The Frugal Creditnista

How to Create a Debt Payoff Strategy

Life gets expensive. Sometimes, going into debt is part of life: for example, you need money to buy a car to go to work (so you have money to pay off your car!). For some people, debt becomes comfortable. It lets us finance the things we need or want. For others, debt is their only option to take care of life’s little incidents. 

No matter how you ended up in debt, repayment should be your top focus. The longer you stay in debt, the more you end up paying and the longer it takes to get back in the black. 

Wherever you are in your debt payoff journey, building a strategy is one of the most effective ways to get your finances back on track. Here’s how you can be intentional about getting out of debt.

Things to Consider When Paying Off Debt

Debt Payoff Strategy

Before we dive into different debt payoff methods, there are a few financial things you need to think about.

First, will paying off your debt affect your credit? The answer is yes, and that’s not always a good thing. It depends on the type of debt you have. For example, if you’re paying off a small loan and it’s your lowest bill, then that account will be closed and the average amount you owe on other accounts will be higher. That might hurt your credit score.

Or, if you have different types of debt (e.g., credit cards, installment loans, etc.) and pay off one type of debt, your credit mix changes. Lenders like to see that someone can manage different types of debt, so that might not work well for your credit score.

But if you’re paying off a credit card, which is considered revolving debt, then your credit utilization drops and your score may increase.

Something else to consider is how much you can afford to put toward your debt each month. It’s exciting to think about putting every extra cent toward your debt reduction strategy. But even if you do have extra money at the end of your month, should you really use it all for debt?

The answer isn’t always yes. For example, if you don’t have emergency savings or are otherwise living paycheck to paycheck, you might want to save a little extra to start a backup fund. This way, in case a bill is a little more than you budgeted or you need an emergency car repair or doctor’s visit, you won’t be putting yourself into more debt.

Popular Methods to Pay Off Debt

Create Debt Payoff Strategy

Now for the real stuff — how to actually pay down debt. There are lots of ways to go about this:

The Debt Snowball Strategy

Snowballing your debt is a common strategy that gains momentum with each debt you pay off. It starts with your smallest bill. Once that’s paid off, you roll the minimum payment you were making on that debt into your next smallest debt. Rinse, repeat until you’re debt-free.

This method doesn’t take into account interest rates or credit type, which you might want to consider. It builds on the excitement of knocking debts out one at a time and shows you real progress pretty early in your efforts.

The Debt Avalanche Strategy

The debt avalanche method trades the smallest debt for the one with the highest interest. You make the minimum payments on each debt, then use any leftover funds earmarked for debt on the one with the highest interest rate.

The goal is to get you out from under the weight of the most financially crushing bill, usually a credit card since rates are 18.99% or higher. 

The Debt Tsunami Strategy

The Debt Tsumani method takes more of a personal approach. Rather than prioritizing the bills with the smallest or greatest payment or the highest interest rate, you pay them off based on the emotional impact they have on you. 

In other words, what’s going to give you the greatest feeling of relief? Joy? Peace? 

The goal is to stop letting debt overwhelm you. We do this by paying off the debt that is keeping you up at night the most. Then working your way down the emotional ladder until you are debt-free.

Building Your Own Debt Payoff Strategy

Debt Payoff Strategy

Paying off your debt is a personal journey, one that looks like no other because it takes into account your unique financial needs. 

Before you choose a strategy, look at what’s most important to you: can you afford for your credit score to take a dip by paying off certain debts and closing accounts? Would you prefer faster progress (the snowball method) or emotional relief (tsunami method)?

Getting out of debt can be a freeing experience, but it still takes some careful thought to go about it. For help, explore our free financial resources!

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