By Gerri Detweiler
NEW YORK (Credit.com) Being in debt has a bigger impact on your financial future than you might realize. Bad debts can continue to to haunt you and your credit report for years, especially if you don't deal with it now. The first step is knowing where you stand. You can monitor your credit easily using the free Credit Report Card. It provides you with your credit scores, and breaks down the various components of your credit file in an easy to understand way. When you're ready to do a deeper dive and look at your actual credit reports, go to AnnualCreditReport.com when you can pull each of your three credit reports once a year for free (though they can be tricky to read and you'll probably find our Credit Report Cheat Sheet useful).
Once you've set your goal to get out of debt, you have to figure out how to achieve that goal. But with so many different experts touting different solutions, how do you pick the one that will work for you? Here are five options:
DIY Debt Reduction
With the DIY approach, you make the minimum payments on all of your debts except the one you are targeting. There are two main variations on this strategy: the snowball method, and the avalanche approach. With the snowball method you pay off the account with the smallest balance first. With the avalanche approach, you pay off the credit card with the highest interest rate first. Either way, once the first debt is paid off, you apply the payment you were making to the next target debt, and so on until they are all gone.
DIY debt reduction may work for you if: You have a clear plan and are committed to sticking with it; you are able to stop taking on new credit card debt for the duration of the program; and you have enough cash flow to pay off your balances in approximately 3 years or less. (Any longer than that and you increase the risk that unexpected expenses will derail your plan.) To make it work: Create a written plan using a program like SavvyMoney, ReadyForZero or Zilch, all of which will allow you to create a specific repayment plan and try out different scenarios. For some borrowers, for example, the avalanche method may represent significant savings over the snowball method. For others, it's not a big difference. But unless you run the numbers, you won't know that and you may leave money on the table by choosing the method that "feels right," rather than the one that will get you out of debt fastest.