Credit Compass

Debt Management Strategies

Tackling debt can feel overwhelming, but with the right strategy, you can create a clear path to financial freedom. Explore these popular methods to find the one that best fits your style and situation.

The Debt Snowball Method
Focuses on building momentum by paying off the smallest debts first, regardless of interest rate.

How It Works:

  • List all your debts from smallest balance to largest.
  • Make minimum payments on all debts except the smallest.
  • Pay as much as possible on your smallest debt.
  • Once the smallest debt is paid off, roll the money you were paying on it into the next smallest debt.
  • Repeat until all debts are paid off.

Pros

Provides quick psychological wins, which can be highly motivating.

Cons

You may pay more in interest over time compared to other methods.

The Debt Avalanche Method
Focuses on saving the most money by paying off debts with the highest interest rates first.

How It Works:

  • List all your debts from the highest interest rate (APR) to the lowest.
  • Make minimum payments on all debts except the one with the highest APR.
  • Pay as much as possible on your highest-APR debt.
  • Once that debt is paid off, roll the money into the debt with the next-highest APR.
  • Repeat until all debts are paid off.

Pros

Saves you the most money in interest charges over the long term.

Cons

It might take longer to get your first win, which can be less motivating for some.

Debt Consolidation
Combines multiple high-interest debts into a single new loan or credit card, ideally with a lower interest rate.

Common Options:

  • Balance Transfer Credit Card: Move balances from high-APR cards to a new card with a 0% introductory APR period.
  • Personal Loan: Take out a loan to pay off all your other debts, leaving you with one fixed monthly payment.
  • Home Equity Loan: If you're a homeowner, you might be able to borrow against your home's equity.

Pros

Simplifies payments and can significantly lower your interest rate.

Cons

Often requires a good credit score. You must be disciplined to not run up new debt on the old accounts.

Credit Counseling & Debt Management Plans (DMPs)
Working with a non-profit credit counseling agency to create a plan to pay back your debts.

How It Works:

  • A counselor reviews your finances and helps you create a budget.
  • If a DMP is a good fit, the agency works with your creditors to potentially lower interest rates and fees.
  • You make one monthly payment to the credit counseling agency, which then distributes it to your creditors.
  • These plans typically take 3-5 years to complete.

Pros

Get expert guidance and potentially lower interest rates without taking on new debt.

Cons

You may have to close your credit card accounts and agree not to apply for new credit while on the plan.