Debt Pay Off Strategies

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You've resolved to pay off your debt. The bad news? You have a lot of debt to tackle, and the number of your creditors calling is overwhelming. You owe thousands of dollars to multiple credit card providers. You have unpaid medical bills, and the utility company is wondering where your last payment is.

The good news? There are several strategies you can take to reduce your debt. The key to finding the right one is all about looking at your personal spending habits and your financial situation.

The snowball method

The snowball method of paying back your debts works well for those consumers who want to see quicker results, or who are so overwhelmed by the number of creditors that they need to reduce that number as quickly as possible.

In the snowball method, you'll pay off your creditors one at a time, generally paying off the creditor that you owe the least to first. For instance, if you have five credit cards that are accumulating debt, you'd pay off the card on which you only owe $250. Once that debt is paid off, you move on to the creditor to which you owe the next greatest amount of money.

The benefits of this method are simple: It provides quicker satisfaction. You will feel a sense of accomplishment every time you check a creditor off your list. The snowball method also helps you gain more control over your debt quickly by reducing the number of creditors about which you have to worry.

The drawback? You generally spend more money in the long term tackling your debt in this way. That's something that the next debt payback method addresses.

The avalanche method

Under the avalanche method, you again check off your creditors one by one. But instead of initially targeting those creditors to whom you owe the least, you target the creditors that are charging you the highest interest rate.

If you've maxed out three credit cards, pay off the one that comes with the highest interest rate first. You'll save a significant amount of interest by paying down your high interest rate cards first.

On the downside, you won't see positive results as quickly with this method of paying down your debt. But you will reduce the debt that is costing you the most money first. And over the long term, you'll save money by embracing this method of paying down your debts.

Bi-weekly payments

For some debts, making payments every two weeks makes financial sense. This works best for longer term loans such as your home mortgage or your auto loan.

Under this method, instead of paying your full mortgage or car loan payment each month, you pay half of it every two weeks. That might not sound like much of a difference, but look at the impact over the course of an entire year. If you make bi-weekly payments, you'll end up making 26 payments in a year. That comes out to the equivalent of 13 monthly payments.

By going to a bi-weekly payment schedule, you will make one extra payment each year. That can reduce the number of years it takes to pay back a mortgage loan or auto loan. Even more importantly, it will reduce the amount of interest you'll pay over the length of your long term mortgage or car loan.

Making additional payments

You can reduce the amount of time it takes to pay off a debt by making additional payments, too. These extra payments can be made according to your own schedule. This is a good option for consumers who regularly receive bonuses or commission checks. When these consumers acquire a bit of extra money, they might be able to make an additional payment on their credit card, mortgage loan or auto loan debt.

For instance, if you owe $2,500 on a credit card with an interest rate of 18 percent and you only pay the minimum required payment each month of $62.50, it would take you 204 months to pay off your debt. During this time, you will have paid a whopping $3,173.22 in interest.

But, if you had that same debt with the same interest rate and you instead pay $150 a month, it would take you 20 months to pay off your debt. You would pay $398.59 in interest during this time.

What works for you

These are just some of the several debt reduction strategies that you can use to pay back your creditors. Before relying on one of these strategies, though, make sure to take an honest look at your household finances. Before beginning any debt repayment plan, you'll need to determine exactly how much you can afford to pay each month to reduce your debt.

And you can only do this if you first determine how much of your monthly income your total monthly debt obligations consume.