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When debt management plans work best

Debt management plans are designed for anyone wanting to pay off their debt in a systematic way. Those people with several high-balance consumer credit cards, who only make monthly minimum payments; those paying high-interest rates; and anyone who receives collection calls should consider a plan.

They can be customized to fit many situations, many types of debt, and creditors. A single, lower payment is very attractive to many. Also, seeing an end (or at least a significant reduction) of calls from debt collectors and creditors.

A plan may not be best if you have trouble paying secured debts, like a mortgage or car payment. It is also not designed for those whose income barely covers necessities, like food and utilities.

What is the debt snowball method?

The debt snowball method is an active strategy to eliminate debt as quickly as possible. You start by paying your smallest debt first. You then apply the money you were putting on that bill onto the next-smallest debt owed. Once you have figured out how much money you can afford to add to the monthly minimum payment for your smallest debt, pay the minimum payments on your other outstanding debts.

To be effective, you would continue this process until all of your accounts are paid off. As money is used from the smallest balance to the next on your list, the amount “snowballs” and gets bigger over time, and the debt is reduced at an accelerated pace.

What is the debt avalanche method?

Much like the debt snowball method, the debt avalanche method is a way to accelerate your debt, with one difference. The “avalanche method” tackles the debt with the highest interest rates first. Once the higher-interest debt is paid off, you apply that money toward the account with the next highest interest rate and continue until your debts are paid off. By focusing on the most expensive debt – with the highest interest rates – you will effectively pay less over time.

Over time, you may save some money with the avalanche method, but debts with high balances may take time to pay off. If you decide on this method, it may be discouraging, since it may take longer to pay off a large balance.