 2: Determine your debt payment fund.
Creating a budget will help you determine how much money you can allot for your debt payments. Identify your income and the basic expenses that you have. Make sure that you have a positive amount when you deduct the expense from your income. Also, it has to be more than the total minimum payments of your combined debts. If not, you need to either cut back on your spending or you can earn more money. The debt avalanche method requires that you debt payments should be higher than your monthly minimum.
Step 3: Distribute the debt payment fund in your debt list.
When you have both your debt payment fund and debt list, you want to distribute your funds based on the minimum payments on your list. After putting the minimum amount, any extra money that you have will be added to what you allocated to the first debt on your list. You will continue to follow this list until you have completely paid off your priority debt.
Step 4: Add the freed funds the next debt on the list.
Once the first debt is paid, you will get the whole amount that is now available and you will add it to the next debt on the list. You will continue to follow this until the second debt is paid off. After which you need to repeat this step until you have gone through all your debts.
This option takes some patience because the early success is not guaranteed here. You are lucky if the debt with the highest interest has a low balance. That means you will experience immediate success that will motivate you to move on to the next payment. It helps to set up milestones so you are not discouraged by the seemingly long time that it takes to completely pay off a debt. Budget for small rewards once you reach these milestones so you are encouraged to push through despite the somewhat long payment period before you.
If you want to know more about how you can get out of debt, view this video for more information.
