The Best 3 Debt Reduction Strategies:
Improve Your Finances Now

We've all been there before. We've stared at the bills that keep coming in, wondering how we'll pay them off. Even making the minimum amounts can seem daunting, let alone paying off the balance. No matter your debt, it can cause your mental and physical health to suffer. Fortunately, there are proven debt reduction strategies you can start today that will help you take control of your finances and start living your life again. Let's dive into the top three that you can try, including when each strategy would be most impactful.

Debt Reduction Strategy #1: Snowball Method

This debt reduction strategy is the easiest to implement and is one of the most popular for getting out of debt. It works best with smaller debts, like credit cards and personal loans.

The idea is straightforward: focus on completely paying your lowest debt balance off. You can use that money to pay off the next smallest debt. You keep going, taking the payments that went to the previous obligations and using them to pay off the higher balance debts. Gradually increasing your payments to more significant debts is why this is the snowball method.

Generally, the snowball method works best if you have a bunch of smaller debts, like $1,000 on one card, $500 on another, and $5,000 on a third card. You can direct your money to pay off the $500 card first to get a quick win and then focus on the $1,000 card, followed by the $5k one.

The snowball method is also popular because people will quickly see wins. Seeing zero balances on debts after staring at them for so long feels fantastic, even if those zero balances are on your smallest debts initially.

Debt Reduction Strategy #2: Avalanche Method

While the snowball method is one of the most common ways to reduce debt, the avalanche method is another popular method. This method is often better, mathematically, than the snowball method but takes far more tenacity and perseverance. Unlike the snowball method, you might not see early wins.

The avalanche method advises borrowers to list all their debts, ordered by interest rate. Make the minimum payment to all debts. Any money left over goes to the highest-interest debt first.

For example, if you have two cards, one for $5k at 25% APR and one for $2k at 15% APR, the avalanche method says to put any extra money toward the $5k one as it incurs the most interest.

Fiscally, this makes sense, as getting rid of the highest-interest debt lowers the amount you'll pay over time. However, some of your more significant debts might also have higher rates and take longer. Not only does this require more perseverance, but it also means that you'll have to pay the minimums on all your cards for longer. With the snowball method, as you pay off cards, you no longer have to make the minimum payments on them, freeing up cash flow if you find yourself in a pinch.

Mathematically, the avalanche method is better as it saves more interest. This method is usually best if you have multiple credit lines with similar balances. In that case, paying the highest-interest ones makes sense. Conversely, if you have a credit card at $5k at 25% APR and one at $500 at 15% APR, it probably makes more sense to use the snowball method to knock out the $500 balance before tackling the $5k one. Of course, you can always switch from one debt reduction strategy to another over time.

Debt Reduction Strategy #3: Negotiate Reduced Payments or Consolidate Your Debts

Contrary to what many people may think, lenders are often willing to negotiate things like interest rates, payment plans, and other ways to help consumers get out of debt. From the lender's perspective, if you've made $10,000 in purchases at a 25% APR, it would be far better for them to collect that entire $10,000 at a 15% rate than it would be for you to declare bankruptcy, and they lose the whole $10k.

If you find yourself burdened with many higher-cost debts, like credit card bills or personal loans at high APRs, you might be able to negotiate a reduction in the interest rate you pay. You can call your lender and ask them to reduce your interest rate. Lenders will be inclined to work with you if you have a good payment history and an account in good standing for a long time.

Even a tiny APR change matters. If you have a credit card at a 25% APR with a $10k balance and put $500 monthly toward it, you'll pay it off in 27 payments (two years, three months). However, by reducing that APR to 20% and still putting $500 toward the bill, you'll pay it off in 25 payments and save $804.76 over those two years. That's pretty good from what might be a 15-minute phone call.

If you have lots of lenders, you may wish to consider a debt consolidation loan. These loans can be at much lower interest rates than credit cards offer. For example, you might have ten cards, each with a $2k balance at 25% APR, and be able to consolidate that into a three-year loan with a $20k loan at 15% APR. Not only will you save thousands in interest, but you'll also make your bill payments much more manageable.

You Can Start to Improve Your Finances Today

These three debt reduction strategies are all easy strategies that you can take to improve your finances now. Today, you can commit to implementing the snowball or avalanche method and list your debts and APRs in a spreadsheet to find the ones you need to tackle first. You can look into a debt consolidation loan to see if you can lower your APR or call your lender to see if they would give you a lower interest rate.

Paying off your debt starts with a commitment. It begins with a plan. And today, you can commence your journey to financial freedom by implementing one of these strategies.