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No debt is your goal for the new year.
It’s a perennially popular resolution, says Lauren Anastasio, a certified financial planner at New York-based personal finance company SoFi.
When people are coming off the holidays and holiday spending, they often have larger credit card bills coming due. “It tends to be a time people are tightening their belt in a variety of ways,” Anastasio said.
Turns out, credit card burdens are a problem for almost everyone.
About 7 in 10 people have at least one credit card. More than half of cardholders already in debt were willing to use credit for gifts and holiday expenses this year, according to Creditcards.com. Even people worth more than $100,000 are struggling.
No matter what strategy you choose to pay down the balances, though, you’ll have to realize a few hard truths. Paying the minimum will keep you in the red for years, says personal finance site NerdWallet. Every month that balance remains, even when you make regular payments, interest gets added.
Anything you can pay above that minimum amount helps. Even $100 extra each month can save you thousands of dollars in interest charges.
What you can’t do, while paying down credit card debt: use those same credit cards.
As long as you are working to pay off high balances, continuing to charge purchases is simply putting a bigger obstacle in your way.
Another advantage in switching to cash: people who use cash spend less than people who use credit.
Snowball or avalanche
What’s the best way to pay down debt?
The answer depends on whom you ask.
Money expert Dave Ramsey likes the snowball method. You look at all your debts and pick the one with the smallest balance. Ignore the interest rate. Ignore the type of debt. Just choose the smallest amount and throw all your resources at paying that down. You do still have to keep up minimum payments on your other accounts, of course.
The theory is that aggressively attacking the smallest amount will allow you to see some immediate results, which then kicks motivation into high gear.
There’s some support for this. The one-debt-at-a-time strategy works better than making equal payments across several accounts, and concentrating on the smallest debt works best, according to research published in the Harvard Business Review in 2016.
But it’s undeniable that you’ll be incurring more interest charges.
Douglas Boneparth, a CFP and president of Bone Fide Wealth in New York, gives the snowball a thumbs-down. “I personally think it assumes people are too weak or too stupid to choose the approach that, at the end of the day, puts the most amount of money in their pocket,” he said.
In the avalanche method you rank your debts by interest rate, highest to lowest. Dedicate any extra resources possible to the balance that has the highest interest. All other balances get the minimum payment. When the highest one is paid off, start paying off the next highest.
Try a blizzard
As a financial advisor, Boneparth is well acquainted with how psychology influences money choices. “People become attracted to strategies like the snowball because it offers greater short-term gratification,” he said. Some people will never care that it doesn’t make as much sense financially.
Boneparth points out another snow-themed strategy — the blizzard — that combines the snowball and the avalanche.
Put your debts in size order. Give yourself a burst of motivation with one snowball debt clearing. Then, switch to the avalanche to attack your remaining balances.
Or try Boneparth’s own hybrid method: Calculate how much you’d save in interest if you used the avalanche method with a snowball vs. avalanche calculator. Mentally take half that amount and earmark it for a reward for yourself. Come up with a regular reminder to inspire you to keep attacking your debt, Boneparth says.
Make it personal
When it comes to paying down debt, you should do you. Pick the strategy that’s most appealing, because it’s likely the one you’ll stick with.
Thoroughly understand how much comes in every month versus how much goes out, Anastasio says. In the best case, you have a bit of a surplus. “That tells someone how much extra they can pay toward the debt every month,” Anastasio said.
Another advantage in switching to cash: People who use cash spend less than people who use credit.
Keep a hard-copy reminder of your debt progress on your nightstand, your fridge, your desk — wherever you’ll see it every day. As soon as one debt is done, cross it off and move on to your next, Anastasio says.
Tell your family and friends you are paying down debt. “It’s a way to get some support and reduce temptations,” Anastasio said. “You may find someone else is doing the same thing.
“Voila, now you have a budget buddy.”
Set up recurring payments to the card you’re throwing the most money at. “Many folks like the idea of set it and forget it,” Anastasio said. It removes temptation and makes it harder to use the money for something else.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.