I am very excited to have this guest post from financial writer, Good Nelly. Contact me if you are interested in contributing or advertising (on the cheap!).
Are you struggling to repay your multiple credit cards and other bills? Do you want to repay your debts on your own?
If so, you can select the debt avalanche strategy to repay your multiple unsecured bills. It is one of the popular strategies to pay off unsecured bills.
So, let’s see how this debt avalanche method works and its effect on your financial life.
How can you repay a debt by using the debt avalanche method?
To use the debt avalanche method, first of all, gather your documents about your unsecured debts like credit cards, personal loans, payday loans, utility bills, and so on.
Now, list your debts from the highest interest rate to the lowest interest rate. Make sure every debt is on this list.
Then make minimum payments on all your debts except the one with the highest interest rate. This will help you to avoid late fees and penalties, thus preventing further damage to your credit score.
Now pay a little extra, as much as you can, to the account with the highest interest rate. Continue with this strategy until you repay this debt.
After you’re successful in paying back the highest interest rate debt, focus on the one with the second-highest interest rate. As you’ve paid back the last debt, you can add a little extra to the second-highest interest debt.
You’ll continue this strategy until you repay the last debt on your list.
Let’s elaborate the debt avalanche method with an example
Suppose you have 5 debts as follows:
|Number||Type||Interest Rate||Outstanding Balance||Min. Monthly Amount|
Suppose you can pay $2,000 on your debts every month. After making the minimum payments on these 5 debts, you’ll have $500, which you’ll pay towards debt ‘A’.
After you pay back the debt ‘A’, make $1,170 ($400 + $270 + $500) towards paying off debt ‘B’.
Continue with this till you clear all your debts on your list.
Your payments will get bigger and bigger and will help you repay the debts fast. Initially, you might think that it’s taking pretty long to repay one bill. But, as you start paying off debts one by one, you can repay your debt accounts faster.
So what are the advantages of using a debt avalanche method to pay off debts?
The debt avalanche method has several advantages such as:
The debt payment amount increases – The payment amount begins increasing as you start paying off debts. Once you repay one debt, you can put more towards paying off the next debt. For example, at first you’re paying $900 ($400 + $500). But after you repay ‘A’, you can pay $1170 ($400 + $500 + $270) towards ‘B’. The minimum payments on ‘B’ plus the payment you’re making on ‘A’. So each time you pay one debt, the amount gets bigger for the next one, and thus you can repay debts faster.
Save money in the long run – Since you’re paying back the highest interest debt, you’ll save money in the long run. Usually the outstanding balance is also more on a card with a high interest rate. And usually the payments you make, most of the amount goes to satisfy the interest payments. Therefore, when you’re paying the highest interest debt first, you can save a significant amount.
Is the debt avalanche pay off method a suitable option for you?
Well before opting for debt avalanche, you can check whether this debt payoff method will be suitable for you.
You can opt for the debt avalanche method if:
- You can motivate yourself to repay debts even if it takes a bit longer.
- You are more concerned about saving money in the long run.
- You can maintain the discipline to stick to the strategy until you repay every cent.
Is there any alternative to the debt avalanche method?
You can use the debt snowball method as an alternative to the debt avalanche method to eliminate debts and pay them off.
It is also a DIY (do-it-yourself) strategy where you list your debts from the lowest outstanding balance to the highest one. After making the minimum payment on the other debts, you put a little extra towards paying off the lowest outstanding debt. Continue with this strategy until the lowest debt is paid off and then follow the same strategy with the next lowest debt on your list.
This strategy motivates you to stick to the debt repayment plan since you can repay your lowest debts pretty fast and then apply a relatively higher amount to repay the debts with comparatively bigger outstanding balances. Sometimes the psychological factor plays an important role than mathematics.
However as already mentioned, the debt avalanche is financially more beneficial. However, you’ll have to stick to it since it may take a little longer to repay the highest interest rate debt.
So what do you think? Will you use the debt avalanche method to eliminate debts?
You can follow another strategy. You can use both the snowball and avalanche together. How will you do so? Select 2 debts at a time, one with the highest interest rate and the other with the lowest outstanding balance. Now pay a little extra on both of these accounts. Doing so, you can stay motivated and benefit financially too.
Another thing, you’ll have to maintain patience to repay debts. Since you didn’t accrue debts in one day, it’ll also take some time to pay them off. So, stay patient, plan a budget, repay debts, and have a good financial future.
Author’s Bio: Good Nelly is a financial writer who lives in Milwaukee, Wisconsin. She has started her financial journey. Good Nelly has been associated with Debt Consolidation Care for a long time. Through her writings, she has helped people overcome their debt problems and has solved personal finance related queries. You can follow her Twitter profile.