If you look at your debt as a whole, it can leave you feeling overwhelmed. You might even wonder if and how you are going to be able to pay it all off. Well, you’re not alone.

There are millions of people out there just like you. Those who are good about making all of their payments on time, yet still feel like there’s no end in sight. Here’s the good news: you CAN learn how to pay off your debt. And RISE is here to help you every step along the way.

With a little focus and some good old-fashioned debt management planning, it won’t be long before you’ll see results. We’ve identified three proven strategies to help you pay off debt. Before you pick the approach that's best for you, let’s explore your options. One of the most crucial decisions is picking which debt to pay off first. 

Strategy 1: The Snowball approach to paying off debt

What is it?

The snowball approach is a popular choice for those who prefer to see immediate progress when paying down their debt. And watch this progress compound itself (by rolling over and over to form an ever-growing ‘snowball’).

Here’s how it works:

  1. List all of your debts from the smallest balance (amount owed) to the largest.
  2. Pay each bill on time every month.
  3. Apply any extra money to your smallest balance until it’s paid off.
  4. Roll over all of the payments that you were making on this newly-paid-off-loan (plus any extra) and apply it to your next smallest balance.
  5. Repeat each step until all your debt is paid off.

Is it right for me?

If you’re the type of person who needs to see your balance go down before you’ll be motivated to start paying a little extra, then this approach might be the one for you! If you owe money to several companies, this approach can also help limit the number of balances you have to manage and get you started towards paying off debt. 

Strategy 2: The High-Interest approach

What is it?

The high-interest approach is the simplest way for you to save money.

Here’s why. Because interest compounds, paying down your highest interest loans first (those with the highest annual precentage rate (APR) and fees) means you’ll end up paying less and less interest as you continue to pay off each new balance.  Here’s how it works:

  1. List all your debts from the highest interest rate to the lowest.
  2. Pay each bill on time every month. 
  3. Make extra payments to your highest interest rate loan until it is paid off.
  4. Roll over all the payments that you were making on this newly-paid-off-loan (plus any extra) and apply it to your next smallest balance.
  5. Repeat each step until all your debt is paid off. 
  6. The extra money you save can be put towards other balances or tucked away for a rainy day.

Is it right for me?

If your priority is to save money in the long run, even though you won’t necessarily see big progress immediately, this may be the best approach for you. Remember, it’s always a good rule of thumb to limit the amount of interest you pay out on every loan. If your most expensive loan is a large balance, this strategy may not free up any cash flow month to month. So, if building a little more flexibility into your budget is important, this approach might not be best option for you.

Strategy 3: The Credit Score Improvement approach

What is it?

Credit scores and debt are inherently linked.  Increasing your credit score can help you gain access to better or less expensive forms of credit (e.g. lower interest rates, higher loan amounts, etc.).  If improving your credit score is a priority, then let’s start by getting a better understanding of “utilization” of your credit cards and how it impacts your credit score.

Say you have one credit card with a $1,000 limit and you owe $800 on that card. Your utilization is 80%. The higher the utilization, the more negatively it will impact your score.

The credit bureaus don’t just focus on your total utilization, but on the utilization of each credit card. For example, imagine you have two credit cards, both with $1,000 limits. If you owe $800 on one and owe $0 on the other, the credit bureaus view your debt at 40% utilization. However, because you owe a high amount on one of the cards (but not the other), your credit score will likely still be lower than if you owed $400 on each card.

With this approach to paying off debt, the focus is to bring the utilization of each credit card down which should benefit your credit score.  Here’s how it works:

  • Set a realistic utilization target for each credit card
  • Pay every credit card down to that target
  • Repeat the steps

For example, set a target of 90% utilization for all credit cards.  Once you’ve succeeded, then start paying each one down to 80%, 70%, etc. 

Is it right for me?

If boosting your credit score is a big priority, then this is a very effective approach. It’s especially helpful if you’re looking to refinance your debt or make a big purchase like a car or a home in the near future. A better credit score could help you qualify for lower interest loans.

Decisions, decisions…

Now that your brighter financial future should feel closer than ever, it’s time to decide which debt payoff strategy is the right one for you.  Whichever approach you choose, RISE has your back.  You got this!

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