Meeting credit payments can be stressful. This is especially true if you have a lot of accounts to pay off. According to reports, a lot of Millennials are feeling stressed because of their combined credit card debts and student loans.
This is the reason why a lot of people opt to use debt consolidation to help them deal with their monthly payments. This debt relief strategy combines all their balances under one credit account. This makes it easier for them to monitor their payments.
Unfortunately, not everyone will really benefit from this option. While it will make payments easier, it can also cost you more. This is especially true if you got a longer repayment plan so you will be given a lower monthly payment requirement. Even with a low-interest rate, it can still end up costing you more. Of course, if you have a stable job and you are after getting less strain in your monthly budget, then this should not be a problem. But if not, then there are other options for you to use.
2 methods to organize credit payments without consolidation
There are debt consolidation alternatives for those who simply want to reorganize their credit payments. Sometimes, the problem is not really the funds. Some people just want their debts to be more organized so they will not miss out on a payment.
If this is all that you are after, then these two options may be good enough for you. Both of these methods will rank your debts according to priority. The list will contain the various details about the debt like remaining balance, minimum payment requirement, due date, etc.
Once the list is completed, you will determine your monthly debt payment fund. This will be distributed towards your list of debts. All the other debts will be paid the minimum payment requirement only. Anything that is left of the fund will be paid towards the top debt. This ensures that the priority debt will be paid faster.
After completely paying off the first debt, the freed funds will be added to the payment for the 2nd debt on the list. This would mean the 2nd debt will be paid off faster. When that happens, all the funds from the 2nd debt will now go to the 3rd one. This will continue until all the debts are paid off.
Now that you know how the credit payments process is organized, here are the two different ways that the ranking is done.
Debt Snowball Method
This method prioritizes the debt with the smallest balance. For instance, you have credit cards A ($2,000, APR 16%), B ($1,500, APR 17%), and C ($5,000, APR 19%) plus a personal loan of ($3,000, fixed-rate 10%). The ranking of your debts would be credit cards B, A, personal loan, and credit card C.
You will pay only the minimum amount for the credit cards A and C and the personal loan. For credit card B, you will pay more than the minimum required amount. Once credit card B is paid off, the funds for this will be added to the payment for credit card A. The payment for the personal loan and credit card C will remain to be the minimum amount. Once credit card A is paid, the concentrated funds will be added to the personal loan credit payments. And once that is done, everything will be paid towards the last debt – which is credit card C.
This method is ideal for those who need the motivation of completed payment. Since the focus will initially be on the debt with the lowest balance, this means it will be paid off faster. This should motivate you to pay the rest off.
However, if this debt relief strategy is not working for you, there is another option.
Debt Avalanche Method
For this method, the priority will be towards the one with the highest interest rate. If we use the same set of examples as above, the ranking will be credit cards C, B, and A, and finally personal loans.
Like with the snowball method, credit cards B and A and the personal loans will only receive the minimum payment amount. Credit card C, since it has the biggest interest rate at 19%, will be prioritized. That means the payment will be more than the minimum requirement. After completely paying it off, you will go on an add the money to the credit card B payment. With every finished debt, the amount will be added to the next debt on the list – until even the personal loans will be paid off.
Since the balance is high, it will take some time for you to completely pay this off. This means the first success will not be as fast as what you will get from the snowball method. But this is the method that will help you save money. After all, you are getting rid of the debt that has the biggest interest rate first. It is the one that is costing you the most. Paying it off first will help you save money.
Signs you can organize credit payments on your own
According to reports, parents are admitting that paying down debt is their main financial priority. The report suggests that this is dangerous because other financial goals like retirement and saving for college is taking the back seat. If this is also your sentiment, then you need to make sure that you can pay off debt as soon as possible.
While the two methods mentioned are effective, it will require you to take care of your own debt relief process. If you want to get out of debt fast, you need to make sure that you are capable of doing it on your own.
Here are the signs that will tell you if you can organize your credit payments on your own.
You can control your spending
First of all, you have to be able to control how you spend. As you pay off the first few debts completely, there is a huge temptation to use more credit. Try to resist the urge. Otherwise, you will never finish paying all of them off. If you know that you cannot control your spending urges, it might be better to work with a professional so they can guide you throughout the whole process.
You have a good credit score
Having a good credit score means you are responsible with your credit accounts. Sometimes, people land in debt because of uncontrollable factors – like a series of unfortunate events. Other than that, they are able to manage their finances properly. If this is your situation, then you can probably handle your debt on your own. The snowball or avalanche method will help you organize your debts so you can pay it off properly and maintain your credit score.
You have a steady source of income
Finally, if you have a stable source of income that will not be threatened anytime soon, then it is okay to do your own debt relief program. You can afford your monthly credit payments so you do not need a debt reduction. There is no need to negotiate anything. You will just rearrange your payment plan so it adheres to either the snowball or avalanche methods.