debt avalance Archives

Credit Card Debt

Credit card debt is one of the worst types of have for two reasons:

The interest rates are super high! Depending on your credit card, you may be looking at interest rates of twenty percent or more – which adds up quickly. And since credit cards let you pay the minimum balance each month, they give you the illusion you’ve got your debt under control when you don’t.

A lot of credit card debt is debt that could have been avoided. While you may put essentials such as your groceries on a credit card, you will likely put a lot of unnecessary items on it, like impulse purchases and meals out you couldn’t afford.

Payday Loans

Payday loans can seem very attractive when you’re in a bind, but they charge even higher interest rates than credit cards and can take months to pay off.

Here’s an example of why a payday loan is a bad debt to have:

You go to a payday lender to borrow 500 dollars.

Your payday loan will cost you $17 per $100 that you borrow. This is the same as an annual interest rate of 442%!

You will have to pay interest as long as you owe any money on the loan, which can add up.

You may have to pay additional fees on top of interest if you can’t pay your loan back in the agreed-upon period.

Payday loans are a type of debt you should avoid – even overdraft protection on a bank account or a cash advance on a credit card are cheaper!

Vacation Debt

Now that travel restrictions are easing; you may consider taking a vacation. That’s a great idea if you’ve got the money saved for it!

If, however, you haven’t saved up for a vacation, then taking on debt to pay for one is a bad idea. There are a few reasons for this:

Unlike a car loan or a mortgage, you have nothing tangible as a result of taking on vacation debt.

You’re likely to put your vacation on a credit card, which charges high-interest rates and can take months to pay off.

Any good memories you have of your trip will be soured by the fact you’ll be paying off the cost of it for several months. If you save up before you go, this won’t happen.

Last week, I covered the first step in paying off your debt – knowing just how much you have! The next step is figuring out how you are actually going to pay off the debt! Next week, I’ll talk about finding extra money (whether it’s through earning it or cutting back), but this week I’m going to talk about figuring out what approach to paying debt is best for you. I’ll cover two of the most popular strategies:

Debt avalanche
Debt snowball

1. Debt Avalanche

With the debt avalanche route, you first target your debt with the highest interest rate. You don’t target the debt you owe the most (or even the least!) on – instead, you target the debt you are paying the most interest on.

For example – you have two credit card balances:

On Card 1, you owe $5,000 at 10% interest
On Card 2, you owe $2,000 at 20% interest.

With the debt avalanche approach, Card 2 is now your priority to pay off, even though you owe more on Card 1 than you do on Card 2. If you can put an extra $100 over the total minimum you are paying on Card 2, you will pay off Card 2 much faster. Once you have completely paid off Card 2, you can then put that extra money towards Card 1.

The main advantage of going the debt avalanche route is that you are saving more money by first tackling debts with the highest interest rate. So the debt avalanche route is excellent if you are concerned with paying as little interest as possible.

1. Debt snowball

With the debt snowball route, you prioritize your smallest debt, no matter the interest rate. For example, you have three credit card balances:

On Card 1. you owe $5,000 at 10% interest
On Card 2, you owe $2,000 at 20% interest.
On Card 3, you owe $1,000 at 5% interest.

With the debt snowball approach, pay off Card 3 first (throwing any extra money at it that you can), even though the interest rate on Card 3 is lower than it is on the other two cards. After you have paid the balance on Card 3, you move on to Card 2.

The main advantage of the debt snowball route is that you get the “win” of paying off debt quickly. So the debt snowball approach is great if you need a constant boost to help keep you on track.

What’s best for you?

That depends on your personality! If you’re the kind of person who needs to have a quick “win” in order to keep yourself motivated, then I recommend the debt snowball approach. If you hate the idea of paying extra interest and know you can keep yourself motivated, then the debt avalanche is the route for you!

To get started, check out this great calculator that can tell you how fast you’d be out of debt using each approach. No matter how you pay off your debt, you’ll feel better the sooner you get started! Tell me in the comments which route you prefer!